In this briefing:
- RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine
- Wanted: A 21st Century Monetary Theory
- The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes
- Catalyst Calendar for Thailand 2019
- Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
1. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries.
Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel.
India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
2. Wanted: A 21st Century Monetary Theory
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
3. The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes
This week’s offering of Insights across ASEAN@Smartkarma is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
Macro Insights
In Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat, Sharmila Whelan suggests that the time has come for Asia to outperform developed markets.
In The Black Elephant Has Trumpeted, Dr. Jim Walker argues that we are on the cusp of a period of pronounced outperformance for Asian economies.
In Catalyst Calendar for Thailand 2019, our Thai Guru attempts upcoming catalysts for selective stocks in Thailand including TMB Bank PCL (TMB TB), Airports Of Thailand (AOT TB), Indorama Ventures (IVL TB), Sino Thai Engr & Constr (STEC TB), and Major Cineplex Group (MAJOR TB).
Equity Bottom-Up Insights
In his on the ground insight, Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves, former Jakartan Angus Mackintosh revisits this leading Indonesian mini-market operator. After a meeting with management, he finds the company on an altogether more favourable tack.
In Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries, Zhen Zhou, Toh takes a look at this significant transaction in the Philippines.
in Capitaland (CAPL SP): Transformational Acquisition at a Premium, Arun George comments on Capitaland Ltd (CAPL SP)‘s latest acquisition and though he sees it as significant would take a wait and see stance on the stock.
Sector and Thematic Insights
In Singapore Real Deals (Jan 2019 Issue 1, Anni Kum launches a new regular product commenting on significant developments in the Singapore property sector. Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In the first issue of Singapore Real Deals, she will dive into the first property launch in Prime District 9 in 2019, RV Altitude, to get a sense of the product mix and pricing strategies that developers are adopting in a price-sensitive market.
In Singapore Property – A Perfect Storm for the High-End Residential Market in 2019?, Royston Foo investigates some worrying developments on the supply side in Singapore property, which he suggests could negatively affect the market, especially the high-end.
4. Catalyst Calendar for Thailand 2019
While it may not be possible to get 100% visibility on upcoming analysts, the team at MCorp Review figured that it would be useful to start a calendar for those we see in the pipeline for this year and cite no more than three stocks that could come into focus during those months because of these catalysts. Some examples include:
- The TMB-Thanachart deal (late January) possibly the biggest bank deal since Mitsubishi-UFJ bought BAY for US$4.4bn in 2013, we see the government’s fingerprints in this and the likelihood that the share swap ratio will favor TMB.
- Chinese New Year (Feb 5), an important test for Thai tourism and AOT following the death of mainland tourists in Phuket last year. An underwhelming show would also hit Indorama.
- General elections (late May?) If this goes through, Sino Thai Engr & Constr (STEC TB) , whose tycoon Anutin Charnvirakul leads the swing vote party Bhumjaithai, could benefit hugely.
- Blockbuster season (August) So far, X-Men sequel The New Mutants, which timeline is confirmed, looks like the big boost for cinema titan Major Cineplex Group (MAJOR TB) , though we suspect Avengers Endgame, the sequel to Infinity Wars, would be an even bigger deal.
5. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
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