The Great Inflation & Equity Duration Crisis for Investors & Asset Allocators
Sector: Risk Management
Provider: Kailash Concepts
Kailash’s recent work on Inflation and Equity Duration seeks to hammer home how: (1) Equities in aggregate have high sensitivity to rates based on history. (2) The aggregate duration is heavily skewed by a group of outliers. (3) There are still many low duration equities that can help mitigate duration risk while providing a valuable inflation hedge. For further details and why the proprietary Kailash Equity Duration Tool is a must have for Portfolio Managers, Allocators and Investors click here.
Adidas (ADS GR)
Sector: Consumer Discretionary
After 20 years, the company finally has a strategy that is accretive to the global duopoly (with Nike). While ADS has repeatedly tried to play NKE’s game (and most of the time ended up losing), Hedgeye’s Brian McGough explains why this is all about to change. His estimates for EBITDA and EPS are above consensus for both this year as well as the firm’s stated ‘ambitions’ for 2025. Targets 40% upside in 12 months, 75% in 2-years and a three-bagger by year-5 of his model.
Kinnevik AB (KINVB SS)
Provider: The Edge
In a major push to focus on its younger, high-growth, unlisted businesses, KINV continues to slim down its portfolio by Spinning off its entire 21% stake in Europe's largest online-only fashion retailer, Zalando. This is not its first Spinoff either - KINV’s last stake distribution (Millicom International Cellular) occurred in 2019 - the stock has since risen 118% (vs. 19% OMX Index). The Edge will analyse and advise on KINV and 8 other global Spinoffs in Q2 2021.
Herige (ALHRG FP)
Provider: LPE Research
Reaping the benefits of a major restructuring - over the past several years this building materials distributor has gone through a substantial reorganisation including significantly reducing the number of sales outlets. However in that time it has managed to consistently increase revenue per store (even vs. 2019 despite Covid). Net income shot up 40%+ in 2020 and LPE expects an additional 28% growth this year. They see plenty of room for further margin expansion and highlight growth opportunities in both the concrete and industrial carpentry divisions. TP €50.00 (30% upside).
Jet2 (JET2 LN)
‘Blue Skies Ahead’ - StockViews’ 28-page report explains why JET2’s competitive advantage at a local level remains underappreciated. How contrary to perception TUI (Short recommendation) has not benefitted from Thomas Cook's demise and remains vulnerable to JET2’s superior product. The tour operator is also resilient to competition from OTA’s such as On The Beach due to a higher quality experience and competitive pricing. ROIC should rise above 20% as the proportion of package holiday customers grows from 50%+. 70% upside.
Provider: Paragon Intel
Negative CEO Interviews & Diligence - A must-read report from the team at Paragon Intel as Darktrace confirms plans for a £3bn London float. Paragon's interviews with 8 former Senior Executives at the cybersecurity firm provide vital information on key individuals while shedding light on the cultural deficiencies, unsustainable sales tactics and governance/ownership concerns. Having uncovered multiple red flags, Paragon say this is the worst group of interviews they have received on an executive and company.
Voodoo SPAConomics (VS): New database launched...
Provider: Vision Research
Vision’s new VS service is very timely given the SPAC explosion in recent quarters. Their database of ~700 SPACs grows weekly and contains c.80 fields of data. Due to growing concerns re. the quality of SPACs, Vision is also highlighting baskets of shorts. One SPAC flagged is trading at ~$12 yet has <$3/share of cash in trust due to dilution and high redemption ratio. A low underwriter score, deal revisions, targeted European natural resources, but announced a software deal shortly before liquidation date, only increases concerns.
Sector: Consumer Discretionary
Provider: MYST Advisors
An off the radar e-commerce play gaining share in home furnishings with upside optionality from its blockchain assets thrown in for free. Described as a low-cost version of Wayfair, this is a "self-help story" with a "changing narrative" under a new, high quality management team. Trades at just ~7% LTM FCF Yield; <1.0x FY22 Sales. TP $140 (100% upside) - this does not include OSTK’s blockchain assets (their prize asset being tZERO) which could be worth an additional ~$3bn, implying a SOTP TP of $210.
