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10k Words - May 2020

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy. 

We had to give you something on coronavirus - so it is the most complex infographic we've seen, from DannyDorling.org, then its over to US bonds, where yields are so low, Bloomberg highlights they imply some belief that the Federal Reserve will move to negative rates. Citi sets out the unprededented wave of central bank liquidity and the impact on the risk-free rate, making bond rates relatively more attractive. From government bonds we move to high-yield (or junk) where rates have surged and Goldman Sachs forecasts a spike in defaults. What happens in equities when the spread on high yield bonds expands? Verdad Capital shows US sm…

10k Words - April 2020

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

The damage to the Australian retail sector is set out in The Australian's store closure count and reinforced with an update on payments volumes from Tyro Payments (ASX code: TYR). Meanwhile, sell-side analysts have proven slow to respond to the impact of COVID-19 and social-distancing, as evidenced by UBS' aggregatge numbers for the ASX - but they are starting to catch up. Markets threw the baby out with the bath water when the epidemic hit home but now businesses that aren't immediately hit are being looked at again, like The Citadel Group (ASX code: CGL), which sells software and consulting to the government and health sec…

Absence of an earnings update doesn't mean there is no material change occurring

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In a market where some are pitching a value opportunity based on the forward PE of the overall equities market being below average, be wary. The forward PE is likely based on a very stale "E".

To quote strategist Gerard Minack in a recent interview, "just be aware that if that's based on the current forecast earnings, that forecast is bunk".


Photo by Jean Carlo Emer on Unsplash
Analysis from Ord Minnett highlights how bunk the market-wide "E" is right now. The broker tracked 207 companies of which only 116 had updated the market since late February - that's just 56% of companies.

Those stocks that have not yet updated the market have only fallen 33%, Ord Minnett has calculated, compared to a 44% fall for those that have. Analysts have been typically slow to revise their earnings projections, with "downgrades deeper for those that have updated".

Is the market being complacent with regard to those companies that have not provided an update?…

COVID-19 - ASX Trading Halts, Transcripts & Updates

Here's an update on what ASX listed companies have been saying in March 2020 regarding coronavirus.There's a series of companies in trading halts relating to COVID-19, an airline that says it is doing well out of the situation, along with some companies capitalising on opportunities presented by the crisis, and a series of companies understandably withdrawing their earnings guidance.


Trading Halts


Neuren Pharmaceuticals (NEU) - March 20, 2020
The trading halt is requested pending an update regarding ongoing clinical trials following the issue of FDA guidance on the conduct of clinical trials of medical products during the COVID-19 pandemic.


Pacific Star Network (PNW) - March 20, 2020
The reason for the voluntary suspension is to allow PNW to continue to assess, and make an announcement to inform the market about, the effects of the COVID-19 on its business. PNW expects that it will take some time for it to undertake the necessary reviews and assessments and be able to appropriate…

10k Words - March 2020

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

Who would have thought that the global pandemic that started in China would lead to significant out-performance of Chinese equities against the rest of the world? Bespoke has illustrated that in terms of the China share of global market capitalisation. Analysts are scrambling to cut growth expectations. Goldman Sachs put out its view of various economies' GDP relative to previous US recession periods. BAML's monthly global survey of fund managers showed growth expectations plunging the most ever to a net 49% (23% brave investors forecasting stronger growth, 72% tipping weaker growth). Morningstar has had a crack at estimating th…

Ensuring the health of your business amid the coronavirus crisis

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Some sage words on how to ensure the health of your business while dealing with potential business consequences of the spreading effects of the coronavirus.



This commentary is from an email sent to associates of companies that Equitable Investors and its associates are either currently shareholders in or maintain a close interest in. We don't often communicate in this manner but wanted to share with you some key points made by leading VC firm Sequoia Capital to its investments - the comments come from deep experience and we could not express them better ourselves.

Facing Challenges









Some companies have seen their growth rates drop sharply between December and February Supply chain disruption can have cascading effects Companies that depend on in-person meetings for sales or business development are being affected. 
 Question Every Assumption








Do you really have as much cash runway as you think? What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Antic…

Corporates Talking Coronavirus

Here's a taste of what Australian listed companies have been saying in March 2020 regarding coronavirus.There's the expected - a drop in demand for air travel and retail traffic declining - but the virus has also been used as a reason for a capital raising and as a driver of online sales.


TRANSCRIPTS FROM CONFERENCE CALLS

Senex Energy (SXY) - MD Ian Davies - conference call on March 11, 2020
"This was originally planned to be a face-to-face briefing in Sydney. But clearly, with COVID-19 and the uncertain environment that, that brings, we've opted for safety first."

" In recent times, global LNG has been characterized by an increase in supply and a softening of demand, leading to an excess of supply in the market. Weather in the northern hemisphere and the coronavirus are some of the factors impacting demand."


Qantas Airways (QAN) - MD Alan Joyce - conference call on March 11, 2020
"We've seen coronavirus and the amazing levels of coverage around …

10k Words - Feb 2020

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

We're in the midst of one of the larger pull-backs in global equiies for some time (on Monday the S&P 500 Index plunged the most since February 2018 according to Bloomberg) so we'll get straight to the matter at hand - alphaarchitect sets out for us how often the equities market falls 10% in a year (~70% of the time for the Australian equities benchmark) and how often a 5% sell-off snowballs to 20% (~13% in Australia). Moody's puts forward a case that higher default rates on high yield corporate debt would be a signal for an equities "purge". With coronavirus or 
COVID-19 dominating market fears, Morgans shows sh…

Epidemics and Market Volatility

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Historical precedents indicate that epidemics may cause short-term market volatility but recent examples have had limited sustained impact.
For China, the travel, entertainment and retail sectors have been most affected in prior epidemics, according to Morgan Stanley's Asian strategy team. The SARS experience in 2003 led to under-performance of local share markets with the MSCI Hong Kong and Korea indices under-performing by 10% and 11% through the escalation phase... " However, corrections have historically been short-lived". The more recent MERS and Avian Flu epidemics reinforce that conclusion, as the charts below set out.

Figure 1: Morgan Stanley charts Asian equity indices against epidemic events

Figure 2: JP Morgan (via FT) shows regional equity market recoveries post crisis peak

Citigroup went back to the 2002-2003 SARS outbreak, noting it featured ~8,000 confirmed cases across 26 countries with nearly 800 people killed; and that it was estimated by some academics t…

Five Year Returns

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(adapted from the Dragonfly Fund Quarterly Update - December 2019)

Stock performance is rarely linear with ebbs and flows through time. Equitable Investors is focused on the medium-to-longer term window and while very conscious of managing volatility, fully expects there to be good and bad interim windows for investment performance.
We are fans of the question posed by quantitative investor Wesley Gray, PhD, author of Quantitative Value, several years ago: “If God is omnipotent, could he create a long-term active investment strategy fund that was so good that he could never get fired?” The answer was that God would get fired. Not because God would be a bad investor, of course, but because picking the investments that would deliver top decile (top 10%) returns over five years then sitting back and waiting would mean that God’s clients would have to hold their nerve in the interim period when the “perfect foresight” portfolio suffers drawdowns of as much as 76%.
Equitable Investors has …

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