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IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
1
IRP
Contents
April 2015 | www.IRPJournal.com
CONTENTS
03
Absolute Strategy Research - US Equities set for a 5-10% Correction
07
Management CV, Inc. - Fanuc: Like Father, Like Son
09
Crossborder Capital Limited - Global Liquidity Falling
11
Ned Davis Research - Silly P/E or How Not to Time European Equities
13
Idea-Driven Equities Analyses - : Cashing in on B2C market growth:
PostNL (AMS:PNL)
15
Storm Research - 1982 & Counting
17
WaveTrack International - The 3rd Phase of the ‘Inflation-Pop’
19
Providentia Capital - Harnessing volatile relationships
for portfolio construction
21
Graham Bishop - Grexit, Brexit, Capital Markets Union and BASEL
2
IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
US EQUITIES
SET FOR A
5-10%
CORRECTION IN Q2
By Ian Harnett and David Bowers, Co-Founders Absolute Strategy Research
U
S equities have been the driving force in Global Equity
markets for the last three years. However, we believe this
leadership may be set to change and that Q2 will see a
5%-10% correction in US stocks.
down largely by the meagre 1% gains in the US market.
We are increasingly worried that rather than simply being a drag
on global equity market performance, the US economy could
trigger a Q2 reversal in US equities.
Since the start of 2015, local currency returns for markets such
as the Eurozone and Japan, where QE has been a major stimulus
via weakening exchange rates, have been strong performers, up
17% and almost 14% respectively, with the global picture held
Chart 1
Chart 1 shows how US activity surprises over the last three
months have been the weakest recorded since the slowdown of
2011/12.
US Activity Surprise Suggest GDP Growth Downgrade
Source: ASR Ltd. / Bloomberg LLP / Consensus Economics / Thomson Reuters Datastream
3
IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
Ian Harnett
Managing Director &
Chief Investment Strategist
David Bowers
Managing Director &
Head of Research
“…we doubt
that the Fed
will be in a
rush to raise
rates in June.”
4
IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
Typically, the ASR activity surprises have had
a strong correlation with changes in the
Consensus Forecasts for GDP in the coming
quarter. US growth expectations might be
scaled back by almost 100bp in the coming
two months.
Chart 2
US Activity Surprise vs 3m %
change in US Equities
This has important implications. First, as Chart
2 shows, the risk of a significant correction in
US equities is high, given this scale of negative
activity surprise. While it may not be the -20%
implied by this graphic (given the lack of
attractive alternative assets), we believe that
a 5%-10% pullback is possible. The second
implication is that we doubt that the Fed will
be in a rush to raise rates in June (especially
with headline inflation remaining negative).
Source: ASR Ltd. / Bloomberg LLP /Thomson Reuters Datastream
Chart 3
US and EZ Trailing and
Forward EPS Growth
A potential trigger for the correction, besides
the weaker-than-expected activity data, will
likely be continued earnings disappointments
in the US. Already the strength of the
US dollar is weighing on US earnings
expectations, with the IBES data suggesting
just 6% for 12 month forward US EPS growth
vs 16% in the Eurozone.
US Equity Valuations Look
Extended on 3yr Z-Scores
Source: ASR Ltd. / IBES / Thomson Reuters Datastream
The lack of pricing power that occurs with dollar strength is
evident in the weak prices paid data, and highlights that US
earnings will likely see further downward pressure. The danger
from such earnings disappointments is that 36/40 US sectors
have trailing multiples above 15x and 12/40 are now over 25x.
As Chart 4 shows, our 3 year Z-score valuation models, while
not as stretched as in 1998, are not overly supportive. Basic data,
such as price/book, above 3.7x for US non-financials, are back to
levels not seen since May 2002.
Source: ASR Ltd. / WorldScope / Thomson Reuters Datastream
5
Chart 4
IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
The question for global investors
is whether, if the US market comes
under further pressure, Eurozone and
Japanese equities can outperform in
local and common currency terms?
As Chart 5 shows, European equities
have beaten US equities since the
start of 2015 even in common
currency terms. And although in local
currency terms performance has been
spectacular, we believe there is still
significant scope for Eurozone equities
to continue to gain if the US falters.
Eurozone/US Equity Performance and ASR
SBI
Chart 5
Source: ASR Ltd. / Thomson Reuters Datastream
Chart 6
One way of playing such a
rebalancing is to look for European
stocks with high international
earnings, which benefit from
dollar strength. These have already
significantly outperformed US
‘international’ stocks, which are
negatively impacted by the strong
US dollar and we expect this to
continue. Despite a modest pullback
in the USD over the past couple of
weeks, we do not expect a reversal
while the ECB is easing and the Fed
is moving towards tightening.
European vs US International
Earners & EUR/USD
Source: ASR Ltd. / Thomson Reuters Datastream
The ASR US Surprise Indicator is already signalling a 100bp
reduction in US Consensus GDP forecasts in Q2. Weak domestic
capex and activity, in addition to the stronger dollar, will likely
lead to US earnings disappointment, exposing some extended
valuations. Our conclusion therefore is that the US market
is increasingly at risk of a 5%-10% correction in the coming
months as earnings disappoint, in the face of some demanding
valuations. The good news is that such a correction would make
it less likely that that Fed would raise rates in June. Also, global
equities, especially Japan and Eurozone equities, look well
placed to withstand such a pull back if it occurs.
To see the full report from
Absolute Strategy Research contact:
Richard Mylles
+44 207-073-0753
[email protected]
www.absolute-strategy.com
6
IRP
Like Father, Like Son - Fanuc Corp. ADS (OTC: FANUY)
April 2015 | www.IRPJournal.com
LIKE
FATHER,
LIKE SON
FANUC
CORP.
