Archive for the ‘Macro Ideas’ Category

The hunt for value in global equities 

Wednesday, July 26th, 2017

By Matein Khalid

July 24, 2017


The US stock market has been resilient to the political and policy firestorms created by the Trump White House. Trump’s failure to enact tax reform or a major fiscal stimulus has restrained but not destroyed the “animal spirits” of the Wall Street bulls, even if the failure to “repeal and replace Obamacare”, a key campaign promise, could prove catastrophic for the Republican in the 2018 Congressional elections.


The S&P is expensive relative to historical valuation ranges at 18 times forward earnings on the eve of the Federal Reserve’s shrinkage (“normalization” in Yellen speak!) of its $4.5 trillion balance sheet this autumn. However, its high valuations were anchored by 7% revenue and 14% earnings growth in the first quarter. It is highly likely that US companies will meet consensus earnings growth estimates of 8% for the second quarter. Volatility, while low now at 10, could well rise this autumn as US central bank begins monetary “normalization” despite Dr. Yellen’s dovish testimony to the Senate Banking Committee.


The most dramatic theme in the US stock market is a shift from growth/momentum (FANG, semiconductor and Internet shares) to value shares, primarily financials trading at modest multiples of tangible book value.


US money center bank shares have benefited from this shift, given that a steeper US Treasury bond yield curve, a $100 billion capital return windfall in the Fed stress tests and a promised rollback of Dodd and Frank has attracted exceptional inflows into big banks, led by J.P. Morgan, Citigroup and Bank of America. I have also been bullish on alternative asset managers, led by Blackstone and KKR. Blackstone manages more $360 billion and has just raised funds for the world’s largest infrastructure fund. Blackstone and KKR boast world class private equity, credit and real estate platforms. Their distribution per units (DPU) are attractive to yield starved investors. With Brent’s post Vienna collapse, oil and gas majors (notably Chevron, Occidental) also offer compelling value. The correction in NASDAQ makes it attractive to reenter Microsoft, Oracle and Juniper Networks.


European equities are a crowded trade and the valuation discount to the US does not offset the risk of a decline in earnings growth estimates and ongoing political crises such as Brexit, the Russian sanctions, the war in Ukraine, the rise of populist political parties despite the defeat of Marine Le Pen in France and Geert Wilders in Holland, terrorism and the migrant crisis.


Once the Fed moves on its balance sheet, ultra easy money from Mario Draghi is living on borrowed time. Valuation multiple in Europe will contract as the ten year German Bund yield rises to 90 basis points and EPS growth estimates are slashed. The biggest risk is a Italian snap election won by the Five Star Movement, a referendum on the Euro and Italexit. This could all lead to a plunge in the Euro Stoxx 600 index level to 320.


In Asia, Japan is my favourite stock market as its valuation is inexpensive at 13.6 times earnings while the Bank of Japan’s zero yield policy at a time of Fed tightening means the yen depreciates to 118 against the US dollar. This is hugely bullish for Nikkei exporters, mainly Sony and Hitachi. I am also bullish on Japanese property developer Mitsui Fudosan, a proxy for Kuroda’s reflation trade.


Asia ex Japan is the most attractive segment of the emerging markets since valuations are still modest at 1.6 times book value, given that the S&P 500 index trades at 3 times book value. Asian markets face potential macro risks this autumn. Government bond yields in the US, Britain and Germany have begun to rise. Trump’s protectionist policies are a threat to cyclical exporters South Korea and Taiwan. The Hong Kong property market is also vulnerable to the rise in US dollar interest rates. Despite the fall in the US Dollar Index, the Philippines peso continues to depreciate, a proxy for the exodus of offshore capital from Manila. Malaysia, Southeast Asia’s top oil/LNG exporter, is hurt by the 1MDB sovereign wealth scandal and softness energy/commodities prices. Thailand’s 3.6 dividend yield and 14.5 times forward earnings remains attractive at a time of rising exports, rural incomes, infrastructure spending and tourism arrivals. Singapore industrial and office property trusts also offer attractive total returns.


After a 23% rally in 2017, the MSCI emerging markets index trades at 13 times earnings, at least 3 full points above its March 2011 bottom. This would suggest buying telecoms or power companies with high dividends and free cash flow, not higher beta banking or technology shares.