Sector: Consumer Staples
Provider: Gordon Haskett Research Advisors
Building off a strong February Week 4 when COST began to cycle significantly stronger comps from a year ago, the company saw an acceleration in trends during the month of March - posting a hugely impressive 11.1% core comp. According to GHRA, it is becoming increasingly clear that COST will “stomp the comp” in the coming months. Other companies well positioned to do the same include Dollar General, Target and Lowe's.
Provider: New Constructs
Discussions re. $100bn valuation are ridiculous - implies revenue will be 1.5x the combined 2020 revenues of two of the most established exchanges (Nasdaq & ICE). It has no chance of meeting future profit expectations. As the crypto currency market matures, transaction margins will drop precipitously; competitors will cut trading fees to zero to try to increase market share. New Constructs explain why an $18.9bn valuation is far more appropriate, while their report also aims to help investors sort through COIN’s complex financial filings.
Bloom Energy (BE)
Provider: Northcoast Research
Northcoast recently expanded their coverage to include the Clean Technology space. BE is one of their preferred plays - its solid oxide module requires little modification to enter multiple applications with a TAM of over $2.6tn. Discusses BE’s disruption of the centralised grid model and its best-in-class electrical efficiency (at rapidly reduced costs). With an experienced management team and multi-year revenue opportunities, BE is ideally placed to benefit from the global shift to alternative energy generation and hydrogen use. TP $35 (50% upside).
Provider: Battle Road Research
Battle Road’s initiation report includes a complete product line assessment, details on NKLA’s manufacturing partnerships, as well as a concise look at the controversy surrounding its initial and modified agreement with General Motors. The report also provides an overview of the battery/fuel cell electric truck industry and a list of unanswered questions stemming from their research, which provide a useful framework for monitoring and evaluating prospects.
Turquoise Hill Resources (TRQ)
Provider: Global Mining Research
Major move forward for the company following news that it has agreed an updated funding plan with Rio Tinto for the Oyu Tolgoi copper-gold mine in Mongolia. GMR now estimate that TRQ’s NPV has increased to C$40.50/share. Funding is adequate out to the end of 2023 when mine EBITDA increases. While some risks remain they are more than priced in with the shares trading at half NPV. Upgrades the stock to Buy. TP C$30.00.
Provider: Sales Pulse Research
Within the BI and Analytics segment, AYX has been a controversial name because of their uneven performance and management change. Input from the Systems Integrators that Sales Pulse polls indicates that there is growing pent up demand for AYX’s best of breed solution. Proof of Concept testing has been completed for many new projects and orders are expected to be released as end users gain confidence in the recovery. Recent channel checks confirming order flow to reaccelerate in the second half of this year will drive the share price higher.
3D Systems (DDD)
Provider: Gradient Analytics
This 3D printing solutions company is shedding underperforming assets at steep losses and is struggling to compete in China. Management’s decision to narrow its TAM will reduce growth opportunities, while margins are also expected to come under increasing pressure. Gradient highlight several earnings quality concerns, not to mention the incorrect pre-announced results earlier this year (which helped engineer a "short squeeze" in the stock). The firm's valuation premium relative to historical norms is completely unjustified.
Four Solvency Risk Short Candidates
Sector: Short Models / Fundamental Analysis
Provider: Two Rivers Analytics
Two Rivers’ Solvency Risk Model seeks companies facing dangerously high leverage coupled with negative or declining cash flows. It also considers interest expense, capex and short-term maturities for additional input. In this report they dig deeper into four of the most dangerous stocks…Viad, Live Nation, Community Health and PetIQ. The Solvency Risk Model is one of eight Models utilised by the team at Two Rivers to identify high conviction Short candidates. Other Models include Declining Business, Liquidity Crisis and Overearners.
Q2 Outlook: Short Energy, Financials & Tech, Buy Utilities & Staples
Sector: Quant Model / Sector Rotation
Provider: Belkin Report
In Q1 Energy and Financials were the top two performing S&P sectors and were Belkin’s top long recommendations. This is no longer the case. Despite giddy stock market euphoria, sector rotation hit a major turning point in March and is now decidedly risk-off. The 3-6 month forecast for stocks in both Energy and Financials points down in relative and absolute terms, whereas Utilities and Consumer Staples are now in the ascendancy. Meanwhile, Belkin’s recommended Tech shorts are expected to continue to work extremely well (ARK Innovation ETF, Solar, Cloud Software…).