Renny Ponvert
CEO, Management CV, Inc.
ADS
(OTC: FANUY)
F
ounder, Honorary Chairman and recently named Chief of
Robotics Research Institute, Dr. Seiuemon.
Inaba (88) built Japan-based Fanuc Corporation (short for:
Fuji Automatic Numerical Control) into a dominant automation
firm over 3 decades and into the world’s leading producer of
industrial robots and NC devices. At age 21, he joined Fuji Tsushinki
Seizo, the predecessor of Fujitsu, and at age 30, he was selected
by a distant relative who sat on the Board to run the new controldevice Company after its spinoff from Fujitsu. We think Inaba,
who is known to regularly put in 11 hour days, is still calling the
shots at this Company. We credit CEO Yoshiharu Inaba’s (66) father,
Seiuemon, with effectively targeting the growing demand for
robots that weld cars, assemble electronics and package food in
China. We note, positively, that China specifically targeted robotics
as a key sector for development in its 5 year economic plan for
7
IRP
Like Father, Like Son - Fanuc Corp. ADS (OTC: FANUY)
April 2015 | www.IRPJournal.com
“We think the balance sheet
is solid with ¥823.7 billion in
cash and equivalents and
no long-term debt”
2011-2015. We like Fanuc’s 36% operating margin and credit
Honorary Chairman Inaba for designing tool plants that can run
mostly unattended. We note, however, a pattern of nepotism that
we view as cautionary.
We also think that, given this management team’s particularly
weak ownership stake, the Board’s long-term incentive plan (LTIP)
is poorly aligned with shareholder interests. And given the fact
that all members of management hold a seat on the Board, we
think that the LTIP is not likely to change in a meaningful way that
we would consider shareholder friendly.
In addition to Seiuemon Inaba’s son, Yoshiharu, who is CEO of Fanuc,
we note that Kiyonori Inaba (36), Seiuemon Inaba’s grandson, is
the General Manager of the ROBOT division of FANUC. Honorary
Chairman Inaba, who earned a PhD in engineering from the Tokyo
Institute of Technology, is said to run his company with almost
military-like precision, and that most of his decisions are final. We
think there is significant key man risk at the Company. While we like
the tenure and industry experience of the management team, we
think they are mostly new to their roles and that their performance
thus far has been unimpressive.
CAPITAL ALLOCATION PRACTICES We think that capital
allocation under CEO Inaba and his father has been ambiguous;
however, it has turned out to be shareholder friendly. Revenue fell
from ¥498 billion in 2013 to ¥451 billion in 2014, and other key
operating metrics have also been declining since 2012. With an
ROE of 9.7%, and an ROA of 8.7%, management’s effectiveness is
subpar versus industry peers. We think that the slow recovery of
the Chinese market and a stagnant Japanese market have had a
negative impact on performance. We also think management has
been slow to address operating weakness, though we credit them
for recent steps to improve operating efficiencies by establishing
laboratory and sales divisions under the supervision of each
division, namely FA, Robots and ROBOMACHINEs. In addition, new
factories were built for machining Robot and ROBOMACHINE parts
at the Company’s headquarters. We think the balance sheet is solid
with ¥823.7 billion in cash and equivalents and no long-term debt
as of fiscal year 2014. Management paid an annual dividend of
¥170.06 in 2014 and has been regularly paying dividends since
2008. The Board paid out ¥31.1 billion in dividends in 2014, down
from ¥39.1 billion in 2013. Management has also returned cash to
shareholders via repurchases in the last couple of years. In 2012,
2013, and 2014 management bought back ¥304 million, ¥246
million, and ¥665 million worth of Fanuc shares, respectively
EXECUTIVE TEAM SKILLS FIT We like this team’s industry
experience and long tenures. We note that most of the Fanuc
team members are new to their roles. Yoshiharu Inaba was named
CEO of Fanuc in June 2003. CEO Inaba joined the Company in
September 1983 and was promoted to Managing Director in 1992
and then to Senior Managing Director in 1995. He was promoted to
President, Chief Director of Marketing and Representative Director
of Fanuc in January 2012 and in 2013 was named General Manager
of the FA Business Division. Inaba holds a PhD in Engineering from
the University of Tokyo and a Bachelor’s degree in Mechanical
Engineering from the Tokyo Institute of Technology. Before joining
Fanuc, he worked for Isuzu Motors. We note that in 2014, Forbes
named Fanuc one of the top 100 innovative companies in the
world. That’s the 4th consecutive year that Forbes has recognized
Fanuc as a top innovator. Hiroyuki Uchida (56) was named Senior
EVP of Fanuc and General Manager of the ROBOMACHINE Business
Division in October 2013. We note that the division he leads saw
a 55% decrease in revenue in 2014. EVP Uchida joined Fanuc in
1982. We like his long tenure and record of progression within
Fanuc. We note, negatively, that he is currently the President of
Organo Corporation, a publicly traded Japanese water treatment
engineering company. We think his dual roles are a distraction and
take too much time away from his duties as Senior EVP of Fanuc.
Copyright 2014 Management CV, Inc.
To see the full report from
Management CV contact:
COMPENSATION & ALIGNMENT ANALYSIS We think that the
compensation levels are low by US standards but in-line with
large-cap Japanese peers. The 18 members of the Board were paid
a total of ¥2.086 billion (about $18.2 million) in fiscal year 2014,
which we think is low for a Company with a market capitalization
of about ¥4.76 trillion. We note that all members of management
are on the Board. Individual compensation levels are not disclosed.