Strategy ideas amid the trauma of Brexit

Monday, June 27th, 2016

By Matein Khalid


It is impossible to predict the macro zeitgeist in real time as a global political event of such seismic importance unfolds before my Bloomberg screen. So I go all cash and fly to Munich not to seek peace in our time but to revisit loony King Ludwig’s Bavarian Gothic fairy tales castles, the cafes of Schwabing/Marienplatz and visit Garmisch with my liebe Hausfrau. There will be a bloodbath in global finance in the next six months. Why? Bank credit default swaps suggest a rise in funding risk. This is Lehman all over again, only worse.


Note Brexit crude oil fell 5% on Brexit. The cost of bank risk will skyrocket in a world where Barclays and RBS shares can fall 20% in a single session. Is this negative for GCC banks, the largest component of regional stock markets? Is the Queen of England English (well, she is genetically German, thanks to Empress Vicky and Prince Al, the bearded dude on the big chair in Hyde Park!).


Defensive sectors? Note UK education publisher Pearson PLC rose 2%. So did Swiss pharma Novartis. Gold? If you are lucky enough to get a profit taking move down to $1310 for new money. It makes total sense to short Tesco with its huge sterling revenues but buy Carrefour, now 7% cheaper even though it has no real sterling revenues. Vive la France, vive MAF Holdings, vive Carrefour!


The real winner of Brexit? Boris Johnson, possibly the next Old Etonian Prime Minister. Donald Trump scored the marketing coup of the millennium by making sure he opened a Scottish golf resort on the day Brexit shook the sceptered isle, this green and pleasant land.


The Chicago Volatility Index has soared 32%, a compelling argument to sell put options on devastated UK banks. Why not Barclays New York ADR, down 30% overnight, a screaming option strategy. Jes Staley was one of the smartest investment bankers of my generation at J.P. Morgan and he will turnaround the 300 year old Quaker bank Bob Diamond’s LIBOR rigging banksters destroyed. Dividend cut? Yes. Gulliver’s travels? Futile since HSBC shares have been such a disaster despite $100 billion in write offs, legal fines, 80 business exits, a $109 billion Mexican money laundering fine, 50,000 payroll cuts, the $5 billion sale of HSBC Brazil to Banco Bradesco. Profit warning? Yes.


I have done my best to hedge global macro risk in 2016 by recommending (table pounding!) the most shunned, least foreign owned emerging market in Asia – Pakistan. This is a local play since the biggest holders of Pakistan sovereign Eurobonds are Khoja financiers of Zurich and the Gulf, not the big EM leemings in the City, New York and Singapore (Aberdeen Wallah!). Friends who trusted me on Pakistan lucked out in the best performing stock market in Asia or Europe in 2016. Bull market zindabad! Christmas came early on McLeod Road in Karachi.


I was horrified that so many Gulf family office and institutions have this touching faith in London property even though it is among the most overvalued bubbles on the earth. I have made no secret of my investment thesis on Makkah Umra hostels, an asset class immune to Brexit risk or even the Saudi credit cycle. To exploit a no brainer asset class it is unfortunately necessary to possess a brain, as some of the biggest and smartest families and institutions in the GCC know all too well.


Fund managers shares should be shorted Hundreds of billions of retail money will flee asset managers in US, Europe and, yes, the GCC. Bear markets are savage and merciless. I know. I barely survived several in my own life. How will UK fund managers sell funds on the Continent? Paybacks in Finanzplatz Frankfurt and the Ville Lumiere are being plotted against the City even as I write. Who to short? Notice Invesco fell 10% on Friday. Get real. Get out. A UK asset management platform is no leprosy due to Brexit. Outflows will escalate. Fees will shrink. Markets abroad will vanish. Balance sheets will tremble. Index funds will fail. Firms will die. Private equity firms? A screaming short, with both black stones and black rocks.


The markets assume the European project will unravel. Why else is London down 3% but Italy and Spain down 12 – 14% as I write. There are existential threats to the Euro with the elections/referendum this autumn against the regimes of Rey Manuel and Matteo Caesar, the coolest Florentine to rule Bella Italian since Lorenzo de Medici. If Italy/Spain exits, Monnet’s dream ends. Global equities then fall 50%, as they did in 2008 and 2001.