Pathology & Diagnostic Imaging
Provider: Rimor Equity Research
The sector offers structural growth, a more benign policy outlook and technology-led cost efficiencies - Rimor Equity Research's 110-page report examines the medium/long-term prospects for pathology and diagnostics revenue growth and assess the impact from ongoing technology advancement including how AI looks set to drive dramatic change to diagnostic imaging. Which companies are best placed to succeed? They look in detail at Healius, Integral Diagnostics and Sonic Healthcare. This work is also relevant for investors interested in Australian Clinical Labs’ proposed IPO.
Toshiba Bid Underlines Japan Value
Sector: Asset Allocation
The Toshiba private equity offer and Hitachi’s ongoing corporate reinvention highlights the significant upside in Japan if balance sheets are managed more aggressively. Given the China geopolitical threat the Toshiba deal looks politically doable alongside a likely bid by Micron for NAND maker, Kioxia, which will further boost activist ambitions in the country. With the weak JPY offsetting a cyclical rally, Japan’s share of the MSCI AC is down to under 7% (despite an accelerating buyback and ROE trend) - as US share peaks, this could double within five years.
Best Deleveraging Names for LatAm
Provider: Lucror Analytics
2021 should be a transitional year as companies recover from the effects of Covid-19. While Lucror Analytics expect many companies to deleverage substantially y-o-y, some bonds have limited upside potential from current levels, given that they have already racked up significant gains. Hence, they have chosen eight names which: (1) are likely to deleverage significantly during 2021-2022; and (2) have attractive valuations, leading to a "Buy" opportunity at current levels. These are Atento, Braskem, CSN, Embraer, InterCement, Unigel, Total Play and Volcan.
China Autos: Bullish NEVs
Sector: Consumer Discretionary
Provider: Silk Road Research
NEV market share continues to rise - SRR expect NEV sales to remain strong in 2021 (+40-60%), with the NEV penetration rate increasing by +150-250 bps, placing China ahead of its path to “20% by 2025”. Highlights Volkswagen as the next China EV play; well placed to gain market share due to its attractive pricing (avg. ~230K RMB) and impressive new launches. Among the domestic brands they prefer Nio and Xpeng over Li Auto.
United Bank of Africa (UBA NL)
Provider: Creative Portfolios
Paul Hollingworth considers UBA to be an ideal candidate for a small GEM or Frontier Fund. A FV of 4%, PBV of 0.35x, Dividend Yield of 7.4%, Earnings Yield of 51.2% and a Total Return Ratio of 13x are derisory levels. UBA commands a PH Score™ of 10 (out of 10!) which captures value-quality trends. The fact that the bank also has a top decile VFM ranking globally (captures fundamental momentum, valuation, and technical indicators) only adds to Paul's bullishness.
A short sterling short
Provider: Macro Intelligence 2 Partners
UK excess savings from lockdown are bigger than the BoE’s estimates. As shoppers flock to shops, multipliers on consumer spending will be significant, leading to an inflation problem. The central bank will let the bonds run hot and will delay any hikes until it’s too late. Sell Dec 2023 Short Sterling around 99.93, stop at 99.50 and look for a Q4 target at 98.50. Play it right and you will see a better than 4:1 payoff.
EU: Waiting in the wings for Hamilton
The Covid-19 crisis is an opportunity for the EU to look further towards sharing debt – the so-called Hamiltonian moment akin to Alexander Hamilton’s actions in the US in 1790. Issues still remain: Ian Kernohan believes that the EU has not done enough to break the doom loop between banks and governments, and any new German administration could oppose further fiscal entanglement with Southern Europe. It is true that rumours around the Euro’s death are greatly exaggerated. Nevertheless, the doom loop remains locked in the attic, not to be spoken of.