Renny Ponvert
301 455 5886
[email protected]
www.managementcv.com
8
IRP
Global Liquidity Falling: Latest GLI™ Data
April 2015 | www.IRPJournal.com
GLOBAL LIQUIDITY FALLING:
Latest GLI™ Data
L
atest February 2015 Global Liquidity data highlights a
further decline. Our GLI™ (Global Liquidity Index) fell
to 39.6 from 41.7 (‘normal’ range 0-100) and the index
has been at or below average now for six months.
Measured in equivalent US dollar terms, net monthly outflows
of Global Liquidity average US$1 trillion over this period, or
around 6% of total funds. Falling Global Liquidity warns of future
financial and economic risk. Current levels of liquidity do not yet
signal recession but they do point to economic slowdown over
coming months and greater market volatility. Consistent with
this picture, Treasury yield curves should continue to flatten and
corporate credit spreads widen. Our models are still flagging a
mild ‘Risk Off’ regime.
The most worrying aspect of the February data is the sharp
fall in US private sector liquidity through the month. This
reflects movements in corporate cash flows, which have
been the mainstay underpinning Wall Street now for over
two years. We must stress that, at an index of 72.2, US private
sector liquidity remains relatively high, but it is falling and
currently stands more than 10 index points below its August
2014 peak. This dip is consistent with recent downgrades of US
earnings guidance. On top, February saw accelerated capital
outflows from the US dollar. The Fed remains slightly tight at an
index of 43.6.
Michael Howell
Managing Director
Crossborder Capital Limited
“Current levels of liquidity do not
yet signal recession but they do
point to economic slowdown
over coming months and
greater market volatility”
Outside of the US, there is more evidence of policy easing
moves. Emerging Market Central Bank Liquidity rose to an index
score of 62.6 in February, or its highest value since the 2008
Financial Crisis. India’s Reserve Bank eased further last month
to an index of 70.0, paced by China 65.8 and Brazil 50.7. China’s
People’s Bank is definitively easing, according to our assessment.
This is further evidence that Emerging Market Central Banks
have broken away from the old-Bretton Woods II policy-regime
of pegging to the US dollar, and instead are allowing currency
weakness. The sliding Chinese RMB may be the confirming
signal. A higher gold price should also be expected on a 6-12
month view, as a result of this acceleration in Central Bank
money-printing. The index trend towards rising Central Bank
Liquidity and falling Private Sector Liquidity is a typical signal of
paper currency weakness. The gap in these indexes is now 3.9
index points, or down from 16.6 six months ago.
To see the full report from
Crossborder Capital contact:
Michael Howell
T: +44 020 7868 4104
[email protected]
www.liquidity.com
Among major markets, Switzerland still enjoys the best liquidity,
9
IRP
Global Liquidity Falling: Latest GLI™ Data
April 2015 | www.IRPJournal.com
followed by the US, India and now the Eurozone. Lowest
liquidity across the major markets is in the UK, Emerging
Markets and Australia. Based on a 6-month change, the
Eurozone has enjoyed greatest liquidity inflows, followed by
Switzerland, India and all Emerging Markets. Largest outflows,
over 6-months, are in the US, Japan and Australia.
of flows back into sterling from the weak period following the
sanctions on Russian money in late-2014.
The investment implication of these flows are:
• Cycle Position – late-cycle Speculation/Turbulence regime
for most Developed Markets and now mild ‘Risk Off’.
Eurozone is an exception. Market and forex volatility should
rise. Move towards defensive investments. At some stage
later in 2015, we expect that this deteriorating backdrop
will trigger a QE4 move by the US Fed.
Overall the trends show Developed Market and Frontier
Market liquidity is falling from high levels, and Emerging
Market and Eurozone liquidity is rising from low levels.
January’s strong bounce in Eurozone liquidity weakened a tad in
February, but ahead of the significant slated ECB action, liquidity
conditions have recovered strongly from the 2014 lows. UK
(25.4) and Japanese (45.0) liquidity recovered a little in February
from setbacks, but both remain weak overall. The Bank of Japan
has reverted back down to a neutral policy stance, according
to our analysis. A notable feature of February was the rebound
•
Bonds – we first expect still flatter yield curves in the US
and UK. Favour mid-duration region of curves. Credits
under growing pressure. Favour investment grade.
Eurozone yield curves could see countertrend steepening
moves.
World Liquidity (GLI), World Business Activity (PMI) and Yield Curves
80
60
70
58
60
56
50
54
40
52
30
50
20
World PMI (JPMorgan/Markit)
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
46
May-10
0
Feb-10
48
Nov-09
10
Global Liquidity (GLI)
3.00
100
90
2.50
80
2.00
70
60
1.50
50
1.00
40
30
0.50
20
0.00
10
0
2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01 2015-01
Global Liquidity
10
G4 Yield Curve
-0.50
IRP
The Silly P/E or How Not to Time the European Equities
April 2015 | www.IRPJournal.com
“Euro-bulls point to low relative and absolute
Shiller P/Es as a reason to overweight the region.”
THE SILLY P/E
OR HOW NOT
TO TIME THE
EUROPEAN
EQUITIES
N
o other valuation metrics get as much attention as the
cyclically adjusted price-to-earnings ratio, or Shiller P/E.
The indicator’s appeal comes from its no-nonsense
approach to investing, which boils down to: (1) buy
low, sell high; (2) value drives price over the long-term; and (3)
inflation should not fool investors.
