Trade Idea – Ford

On 6 February 2018 the Ford shares have been sold at USD 10.5. The 1-day realized return before any taxes and fees is 2.14%.

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Trade Idea – Ford

On the basis of increased market volatily a short term focused trade has been initiated in Ford (which is one of the most oversold stocks currently) at USD 10.28 on 5 February 2018.

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Historical share price development of Ford (source: Yahoo Finance)

From technical perspective the stock is clearly following a long-term downward sloping trend, but some return might be possible over a couple of days.

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FY 2017 adjusted profit before tax results (in mn, source: Ford)

Performance of the automotive segment was driven by North America and the financial services gained a lot as well.

Link to the IR site of the company for background data and insights.

Year Ahead 2018

1. Looking back to 2017

In my previous ‘year ahead’ briefing the key question related to our current situation among the business cycle. This year did not provided a clear answer for that. In 2017 the global investment universe became more extreme from different perspectives.
So far global equites had a strong year beating all the other asset classes, while the volatility measures reflect limited risk averness. Can we consider these as signs of general market euphoria (which is usually followed by share price decreases)?

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Historical performance of MSCI World index (source: Yahoo Finance)

CE4E9932-0055-458D-A697-E837057F61C5Current value of VIX index is close to its 3-year minimum (source: Yahoo Finance)

The S&P500 index achieved positive returns in each months of the year (after dividend adjustments) which is a clear historical record. The daily prices oscillated within extremely small daily ranges (more than 1% daily movements occured on a few trading days only).

We experienced 5-year record global growth rates with record high set of growth indicators, and the interest rate levels are still low. The global monetary thightening is ahead of us, the short-term Eurozone rates are still in negative territory, while the short end of the US yield curve is at appr. 2%.

C9E06416-5BEC-417B-8181-7A5AB34B214AComparison of US and Eurozone yield curves (sources: US Treasury, ECB; values are in percentages)

The growth stocks were clearly overperforming the value category. Technology, artificial intelligence stocks benefited from the general market hype and were characterised by extreme valuations (even in case of no proven revenue streams of early phase business models). A good example is Long Island Iced Tea which recently changed its name to Long Island Blockchain and the announcement caused several hundred percentages increase in share price on one trading day (link).
On the FX side, despite its clear interest advantage, the USD underperformed against several key currencies, resulting in one of the biggest surprise of 2018 from market perspective.

 

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2. Expectations for 2018

Following several years of cumulative growth gains of the economy, the key question for us is whether there is still some room for the market to grow. The brief answer is yes in general, however the momentum of 2017 may not be repeated and there are signs of certain risk factors which underlines the necessity of strict position limits and risk management approaches.

OECD expects the global economy to grow by 3.7% in 2018 and the 2018 and 2019 forecasts show decreasing rates which can predict a kind of slowdown in mid term.

In absolute terms there is no really favourable asset class, the valuations are at record high levels. Due to the extremely low interest rates, the present and future values of expected cash flows are close to each other practically in every segment.

2.1 Equities

Despite the negative voices (duration of the current US cycle, euphoria on the markets, geopolitics, outlook of the Chinese economy, flattened yield curve), it seems that there is no real alternative of equities for the next year.
The high P/E ratios reflect a reasonable outcome of a low interest rate environment and as long as they are combined with low inflation stock market gains can be expected.

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2.1.1 Regional preferences

The European equity sector – which was lagging behind the US in recovery from the recession – can easily be a top performer in 2018 due to the following considerations: (i) compared to all the other key regions (especially US and the emerging markets) the European stock market P/E ratios didn’t increase that much during the recent years, (ii) the Eurozone unemployment rate is already below its long-term average (which is supportive for consumption), (iii) increasing loan growth rates (with still favourable interest rate environment), (iv) high share of value stocks which sector might perform well in case higher yields will be realized.
The second preference is Japan where the central bank is expected to maintain the loose monetary policy to meet its inflation target. While the ECB, the FED and the other central banks seem to decrease the magnitude of their monetary stimulus, this can be a relative advantage for the Japanese stock market. This policy can result in a weaker JPN which is usually supportive for the equities due to the traditional negative correlation effect. Moreover, the traditionally non-leveraged Japanese corporate sector can benefit from any increase in their debt levels on their exremely low rate regime.
The UK market is not preferred now. As per OECD estimates, the growth rate of UK (1.2%) is appr. half of the Eurozone forecast (2.1%). The lack of clarity about the outcome of the Brexit situation may not go away anytime soon. Therefore it seems to remain as a drag on the UK market confidence. In addition, UK is among markets which are characterised by high number of dividend payers, and in case of increasing bond yields, these companies are underperformers.
No clear opinion on the direction of the US and emerging markets equity sector due to the sharp increase in their valuations.