The insatiable lure of buying at the top
Provider: Belkin Report
What is the psychological force behind the massive equity inflows and margin debt expansion? Normally consumers look for bargains – at the top of bubbles, investor sentiment is the opposite: stock buyers have a fatal attraction to buying stocks that have already reached extraordinary levels. Deviant mass psychology has investors selling low and buying high; don’t fall for it!
Global growth to peak in Q3
Provider: Andrew Hunt Economics
In the next 3-6 months global growth will see implications of monetary tightening implicit in bond price declines, causing a slowdown in many weaker EM’s. Europe’s post-covid bounce will be limited compared to the US, and China will be forced to rein in growth lest it let the inflation genie out of the bottle. Andrew Hunt believes that at some point in late 2021 or very early 2022 there will come a point to reduce one’s exposure to commodities and other global growth proxies, perhaps buying Treasury bonds once again.
Inflation danger registers higher level in Europe than US
Provider: Macro Hedge Advisors
Waves of attacks on the USD over inflationary concerns are ignoring the fact that Europe is in a far more severe position. The ECB balance sheet is aiming towards 80% of GDP compared to the Fed’s ~37%, and a third of ECB assets are made up of long-term collateralised lending to weak banks and sovereigns. Any significant monetary normalisation will have to go together with a painful debt relief plan. Comments that the ECB may opt instead to buy newly issued government debts weighted towards the weak sovereigns are nothing short of fantasy.
The Covid flight to safety is over
Provider: Intertemporal Economics
At the first sign of a slowdown, the FOMC will implement yield curve control to crush long-term real rates. Brian Pellegrini advises to watch the 5-30 curve for clues as to when the bond market is looking for a change in policy; once it moves, get ready for the 2-10 to flatten. The Covid-19 flight to safety is definitively over, so dollar movements are being driven by relative changes in monetary policy. As USD climbs, the Fed will be far more prone to policy action over export worries.
US: Doubts about Biden’s target for greening the grid
In the 1920s, in part due to Spanish Flu, US factories switched en masse from localised steam generators to power plants, leading to a productivity boom. The current clean power transition underway is similar, although recent experience in Germany suggests the transmission buildout will emerge as a major bottleneck in greening the grid. Niall Ferguson is sceptical Biden can navigate the regulatory morass to meet his 2035 carbon-neutral goal. Regardless, US transmission-building companies will benefit: there is too much money heading their way.
Japan: Land of the rising gold holdings
Provider: Coldwater Economics
Michael Taylor discusses two surprising things that came from Japan in the raft of March foreign reserves numbers. Firstly, they actively sold bonds ($19.6bn). Secondly, they also ploughed into gold, increasing their holdings by $3.1bn (10.6% rise in quantity). It is evident that Japan believes the US faces inflation; the message is clear, sell bonds and buy gold.
Brazil: Pandemic poses fiscal problems
Provider: Intelligence Research
The reinstatement of Covid-19 emergency aid was finally agreed last month after weeks of haggling between lawmakers – arguing that it was needed to sustain poor Brazilians – and a Bolsonaro hesitant over fiscal concerns. The new iteration of the handout will be less fiscally onerous but nevertheless strains Brazil’s stretched public finances, already in dire straits over a compromised economic recovery and government problems with the 2021 budget.
Provider: Totem Macro
The volatility of a global cyclical turn, the culmination of decades-long secular trends, volatility surrounding soaring asset valuations and market excess is leading to a range of outcomes hitherto unseen. Whitney Baker explains that the last cycle had two engines: the US and China, the only regions that managed to leverage up as everywhere else degeared. This time there’ll be no deleveraging anywhere; there will be no fiscal austerity in Japan and Europe, nor private sector de-gearing across EM (excl. China) and DM (excl. US). The next six months will see the markets digesting the implications of that regime change. With credit divergences once again re-synchronising in this upswing, extreme valuation divergences will too.
China remains a key global growth engine
Provider: MRB Partners
The Chinese economy is strengthening and broadening, with expansion on track to exceed the prior cycle in amplitude and length. Imports are growing strongly, boosting the global trade particularly for non-commodity items. Recommendations include: remain overweight China within EM equity portfolio; stay neutral on the yuan within EM currency basket on a 6-12 month view. Government bonds will outperform G7 bonds but will underperform EM local currency-denominated bonds.