Because of the ratio’s academic pedigree and Nobel cachet,
market commentators rarely feel the need to check the
indicator’s track record and often quote the Shiller P/E out
of context. For example, Euro-bulls point to low relative and
absolute Shiller P/Es as a reason to overweight the region.
Vincent Deluard
The chart below takes the perspective of an investor who would
have built a country portfolio based on the level of Shiller P/Es in
February 2005, slept for 10 years, and just woken up. He would
be pleased to see the cheapest market (the Netherlands) posted
gains of 82%. He would also be pleased that the most expensive
market (Austria) lost 45%. But the rest of his country allocation
would not have worked well. July 2004 Shiller P/Es would have
overweighed Greece, Portugal, and Ireland – not exactly the
best call getting into the sovereign debt crisis. Conversely,
Denmark, the best performer over the period, would have been
underweighted because of its high Shiller P/E in July 2004.
European Strategist.
Ned Davis Research, Inc.
1. In the 03/14 Featured Report, Ed Clissold observed that: “the Shiller P/E has not worked any better than other metrics. Since 1993, it has done worse”.
11
IRP
The Silly P/E or How Not to Time the European Equities
April 2015 | www.IRPJournal.com
Of course, any indicator can be made to look great or
horrible by carefully selecting the study period. To confirm
these results, we re-ran the simulation over the past 10, 7,
5, and 3 years. For example, the green point at the right of
the chart below indicates that the Czech Republic Index
traded at a Shiller P/E of 40.7 in February 2008 and that the
index lost 42% in U.S. dollars since that date.
The only clear pattern that emerges from this scatter
plot is that there is no pattern between Shiller P/Es and
forward stock returns. If we were to read the tea leaves, it
seems that the European markets that were overpriced
ten years ago tended to outperform over the following
ten years.
Why have Shiller P/Es been so bad at country selection
in Europe recently?
First, it may be because Shiller P/Es were not built for
country rotation models. R. Shiller’s original work uses
the cyclically adjusted P/E to spot long-term excesses
in valuations within a single market – the U.S.
Second, the Shiller P/E makes the implicit assumption
that the earnings growth potential of an economy is
stable over the economic cycle. This has not been the
case in Europe over the past 20 years. For example,
the Spanish and Irish economies were boosted by a
combination of unique factors between the mid-90s
to 2007: an investment boom driven by EU structural
funds, a real estate bubble, and falling borrowing
costs. These tailwinds were a unique historical event
and it is absurd to imagine that earnings growth
would ever return to this breakneck pace.
Third, there may now be enough value investors to
arbitrage excessive differences in Shiller P/Es. If that
were the case, Shiller P/Es would be positively related
to future earnings growth, rather than stock prices.
The chart below shows that this has clearly been
the case over the past 3, 5, and 7 years. For example,
the MSCI Ireland Index had the lowest Shiller P/E in
March 2008, and its earnings dropped by 70% over
the following seven years.
This suggests that investors are able to see through
the ‘earnings illusion’. Therefore, the relatively low levels
of European cyclically adjusted valuations should
point to lower long-term earnings growth, rather than
higher stock returns. That is our forecast as well.
To see the full report from
Ned Davis Research contact:
Vincent Deluard
+44(0)20 7779 8579
[email protected]
www.ndr.com
12
IRP
Cashing In On B2c Market Growth: PostNL (AMS:PNL)
April 2015 | www.IRPJournal.com
CASHING
IN ON B2C
MARKET
GROWTH:
POSTNL
(AMS:PNL) A
Consumer Spending
(in EUR bn)
16.7%
recently published joint report by GfK, Thuiswinkel.
org and PostNL shows that online consumer spending
in the Netherlands grew by 8.4% in 2014, establishing
a new absolute high at almost EUR 14bn or 17.6% of
overall consumer spending. Yet, this was not the only record that
was broken. The same applied for the number of online shoppers
(12.7 million or some 75% of the Dutch population), the number
of online transactions
(more than 127m or
on average 10 per
online shopper) and the
average spending per
online shopper (roughly
EUR 1,100). Besides, for
the first time in history,
Breakdown Online Sales
online spending on
(in EUR bn)
products topped that of
services.
Going forward, online
consumer
spending
will continue to grow its
share and within online,
growth in products
sales will continue to
outpace that of services,
as is illustrated below:
36.6%
83.3%
53.4%
2012
2020e
2012
Online
Services
Source: GfK/Shopping 2020/the IDEA!
1. Source: Ecommerce Europe, 2014
13
2020e
Goods
IRP
Cashing In On B2c Market Growth: PostNL (AMS:PNL)
April 2015 | www.IRPJournal.com
Henk Slotboom, RBA
Idea-Driven Equities Analyses
“PostNL holds an estimated
80% share in the E2E delivery
segment for B2C parcels”
As impressive as these numbers may look, Dutch online B2C
spending is relatively modest in an international perspective. In
2013, online B2C spending in Europe amounted to EUR 363.1bn
. The Netherlands accounted for less than 3% of that. The same
applies for online B2C spending growth, where the Dutch
merely outranked the Finns. Last but not least, the handicap of
a relatively small home market is reflected in the fact that none
of the Dutch e-tailers managed to establish a real international
footprint like e.g., Amazon or Zalando. Instead, there merely are a
limited number of ‘national champions’, with BOL.com (owned by
Royal Ahold NV) and privately owned RFS Holding and Coolblue
as the most important examples.
We believe the situation in the Netherlands to be different,
because of the following reasons:
Now does that mean the Dutch market has nothing to offer for
investors looking for exposure to the ecommerce revolution?
