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Showing posts from 2019

Ten Thousand Words: December 2019

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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. With another calendar year coming to a close and interest rates remaining "lower for longer", there are plenty of measures by which large-cap equities look to be priced highly. In Australia, the market PE multiple has continued to expand to record levels despite earnings expectations softening, as Morgan Stanley sets out. Australian consumer confidence, by the way, is at its lowest point for several years, according to the ANZ-Roy Morgan survey (but the implication for stocks is unclear). Looking globally, here are some of the ways by which stocks can be measured as over-priced or fully-priced: we have a high S&P 500

We're not Amays-ed to hear of M&A interest

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Press reports indicate that potential acquirers are eyeing off digital-first mobile telephone and energy retailer Amaysim (ASX code: AYS) - either to buy it all or to split mobile and energy. The Australian says here that "private equity firm Anchorage Capital Partners is the latest group to kick the tyres on Amaysim, which has been under scrutiny from other buyout funds and even telco Optus". It goes on to add that "at least one group" is considering buying both Amaysim and the retail arm of Vocus. Equitable Investors Dragonfly Fund owns shares in Amaysim and wrote about it as a likely M&A candidate in our last monthly update. Here's what we wrote: Amaysim (AYS) is deliberately investing in building out its customer base to put in the best position to negotiate supply terms but we think that at the same time it will be making itself more attractive to acquirers. AYS has just under one million mobile subscribers as well as 203,000 energy customers. 

Ten Thousand Words: November 2019

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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. Volatility has been on strike recently as demonstrated by Robeco's JS Blokland and the % of days US equities have fallen more than one percent. But  WSJ's Jason Zweig illustrated how volatility is volatile, at least historically. In this low inflation environment, Antipodes has called out a "bubble in duration" arguing that equities are increasingly behaving like bonds. Yet, at the same time, Crescat Capital chimes in with a chart showing that US EPS growth is now falling behind the modest inflation levels. And finally, AQR sets out the case for "value" to return to favour, finding it to be "the cheap

Ten Thousand Words - October 2019

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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. Starting with a sobering thought, businesses that have debt graded as speculative or that can't cover their interest bills - Interest Cover Ratios (ICRs) of less than 1 - are "almost 40 percent of total corporate debt in the economies we studied", the IMF noted (as reported by the Financial Times). On a more upbeat note, Bespoke tabulated how a 1% decline in the S&P 500 to start October has typically been followed by healthy returns; and the rise of software M&A was charted by PitchBook. One of our favourite themes - the far greater opportunity set in small and micro cap stocks - has been illustrated by Verdad A

Volatility & Uncertainty

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Volatility across all the asset-class proxies deployed in Equitable Investors' Risk-Parity Core strategy increased over the past 12 months but - as set out in the chart below - volatility remains below its peak levels of the past five years. Figure 1: Annualised Standard Deviation (trailing 12 months) Source: Sentieo, Equitable Investors Similarly, the S&P/ASX 200 VIX Index, a domestic equities volatility measure, has increased over the same period but remains well below the peaks of recent history. Rising volatility in risk assets (equities, commodities, real estate etc) is consistent with increased levels of uncertainty in the world as illustrated by the World Uncertainty Index (based on counts of the word “uncertainty” and variations in quarterly Economist Intelligence Unit country reports).   Figure 2: World Uncertainty Index Source: Ahir, H, N Bloom, and D Furceri (2018), “World Uncertainty Index”, Stanford mimeo (via policyuncertainty.com) This text has be

Ten Thousand Words - September 2019

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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. Aussie equities haven't been in vogue judging by the EPFR Global measurement of cross-border fund flows. Yet the Australian equity risk premium is adjudged to be on-par with the US by valuation guru Aswath Damodaran. Are bonds in a bubble? Investors doubled their money in a couple of years , as BGC Partners highlighted, by buying 100-year Austrian government bonds with a coupon of 2.1% that has since traded up in price to a 0.66% yield. Looking at valuations, high growth Software-as-a-Service (SaaS) stocks have recently pulled back from peak valuations, as illustrated by tomtunguz.com, while PZENA Investment Management sho

Sleepy Heads

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Australian investors have done well out of sleep with ResMed’s market cap multiplying nearly 19x since 2002. Equitable Investors Dragonfly Fund’s best performed investment (at the time this was written), Rhinomed (RNO) , has a different angle on sleep. So does a newer investment for the Fund, Oventus Medical (OVN) . Both were contributors to the Fund’s positive performance in July. RNO has a consumable nasal insert sold as a solution for mild sleep apnea but is also now emerging as a drug delivery platform. During July, RNO (a) released data showing its “Mute” nasal insert is the fastest growing product in its category in US drugstores; (b) received a CE Mark registering its “Pronto” nasal insert that releases vapour (essential oils) for Europe (having already received US FDA and Australian TGA approval); and (c) released its June quarter cashflow showing cash receipts up 150% year-on-year to $1.5m. As Figure 1 below shows, RNO has emerged as a rapidly growing product in US drug store

Ten Thousand Words - August 2019

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Apparently , Confucius didn’t say “One Picture 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. Aussie tech stocks are approaching dot.com pricing according to Schroders, while at the same time Argentina's sharemarket this week experienced the second biggest one-day plunge since 1950 (out of 94 stock exchange indices tracked by Bloomberg). Volatility has ramped up in mainstream Aussie and US equities and Evans & Partners have chimed in to remind us that corrections are normal with an average intra-year drop of 13.9% for the S&P/ASX 200. Meanwhile, Goldman Sachs explores the new world where negative interest rates are normal. JP Morgan then looks at what has happened to equities in markets where bond yields fall below 1%

Ten Thousand Words - July 2019

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Apparently , Confucius didn’t say “One Picture 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 focus this month is on the impact of low yields on the equity market - the spread between Australian government bond yields and ASX dividend yields has only expanded despite the large cap equity rally, as Evans & Partners shows; leading large cap yield plays up to their highest valuations, as measured by P/E, since the GFC, as illustrated by Equitable Investors; and despite a long history of  lower PE stocks outperforming, the market perception at the moment is that "value" is out of vogue, according to the Bank of America Merrill Lynch survey. Equitable Investors is exploring these themes further in its June quart

Ten Thousand Words - June 2019

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Apparently , Confucius didn’t say “One Picture 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. Bond yields are in focus as the RBA cuts rates and speculation that the Federal Reserve will do the same increases. We get a look at the German 10-year bond and how its decline into negative yield mirrors the same event in 2016; a convergence between the US 10-year bond yield and the market's dividend yield; while Deutsche Bank says half the US market is choosing index funds now and Goldman Sachs' number crunchers show Australia's "growth" stocks are the world's most expensive. We like the chart from AKRO investiční společnost showing how banks have improved their capital position since the financial crisis; and

Forget EPS accretion and focus on value!

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We happened upon a copy of Credit Suisse's "To Buy or Not To Buy" - 26 pages on M&A - a couple of years after it was published (Feb 2017) but found it compelling - particularly in relation to EPS accretion. Three quarters of investor relations professionals surveyed by AT Kearney said stakeholders place a “strong emphasis” EPS accretion or dilution - and that EPS accretion or dilution was deemed to be, by far, the most important metric. Most announced M&A deals today are accretive to the EPS of the buying company. But EPS accretion or dilution actually provides little or no insight because value creation is based on cash flows rather than accounting measures - and the cost of capital rather than the funding source. Credit Suisse took a sample of 95 of the M&A deals, categorised them based on whether the company said it would be immediately accretive or dilutive to EPS, then reviewed the one-day abnormal return for the buyer on the day of the announceme

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