Central bank digital currencies (CBDC): China takes the lead
Provider: Renaissance Macro Research
CBDC initiatives around the world are accelerating as policymakers respond to concerns over the challenge to monetary sovereignty from non-bank issuers of money-like assets, with China taking the lead. Unlike digital currency available today, e-cash is a liability of the central bank. As such, it will disintermediate the banking system by attracting balances and payment flows; central banks will manage financial stability risks through penalising high e-cash balances or limiting them. There will be no first-order impact on credit creation since commercial banks can simply obtain funding from the central bank rather than private depositors. As a centralised currency, CBDC need not leverage blockchain solutions, although cryptography can improve its security.
China: Approaching a cyclical peak
Provider: PRC Macro
The slowdown to M1 and M2 growth and the continuous shadow bank lending contraction suggests that previous credit supply tightening is passing through to slower credit demand growth. William Hess believes China is approaching a cyclical peak. The strong corporate loan issuance does not reflect strong investment demand, but rather is an indication of elevated corporate refinancing demand. Slower credit demand from restocking against strengthened refinancing demand may indicate a transition from CGB yield curve bear steepening to bear flattening in the near future.
Jordan’s royal crisis highlights economic risks
Provider: Oxford Analytica
King Abdullah’s outspoken half-brother was recently placed under quiet house arrest after his outspoken comments against poor state performance. This crisis has stemmed from the government’s increased sensitivity to criticism as public discontent grows over conditions it has little power to alleviate. The situation may be eased for now, but deeper problems remain and alienating Riyadh carries economic risks.
Thailand: The Baht bond bandwagon
Warut Promboon initiates coverage of the Thai Baht (THB)-denominated corporate bond market. His latest report covers the country’s bond market in terms of composition, participants and rating agencies. He also describes major hindering points for the development of the THB bond market, comparing it to Singapore’s SGD bond market, which Warut believes to be the next milestone for the THB corporate bond market.
The effects of climate change on productivity
Provider: Llewellyn Consulting
John Llewellyn examines 26 countries to find the winners and losers of climate change. He explains that the colder countries, notably Russia and Canada, are set to gain from higher temperatures, with Canadians potentially being 2.5x richer in per capita GDP. The hotter countries in contrast – India, Brazil and Saudi Arabia in particular, could see sharp reductions in productivity – India could see a 90% lower per capita GDP vis-à-vis a baseline of no climate change. Of course, such consequences depend on the actions of countries, but John indicates that we should in particular watch closely Russia’s activities in the arctic, EM country policy and whether or not DM nations are willing to compensate them for seeking low-emissions strategies.
Bitcoin at US$341,250? This is not a forecast….well not yet!
Provider: CrossBorder Capital
Gold has been a disappointing investment of late partly due to the growing presence of cryptocurrencies, like Bitcoin, as rival monetary inflation hedges. Michael Howell argues that gold still lies below its adjusted ‘fair value’, even allowing for Bitcoin. But, turning the tables, if investors switched entirely to Bitcoin as their future monetary inflation hedge, the price of BTC could skyrocket through US$300,000! He concludes: hold both.
Provider: Global Mining Research
There is nothing more detrimental to shareholder value than Black Swan Events, such as Covid-19 impacts, mine catastrophes and in-country issues. Tony Robson and David Radclyffe focus on the latter in their latest report, looking at three recent events: Malian government refusal to extend B2Gold’s Menanko permit; Ghanaian govt’s recent termination of Resolute’s Bibiani mining lease; and the Kyrgyz Republic raising a new tax dispute with Centerra.
High grade nickel
Provider: Core Consultants Group
We have seen high-pressure acid leaching (HPAL) used to produce battery-grade nickel from Nickel Pig Iron (NPI) but, despite it being economically viable, questions remain over sustainability. With a break-even LME price of $7.60 per lb, the method remains an incomplete solution as consensus long-term nickel price data heads towards $8.11. As EV production continues its general upwards trend, it is clear that the nickel market must step-up class-one production to meet projected battery demand. If history is doomed to repeat itself, we’ll see the process developed to such an extent that it will become the primary method of production for high-grade nickel.
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