2. PostNL holds an estimated 80% share in the E2E delivery
segment for B2C parcels
In an operationally geared environment, this creates a major
advantage; not only in terms of relative costs but also in
terms of being better suited to match the delivery moment
with the receiving clients’ preferences (e.g., evening delivery).
With its dominance on its home market, PostNL clearly
differentiates from most of its peers.
1. The Dutch prefer delivery over pick-up
A 2013 survey by GfK showed that 91.2% of the Dutch online
shoppers prefer to collect their purchases through end-toend (E2E) delivery (at home, via one’s neighbours or at work).
As far as the remainder 8.8% of the shoppers are concerned,
more than half (4.6%) prefer to pick-up one’s orders at a
PostNL service point instead of in a shop or a parcel locker.
In surrounding countries, pick-up rates vary between 30%
and 50%.
Not necessarily. In a recent study we published on this topic, we
did come up with a candidate: former mail incumbent PostNL.
After all, all these online purchased goods will have to find their
way to the buyers.
Of course we are aware of what has been happening in the UK,
where parcel delivery firm Citilink was forced to throw in the
towel, partly due to the overcapacity in the sector and partly also
by the fact that companies like Amazon have increasingly been
taking control over their own distribution (e.g., parcel lockers).
3. PostNL’s pick-up network is second to none
Even if there would be a shift towards pick-up, PostNL has
both the most (nearly 2.5 times the number of its nearest
rival) and the best pick-up locations.
4. Parcel volumes to outpace online spending growth
Last year, online spending on products exceeded that for
services for the first time. Besides, the average value per
transaction is still dropping. This means that B2C online
volume growth will outpace growth in spending by en
estimated factor of between 1.3 and 1.5 times.
To see the full report from
Idea-Driven Equities Analyses contact:
With its new logistics infrastructure for parcels nearing completion,
providing PostNL with an incremental 30% capacity and increased
efficiency and flexibility, the company is ready to benefit from the
further growth potential of ecommerce, both in the Netherlands
and in Belgium. For investors this creates an opportunity to tap
into this growth potential and at a significant valuation discount
to both the e-tailers and most of PostNL’s peers.
Henk Slotboom, RBA
+31 343 840 151
[email protected]
www.theidea.nl
14
IRP
1982 & Counting ShinMaywa Industries
April 2015 | www.IRPJournal.com
Rhiannon Ewart-White
1982 & Counting
ShinMaywa Industries
Structural aerospace demand growth remains the key mid-term earnings driver.
Pre-Olympic construction related demand & the weak Yen continue to benefit earnings
On 15x 3/16 earnings the stock remains materially undervalued.
profitability can be replicated remains unclear. Mindful of the
demand spike in its Special Purpose Truck division created
by pre-Olympic construction related demand, ShinMaywa
is reluctant to commit to new capacity, preferring instead
to extend existing production lines. We believe its prudent
approach is logical in a market in which it commands a 50%
plus share.
CONCLUSION: Strong aerospace & pre-Olympic related
construction demand, coupled with the weak Yen, are
combining to propel ShinMaywa’s earnings higher. We
expect these factors to persist in the coming 2-3 years.
The company is confident its Aircraft division is set to benefit
from continued aerospace market growth. With approx 80%
of division orders bound for Boeing ShinMaywa’s supply
relationship remains vital, a status highlighted by the fact it is
the sole wing spar supplier for the B787.
We believe the company remains on track to beat its FY14
forecasts & that earnings are set to grind higher thereafter.
On a 3/16 P/E of 15x we conclude the stock is attractive
despite trading at its highest level relative to Topix since
1982. We maintain our Positive rating. For more detail please
see our Jan 7th initiation report, ‘Boeing’s wing spar’.
The new B777X contract also offers potential for further high
margin growth from 2020, although the extent to which B777
ShinMaywa expects its Aircraft division to benefit from
continued aerospace market growth. FX rates remain a risk,
however, as all contracts, procurement & sales are conducted
in US dollars. A Y1 move versus the 3/15 CoE of Y/$105 has a
Y200m impact on OP & would generate a positive impact if the
Yen were to depreciate further, although earnings are already
benefiting at current levels of Y/$119.
Orders: Orders are split approx 70-80% to Boeing & 20% to Airbus,
Gulfstream & Embraer. The division mainly supplies wing-tobody fairings for the Boeing 777 via Fuji Heavy (7270), & wing
spars for the B787 via Mitsubishi Heavy (7011). ShinMaywa has
provided components to Boeing since 1979, originally due to
its reputation for manufacturing parts from carbon fibre. Boeing
requested joint development of the initial carbon fibre wing spars
& ShinMaywa remained the sole wing spar supplier for the B787.
The company expects its 3/15 earnings forecast to prove
conservative in light of FX effects. The other key risk identified
by the company relates to recruitment difficulties affecting
future capacity.
Outlook: A contract has been signed with Boeing for 777X
15
IRP
1982 & Counting ShinMaywa Industries
April 2015 | www.IRPJournal.com
parts supply, with the new model gradually set to replace the
777. ShinMaywa aims to supply the first set of parts in 2020.
Further order details are to be confirmed but are likely to involve
the supply of fairings as with the 777 contract. The 777 has the
highest margins of any Boeing aircraft for ShinMaywa due to the
lack of depreciation costs but it is unclear whether 777X margins
will be similar. ShinMaywa believes order value will depend more
on final contract negotiations than the product make-up.