2.1.2 Sectoral themes

In case of increases in bond yields, the financial sector is clearly preferred, based on historical data there is significant correlation between the long-term yields and the returns of this sector. On the other hand, the defensives are usually underperforming in such an environment.

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Comparison of relative performance of European Financials (lhs) and the Eurozone long-term bond yields in % (rhs), source: Yahoo Finance

For mid term, I expect that the corporate digitalization solutions and electric car related equities can remain interesting for investors. According to McKinsey the development of the global IoT (Internet of Things) can result in an annual economic impact amounting to between USD 4 and 11 trillion by 2025; and the industrial/corporate sector could gain the biggest share out of that value.

Which sub-sectors can be the beneficiaries?

  • regarding the increase in EV penetration: utilities already announced related strategies (for example E.ON, Enel), miners/traders supplying key ingredients of battery manufacturing (for example Glencore – supplying close to 30% of global cobalt volume), car manufacturers (BMW, Volvo, VW), technology providers (for example Infineon)
  • regarding digitalization: software/platform developers allocating significant efforts on corporate/industrial digitalization and AI (for example SAP, Siemens, Google, Microsoft, Dassault), cyber security specialists and strategic consultants (for example Accenture)

Even on short term one of the key challenges for the corporate sector is the rapidly growing wage inflation. On this basis subsectors having large exposure to labor costs are not preferred.

 

2.2 FX

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The mainstream opinion is shared in relation to the expected development of key currencies. In case ECB’s monetary policy will be stricter the EUR will appreciate against the USD and other currencies. The sterling is expected to underperform due to Brexit issues as mentioned previously. Weaker JPY is projected.

 

2.3 Bonds

It is definitely not the preferred asset class in case of increasing reference yields and stricter policy. On the other hand, individual stories might be available. One of them can be that the repurchase of own subordinated bonds by European banks to comply with the relevant Basel regulations (in case of ‘must have’ purchases, relatively high gains might be in place for investors).

 

Thanks for reading my thoughts. Wishing a healthy and successful year for everybody.

 

Trade Idea – HCP

HCP is an integrated REIT that invests mainly in healthcare related real estate portfolio (senior housing, life science and medical office) in the US. Since 1985 it has been a publicly listed company and is the first healthcare REIT selected into the S&P 500 index.
Mostly inorganic type of growth strategy characterized its development.

  • In 1999 it completed a merge process with American Health Properties, which was the largest transaction ever closed in the healthcare REIT sector at that time (USD 1bn deal value). Its assets under management reached USD 2.5bn.
  • With the acquisition of CNL Retirement Properties in 2006 for USD 5.3bn value it practically doubled its size.
  • In 2007 it created the life science platform through the USD 2.9bn value purchase of Slough Estates (83 properties).
  • In 2012 it acquired a USD 1.7bn senior housing portfolio from a joint venture between Emeritus and Blackstone.
  • In 2016 the spin-off of Quality Care Properties (QCP) into an independent publicly-traded REIT has been completed.

 

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Historical share price development of HCP (source: Yahoo Finance)

Currently the company is on the path of revitalizing/transforming its portfolio (reducing Brookdale concentration, announced sales process related to the remaining UK holdings, reentering the Boston life science market).
The latest (2017 Q3) report provided lower net income and FFO numbers compared to the previous comparable period.
Many REITs are underperforming nowadays on the basis of increasing rates, however HCP still offers significant expected dividend yield (over 6% per annum).
Long position in HCP has been opened on 18 January 2018 at USD 23.4.

2017 Performance of Trade Ideas

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Compared to last year, lower number of initiatives have been posted during 2017, the short-term focused technical approach resulted in really few entry points, possibly due to the general market hype.

The top pick of the year, the Aegon position was closed in January and the currently held Equifax shares have similar unrealized performance.

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Realized individual returns in 2017

The highlighted holding period returns are not annualized and are generated from long positions in the equities and do not contain dividend returns received over the holding period. All return values are before fees and taxes.