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Elkstone Private Monthly Bulletin

Elkstone Private – Monthly Update May 2018

Stephen’s Snapshot
The Market – Latest Dynamics

 

Global stock-markets rose in April on the back of positive US quarterly earnings, increasing commodity prices, and relatively robust Chinese economic data (April saw exports from the region expand by 12.9% versus a consensus expectation of 6.3%). Market volatility – which returned in February – persisted through most of month on the back of concerns of a potential “trade war” between the U.S. and China, as well as heightened tensions between Russia and the U.S. regarding Syria.

Coupled with uncertainty over the role of Iran in the international community, oil prices increased by over 7% during the month. As a result, commodities were the top performing asset class; (up 0.95% YTD and 4.03% in April). Looking ahead, the Fed is expected to increase interest rates twice more during 2018 (circa 25bps increments), whilst the latest comments from the ECB (Mario Draghi) point to a continuing accommodative (asset purchase programme) policy until September if not beyond.

Stephen O’Sullivan is a Senior Investment Manager at Elkstone Private.

Technical Analysis – Our Interpretation – Bespoke View

Leadership at a sector level continues to have a bullish tilt with Technology and Consumer Discretionary to the fore. Recently, Financials have been the primary counterbalance, a trend we think can extend further as the yield curve flattens. Beyond this Energy has found a firmer relative footing but history suggests that patience is rewarded as one waits for further evidence that a longer term relative base is in fact in place.

Regionally Europe has begun to flex its muscles, and for the first time in a number of years it is beginning to hold its own versus the US. All the more impressive given the fact that index composition works against it (US Tech 24% of the market compared to Europe at circa 5%). Key Indices in Europe sit within touching distance of some quite significant long-term resistance levels and should these be overcome, Europe will be a much more interesting space through the second half of 2018.

Market Performance – EUR (€) Denominated Returns

Name Year to Date
(YTD)
Trailing 30D
(T1M)
April Return
EUR (€) EUR (€) EUR (€)
db x-trackers MSCI AC World ETF +2.32% +4.97% +3.59%
U.S. – S&P 500 +4.55% +8.03% +1.85%
Europe – Eurostoxx 600 +0.35% +1.94% +3.90%
Gold +2.63% +2.35% +1.27%
WTI Crude Oil +19.86% +8.92% +7.25%
Bloomberg – 24th May 2018

Notable movers – Trailing 30 Days – EUR (€) Denominated Returns

Positive Performers
Positive Performers Trailing 30D
(T1M)
EUR (€)
Advanced Micro Devices +38.67%
Paddy Power Betfair PLC +25.62%
Trupanion* +22.34%
Apple* +20.48%
Sainsbury (J) PLC +19.61%
Bloomberg – 24th May 2018
Negative Performers
Negative Performers Trailing 30D
(T1M)
EUR (€)
Symantec Corp (20.91%)
BT Group PLC (15.69%)
Mediobanca* (15.06%)
AirFrance – KLM (12.57%)
Electrolux AB (11.47%)
Bloomberg – 24th May 2018

This Month’s Chart

“Macau gaming companies fighting back?”

Chart Source: Bloomberg

 

The period 2014 through to the latter part of 2016 saw significant falls in the share prices of many Gaming companies with exposure to Macau, (it lies off the southern coast of China). This was largely on the back of tighter Chinese controls regarding capital flows out of the region, as well as a number of casino employee arrests. Casino companies have in the past been known to try and recruit high rollers from the mainland, despite laws explicitly prohibiting such acts. Nevertheless, the share price performance of the group is now looking better to the upside, as judged by the VanEck Vectors Gaming ETF (BJK), one of the main ETF’s with exposure to the sector. Positive tailwinds include a return to rapid growth in both wealthy VIP visitors and mass market segments – both of which feed into the more significant macro Chinese trend of increasing levels of disposable income. Further, the pending opening of the Hong Kong-Zhuhai-Macau bridge could significantly improve accessibility for international travellers who arrive by air via Hong Kong, as it will allow faster access to the island.

 

Fixed Income – Some Things to Ponder 

“Late April saw yields hit 3%”   

 

 

Chart Source: Bloomberg

 

Late April saw the U.S. 10-year Treasury yield touch 3% for the first time in more than four years. Yields on shorter-term U.S. investment grade (IG) corporate bonds are at an 8-year high. The past decade has seen rock-bottom short-term interest rates which has in turn driven income-hungry investors to riskier assets such as equities in search of higher returns. Upshot, investors can now earn positive after-inflation returns from these instruments for the first time since the global financial crisis. Despite elevated political concerns under the Trump Administration, confidence within the domestic U.S. economy is also on the up, with the Federal Reserve pressing ahead on its normalisation path. Over the medium-term, rates are expected to increase, however the effect on wider equity markets should be somewhat muted given the current backdrop of synchronised global growth. Therefore, resulting in a (still) favourable backdrop for risk taking, and future returns driven primarily through earnings growth in equities and yields within fixed income.

 

Macro – Some Things to Ponder 

Global shipping rates on the up….

Chart Source: Bloomberg

 

Recent months has seen an uplift in global economic prospects, on the back of an uptick in developed market economic growth for 2018. Countries that export commodities have also seen the benefits, with an improving pricing backdrop for both metal and oil prices, coupled with resilient ongoing global demand. Nevertheless risks do remain in the form of possible trade conflicts between major economies. The Baltic Dry Index (BDI) is a measure of the cost of shipping dry bulk stocks such as commodities. The routes covered are used as a proxy guideline as to demand and supply within the international marketplace. The chart shows that shipping prices have been on the increase since early 2016, and are once again moving higher. Suggesting that (for now) global trade metrics continue to look positive.