The main factors determining future profitability are:
1. FX.
2. Depreciation (see below).
3. Increasing mass production to reduce costs.
4. Regular price reviews. Non-Boeing contracts are
insignificant in terms of sales & unlikely to have a significant
impact on future sales.
FY14 divisional gross profit has remained flat at approx Y20bn, with
little organic growth. ShinMaywa has the potential to increase truck
capacity by 10-20%, thereby increasing its sales peak. A more likely
scenario, however, is that Japanese dump truck market demand
will remain at approx 80k trucks per year generating flat sales
between FY15 to FY18 to meet pre-Olympic demand.
Overseas: A percentage of overseas sales are produced via the
export of special purpose trucks to the Middle East, although the
volume is not significant. A small percentage of components are
manufactured in Thailand & imported to Japan. Lack of demand
for high-tech components means ShinMaywa does not export to
South East Asia.
DEPRECIATION: B787 production requires specialist facilities.
The introduction of these has incurred some depreciation
costs which ShinMaywa is dividing across the number of
aircraft produced. Unlike other industries the aerospace
industry records this type of depreciation under CoGS rather
than SG&A. Thus depreciation increases with aircraft produced
as opposed to the number of years or depreciation method.
The exact cost is unclear as the number of bestselling B787
models may exceed current estimates, or facilities could be
used for the 777 or other programs.
BALANCE SHEET: The 3Q14 equity ratio was 58.3% versus
57.9% in 3Q13. The 3Q14 net debt to equity ratio was -7.8%
versus 3Q13 -6.1%. The P/B ratio is 1.3x.
To see the full report from
StormResearch contact:
Rhiannon Ewart-White
+44 121-288-4506
rhiannon @stormresearch.co.uk
RETURNS: The 3Q14 ROIC was 8.1% versus 3Q13 7%. The
projected FY14 dividend of Y12 (flat YoY) yields 0.92%.
www.stormresearch.co.uk
16
IRP
The 3rd Phase Of The ‘Inflation-Pop’
April 2015 | www.IRPJournal.com
THE 3rd PHASE OF THE
‘INFLATION-POP’
T
he Elliott Wave Principle (EWP) is categorised as a
‘causal-deterministic’ methodology for financial priceforecasting and it’s an invaluable tool for identifying
directional trends within each of the major asset classes,
stocks, bonds, currencies & commodities. It’s described as a
deterministic system because it has inherent ‘predictive’ qualities
based on pattern repetition – this evolves in a flowing, seamless
process of growth/decay, action/reaction, trend/counter-trend.
across a wide spectrum of markets. But its application of
the methodology has been abused mainly as a result of
unregulated activity and this has resulted in the criticism
that it is too interpretive, subjective to form part of a fund
manager’s decision-making process. Contrary to this, the EWP
can be approached from a ‘quantitative’ standpoint where
its application is governed by strict guidelines of pattern
identification modelled from geometric ratio and proportional
measurements. Once this is applied, the subjectivity can be
replaced by a more quantitative, objective approach to enhance
its integrity.
The EWP attracts widespread attention because it has a
proven track-record for predicting major trend developments
17
IRP
The 3rd Phase Of The ‘Inflation-Pop’
April 2015 | www.IRPJournal.com
Peter Goodburn, CFTe, MSTA
Managing Director
WaveTrack International
“Our analysis suggests that
many global stock markets that
have a commodity element will
join in the underlying upsurge
to record highs during the next
2-3 year period.”
DOES THE EWP
ACTUALLY WORK?
classes and many of the underlying commodities have yet to hit
rock bottom, but they are approaching major lows.
One archetypal example can be seen manifesting in the XAU Gold/
Silver Miners index. The index has undergone a massive, multi-year
decline that began in March 2008 from the 209.27 level – see fig
#1. From this high, it underwent three significant price-swings, the
first as a decline that unfolded during the financial-crisis, to a low
at 63.54, the second a recovery to a new record high that traded
in Dec.’10 to 232.72 and a third sequence, a decline to a current
downside projection of 61.39-56.50+/-. As at this precise time, levels
are still somewhat away at 75.40 and so these downside targets are
forecast into the April/May ’15 time-zone. For comparison, match
the (inset) archetypal tutorial pattern to the action just described –
you’ll discover a perfect match, both in structure and in geometric
amplitude measurement.
Without doubt, yes, but consistency is the key. First though, a
thorough study of historical price-data must begin the process.
Once this has been completed, the current price activity can
be incorporated into the developing picture, or pattern. In this
example, an extract from our archives published in January 2004
forecast two significant directional price changes for the Dow
Jones Industrial Average (DJIA) 30-share index several years in
advance. The first forecast a price advance to 14169.80, a gain
of +34% per cent, but then a ‘reversal-signature’ that confirms
the beginning of a massive decline with downside targets to
6411.30, a depreciation of -54% per cent.
What of the Future?
The consequences are huge, because once this pattern has
ended, it will then begin a multi-year upswing that ultimately
projects into record highs through the application of the longerterm trend that took effect way back in the 1980’s. This forecast
points towards multiple gains of 6:1 with upside price targets to
350.00-55.00 – impressive but again realistic when compared to
the accuracy of the Dow Jones (DJIA) forecast shown earlier.
Since Central Banks began financial stimulus following the lows
that formed in the aftermath of the ‘financial-crisis’, the price
action of the varying markets began tracing-out specific Elliott
Wave patterns. These patterns are typically repeating within many
stock indices and equities with variations visible in commodities,
both energy, base & precious metals. Through cross-referencing
and a logical elimination process, a path of future price direction
and amplitude is plotted. The results are quite amazing and
could be considered ‘contrarian’. But this shouldn’t be a factor to
dissuade from the quantitative approach.