Valuation Spotlight 

The Case Shiller PE ratio and what it means for your portfolio…

 

Chart Source: Bloomberg

Many market participants use the Price/ Earnings or PE (per share) ratio when measuring how expensive a company’s stock might be. It can be especially helpful when looked upon versus a company’s peer group. Generally speaking the higher the ratio, the more expensive a stock is against its peers, (however this could be somewhat misleading if the company in question is expanding faster than its industry in terms of earnings and sales). The Case Shiller PE ratio takes the process a step further by adjusting for inflation, (the workings are normally based on the inflation-adjusted earnings from the prior 10 years, as opposed to the previous 12 months for the normal PE metric). This is known as the Cyclically Adjusted PE Ratio, i.e. it adjust for cycles. Many investors are drawn to the measure as it tends to eliminate the fluctuations in the normal regular PE ratio which are caused by variations in profit margins during differing ebbs and flows within the wider economic cycle. As of today, the Case Shiller PE stands at 32.42, with many investors citing a market that appears relatively rich when measured against historical norms. However, with global growth metrics now largely in sync, the possibility of a further move higher in this ratio looks increasingly likely.

 

FX Corner


Chart Source: Bloomberg

 

Since mid-April, the Argentinian Peso has depreciated by circa 20% against the U.S. Dollar. Catalyst’s for the latest Peso move include; (i) a rising U.S. interest rate environment; (ii) the Trump administration trade policies, which could adversely impact Argentinian exports, and (iii) recent dollar appreciation, making it more expensive to repay U.S. debt. Argentina’s external debt was $178.9 billion (28% of GDP) in 2015 and is projected to increase to $252.9 billion (38.8% of GDP) in 2018 according to the IMF. To try and stem this panic and persuade investors not to sell their Pesos for Dollars, Argentina’s central bank has increased the interest rates on Pesos to 40% from a previous figure of 27.25%. These factors have made foreign investors jittery about the country’s ability to pay back its foreign borrowings and grow its economy.

The current crisis has yet to develop into a full run on the domestic banking system, nevertheless it has evoked memories of past episodes of currency and financial events in countries such as Mexico (1994), Russia (1998), Turkey (2000) and Argentina (2001).

Chart Source: Bloomberg

 

 

Technicals – Some Charts of Note

Cyber Security – Demand within this space continues to be positive

Chart Source: Bloomberg

 

Segro – Specific Property companies continue to outperform

Chart Source: Bloomberg

 

Closing comments – Portfolio stock – Statoil – continues to perform well…

Chart Source: Bloomberg

 

STO’s share is riding high on the back of an improving oil price backdrop, which could see a further leg higher on the back of recent elevated Russian tensions within the EU. Europe is Russia’s number one client (circa 70%) of crude exports, however this figure could fall over the coming years as Russia increases shipments to China via the East Siberian‐Pacific Ocean pipeline. Statoil is not solely dependent on oil however, and is looking beyond traditional energy, with an increasing focus towards offshore wind opportunities.  One such example is the Hywind floating turbine project in Scotland with the company also having several other projects due to go live over the coming years. STO has also acquired the rights for two natural gas blocks in eastern South Africa which have the potential to contain significant amounts of natural gas (NG). This would position the group to export NG to the faster growing economies of Southeast Asia in the coming years.

 

Who said what

# 1 Volatility: “It feels raw at the moment and it is not entirely pleasant. But in the near term, investors have to accept the fact that their account balance will bounce around more than it did last year.” – Jon Swaney, Co-head of strategic asset allocation at New York Life Investment Management.

#2 Oil Prices: “Sometimes people forget that actually, it was not that long ago we were down at $28 a barrel … I think oil prices today feel a bit frothy.”- Brian Gilvary, CFO at BP

#3 Recent Apple results: “Slowly but surely, [Apple] is morphing into more than just an iPhone story and is displaying ability to sustain revenue growth irrespective of iPhone trajectory.” – Amit Daryanani, Analyst at RBC Capital Markets

#4 Brexit: “It is now up to the U.K. to come up with its vision for the future, which should confirm the U.K.’s red lines or adapt them. This is true for the future relationship. It is also true for issues of the withdrawal such as Ireland and Northern Ireland, where we have done our share of the work.”- Michel Barnier, European Union chief negotiator

#5 Hedge Funds: “History will end up repeating itself and we’ll have some geopolitical risk really enter investment portfolios again.” – Kyle Bass, Hayman Capital

                                                     

Disclaimer
This monthly marketing report should in no way be relied upon or substituted for the exercise of independent judgement. Elkstone has taken all reasonable care in the production of this material, but nothing in this note should constitute investment advice in any shape or form. Nor should it be perceived as giving accounting, tax or legal advice. This report is produced solely for educational purposes only. Individual circumstances differ, and readers should not act upon this content in any way. Readers should consult with their independent and regulated professional advisors before making any financial decisions. Prices can fall as well as rise, and may be subject to sudden and sharp moves. If you invest in the stock or other markets you may not recover the total amount originally invested. Historic performance in no way guarantees or indicates future price performance. Further risks to be aware of include currency and exchange rate fluctuations, which may also adversely impact your holdings. The educational information and opinions presented in this report were obtained or derived from sources that Elkstone deems to be reliable, but Elkstone or its related parties (employees, consultants, management, and directors) makes no representations or warranty, express or implied, as to their accuracy or completeness or correctness. Therefore Elkstone accepts no liability for loss arising from the use of the educational material contained within this newsletter.