This same application of the EWP is applied to each of the asset
classes and our analysis covers all the major stock index markets
traded around the world, including our benchmark S&P 500,
but also those of Europe, Asia and many Emerging Markets.
Our database also includes analysis of many currency pairs and
crosses utilising 350-years of historical data, long-dated interest
rates and all the major commodities, including Crude/Brent Oil,
Copper and Gold-Silver-Platinum.
The pattern unfolding from the financial-crisis lows is unfolding
into three distinct phases – an initial upswing, then a corrective
downswing, and finally another upswing to record highs. This
varies for certain commodities, specifically precious metal
equity mining companies, but the common denominator
that binds each asset class together indicates a 3rd phase
representing a huge commodity upswing is about to begin this
year. The entire process is termed the ‘Inflation-Pop’ scenario
depicting a brief 2-3 year period of accelerating price rises.
Copyright © 2015 | WaveTrack International GmbH
For more information about
WaveTrack International contact:
The ‘inflation-pop’ is not conjecture, a figment of opinion, a
preconceived idea but a realistic representation of an upcoming phenomenon based upon Natural Laws, the application
of the alternating sequence of action/reaction processes. Our
analysis suggests that many global stock markets that have
a commodity element will join in the underlying upsurge to
record highs during the next 2-3 year period. So far, these asset
Peter Goodburn, CFTe, MSTA
+49 (0)89 210 207 10
[email protected]
www.wavetrack.com
18
IRP
A
April 2015 | www.IRPJournal.com
New Approaches To Harnessing Volatile Relationships for Portfolio Construction
variety of investors currently face a common set of
challenges for building robust and well diversified portfolios,
due to changes in uncertainty (volatility of volatility),
stretched relationships between markets (volatility of
correlations) and unusual behaviours between risks (correlation of
volatilities). All of this against the backdrop of increasing regulatory
requirements, including the AIFMD and UCITS. It appears that
in the midst of this hurricane of activity and potential confusion,
investment managers need to stand in the relative stillness of the eye
of the storm and methodically distil vast amounts of data into useful
specific information, resulting in implementable strategies for alpha
generation within a risk framework that responds to the changing
demands upon it over time. This central objective is seductively
intuitive yet all too often illusive.
Gulamabbas Lakha,CFA
Chief Executive Officer
Providentia Analytics
Modelling dynamic relationships
Over the last decade the team at Providentia Analytics have
developed various tools to analyse the ever changing economic
and market landscape, so as to empower portfolio managers.
They can be considered various types of lenses to view the
market. One of the tools, named ‘Correlation Elasticity’, can
examine any relationship between economic or market
variables, treating it like a piece of elastic; asking (i) how flexible
is it and (ii) how stretched is it currently? For instance, the charts
correlated to highly uncorrelated; and second that at that point
in time it was rather stretched (as indicated by the dark blue bar
on the extreme left).
below relate to the quarterly correlation between US bonds
and equities over time. The histogram on the right provides
an indication of the distribution of that correlation, showing
first that the relationship is quite flexible, ranging from highly
better informed trades for alpha generation. In addition, such
tools can be used for dynamic stress tests regarding exposure
to commodity, currency, interest rate or other macro risks (also
useful for regulatory reporting).
It is important to stress that mean reversion assumptions should
not be made, since dislocations can persist or indeed extend.
Rather, the role of fundamental judgement, empowered by
such quantitative information, can be harnessed for structuring
Using ‘big data’ to identify dislocations
By harnessing powerful computational analytics, the exercise
above can be undertaken for thousands of relationships,
between equities, fixed income, currencies, commodities,
funds, or any aspects of a given investment universe. Such
an approach can identify alpha opportunities from dislocated
relationships, where instruments may be behaving in a counterintuitive way, resulting in much lower correlations relative to
history. Furthermore, this lens can be focussed on the high
end of correlation distributions to provide an early warning
system for concentration risks, style drift, or declining quality of
diversification.
The following image of what we call a ‘Diversification Matrix’
shows the results of examining all the cross relationships of
an institutional European equities portfolio with just under
sixty holdings (1653 in total). The results enable the manager
to focus attention on potential concentration risks from a few
specific holdings.
19
IRP
April 2015 | www.IRPJournal.com
New Approaches To Harnessing Volatile Relationships for Portfolio Construction
Focusing attention on changing influential factors
From a strategy perspective, an ‘Influence Matrix’ can help
monitor changes in the importance of economic, market or risk
factors on a set of target investments or sectors. The following
chart highlights which specific factors are influencing different
equity sectors, by providing the historic percentile of current
correlations, thereby giving a historic context to changing
influences. From an accessibility perspective, this tool is
potentially more intuitive than multi-factor regression models
with static significance tests. Instead, with this approach
managers have a wider picture to determine for themselves
which factors are currently influencing the instruments they
wish to invest in.
A ‘quality of diversification’ approach to
portfolio construction
To see the full report from Providentia Analytics contact:
Gulamabbas Lakha
First Floor, Berkeley Square House
Berkeley Square, London, W1J 6BD
Utilising the above methods to systemically identify dislocated
relationships, for both alpha generation and concentration
risks, can empower a manager to distil ‘big data’ into specific
information and distinguish between effective versus perceived
diversification. The result is usually more robust portfolio
construction.
+44 (0)20 7499 9040
g.lakha@providentia-capital. com
www.providentia-capital.com
20
IRP
Grexit, Brexit, Capital Markets Union and BASEL
April 2015 | www.IRPJournal.com
Grexit, Brexit,
Capital Markets
Union and BASEL
1.
POLITICAL
The Eurogroup gave Greece some
breathing space after several meetings and
Graham Bishop commented that the good
news appears to continue. However, he
said the right analogy of the situation is a
game of chicken between a Fiat 500 and a
50-ton `main battle tank’ - the relative weights are roughly
comparable to the economic weights.
Other political news of the month included the French
government overriding parliament to ram through
reforms. On Brexit, a new survey from Ipsos MORI showed
that 45% of British business leaders want to return to
being part of an economic community, without political
links, but just 1% would be happy to leave the EU.
Graham Bishop
2.
3.
ECONOMIC
The European Commission’s Winter
Economic Forecast showed, for the
first time since 2007, the economies
of all European Union Member States
should grow again this year.
Nouy of the ECB warned in an interview with the Financial
Times that Europe’s big banks will need to raise capital.
Relevant documents published in February include EBF’s
response to consultation on draft RTS on contractual
recognition of bail-in; the BCBS’ Guidance on accounting
for expected credit losses; the EBA’s advice on the
definition of eligible capital; EBF’s response to the FSB’s
consultative document on Total Loss Absorbing Capacity
and EBF’s response to EBA consultation on draft guidelines
on product oversight and governance arrangements for
retail banking products.
Mario Draghi told the European Parliament that a deeper
Monetary Union is needed to face important shocks.
BANKING
The FSB Chair wrote to G20 Finance
Ministers and Central Bank Governors
about “finishing the post-crisis agenda
and moving forward”. Nonetheless, a
House of Lords report concluded that the
EU financial regulatory framework has
been radically transformed in the wake of the financial crisis.
4.
SECURITIES
The
European
Commission
launched its much-trailed Green
Paper on Capital Markets Union
(CMU).
Several bodies responded to the
paper. The FRC and IASB support the goal of the proposed
CMU. AFME commented: “CMU is an essential reform
project to revive the EU economy.”
Commissioner Hill is sticking by the bank trading reform.
Reuters informed that “there are no plans to scrap a draft
European Union law on reining in trading risks at big banks
but some of the proposed rules could be softened.” Daniele
21
IRP
Grexit, Brexit, Capital Markets Union and BASEL
April 2015 | www.IRPJournal.com
5.
ASSET MANAGEMENT
The
European
Commission
recommended that pension funds
should benefit from a further twoyear exemption from central clearing
requirements.
PensionsEurope
welcomed this news.
EBF and Insurance Europe also agree that CMU must
unlock the latent potential of EU financial markets.
According to EFAMA, the European Commission’s Green
Paper highlights the clear need for a CMU focused
primarily on investors.
The Investment Association also responded saying that
“the potential benefits of a deep, retail CMU are enormous,
in terms of a virtuous cycle of investment driving growth,
leading to better financial security for citizens and a
vibrant economy.”
PensionsEurope also commented on EIOPA’s plans for
further work on solvency of IORPs, whilst the Investment
Association discussed the comprehensive disclosure of
costs and charges.
6.
7.
On a similar note, ACCA shared the view that to create a
supportive environment - especially for small businesses
- it is crucial to both remove cross-border investment
obstacles and to lower the cost of capital in order to have
it flowing again and put to productive use.
INSURANCE
Insurance Europe responded to the
IAIS consultation on a risk-based
global Insurance Capital Standard.
Commercial Risk Europe assured that
Solvency II is at risk due to budget
cuts at EIOPA - which explained the
implications of the cuts for 2015.
Prominent think-tanks also expressed their views.
Brookings gave its initial impressions and indicated that
“the core idea is to build up the role of financial markets in
Europe and to diversify away from a financial system that
remains very bank-centric.”
CORPORATE GOVERNANCE
AND ACCOUNTING
The European Commission recommended that pension funds should
benefit from a further two-year
exemption from central clearing
requirements. PensionsEurope wel-
Nevertheless, CEPS noted in its paper Which union for
capital markets? that “despite years of harmonising
regulation and a single currency, Europe’s capital markets
remain fragmented.”
The Commission also launched consultations on
securitisation and a review of the Prospectus Directive.
comed this news.
On the subject, AFME published a report arguing that
further reform of post trade regulations is necessary to
achieve integrated and efficient European capital markets.
PensionsEurope also commented on EIOPA’s plans for
further work on solvency of IORPs, whilst the Investment
Association discussed the comprehensive disclosure of
costs and charges.
In relation to the Prospectus Directive, the OECD published
a report warning over “aggressive interpretation” of bond
covenants, and trade bodies launched a guide on best
practices for the EU corporate private placement market.
Other news on securities included the EU Council’s
announcement it will back the European Commission
proposal to fight against the manipulation of financial
benchmarks. Reuters reported that the United Kingdom
will apply EU rules on dealing with payments by fund
managers for investment research from brokers.
Traders Magazine published an article on what’s causing
the delays in new OTC derivatives rules. “The 18-month
stalemate is raising costs and risk for buyside firms and
increasing concentration levels among remaining CCPs,”
the article reads.
To see the full report from
Graham Bishop contact:
Graham Bishop
ESMA’s revised 2015 Work Programme was also released
in February. The organisation will lack sufficient resources
to execute all the tasks that were initially planned for 2015.
+44 1424 777123
[email protected]
www.grahambishop.com
22
IRP
Absolute Strategy Research
April 2015 | www.IRPJournal.com
23