Global Asset Allocation, Politics & Governance, Ecstrat

John-Paul Smith

Global Asset Allocation, Politics & Governance

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
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More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Cross Asset Strategy

This report examines the underlying governance factors that have driven EM underperformance over the last five years.Brazil, Russia, Malaysia and Turkey appear to have entered a vicious circle whereby lower growth leads to currency devaluation leading to policies, which are negative for both equity investors and economies and so the whole process starts up again (we still believe that of the four Turkey has the best prospects of escaping from this vortex).Most disturbingly, we believe that China as well as Indonesia may be on the verge of joining this not very select group.While sentiment towards EM has the hallmark of a short term bottom with plenty of space for bear market rallies and short squeezes, there is little sign of the positive inflection in policies, which might mark a secular turning point in individual markets or in the broader asset class.

This report examines the underlying governance factors that have driven EM underperformance over the last five years.Brazil, Russia, Malaysia and Turkey appear to have entered a vicious circle whereby lower growth leads to currency devaluation leading to policies, which are negative for both equity investors and economies and so the whole process starts up again (we still believe that of the four Turkey has the best prospects of escaping from this vortex).Most disturbingly, we believe that China as well as Indonesia may be on the verge of joining this not very select group.While sentiment towards EM has the hallmark of a short term bottom with plenty of space for bear market rallies and short squeezes, there is little sign of the positive inflection in policies, which might mark a secular turning point in individual markets or in the broader asset class.

Many (un)happy returns in EM; governance and the vicious circle

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

<ul><li class="p1">Seismic changes are affecting the consumer packaged goods industry as consumers are becoming less brand loyal and supermarkets are under attack from hard discounters and online competition.</li><li class="p1">The prolonged period of slow economic growth has conditioned consumers to be more price sensitive, and the emergence of the e-commerce channel is rapidly changing consumers' shopping behaviours.</li><li class="p2">In our opinion, the strongest antidote to these pressures is a strong brand.</li><li class="p2">In this report, we quantify the power of each company's brand by its ability to take pricing, using a number of metrics, and conclude that while brand strength varies widely across the consumer packaged goods space, beverages and tobacco generally enjoy stronger positions.</li><li class="p2">We also dive deep into cost advantages and show that while some of the large diversified CPG firms may generate economies of scope, economies of scale are more prevalent in industries with a homogeneous manufacturing process.</li></ul>Lead Analysts: Adam Fleck, CFA; Philip Gorham, CFA, FRM; R.J. Hottovy, CFA; Erin Lash, CFA; Ken Perkins, CFAFull report below the fold...&nbsp;

Seismic changes are affecting the consumer packaged goods industry as consumers are becoming less brand loyal and supermarkets are under attack from hard discounters and online competition.The prolonged period of slow economic growth has conditioned consumers to be more price sensitive, and the emergence of the e-commerce channel is rapidly changing consumers' shopping behaviours.In our opinion, the strongest antidote to these pressures is a strong brand.In this report, we quantify the power of each company's brand by its ability to take pricing, using a number of metrics, and conclude that while brand strength varies widely across the consumer packaged goods space, beverages and tobacco generally enjoy stronger positions.We also dive deep into cost advantages and show that while some of the large diversified CPG firms may generate economies of scope, economies of scale are more prevalent in industries with a homogeneous manufacturing process.Lead Analysts: Adam Fleck, CFA; Philip Gorham, CFA, FRM; R.J. Hottovy, CFA; Erin Lash, CFA; Ken Perkins, CFAFull report below the fold...&nbsp;

Morningstar Consumer Observer: Shopping for the CPG Brands Best Positioned for a New Era in Commerce

Growth in the second quarter was revised up from 3.7% to 3.9%, beating the consensus estimate of 3.7% growth.It was what economists like to call a high-quality revision as the contribution from inventory expansion was now just 0.2% instead of 0.4%, meaning fewer goods were piling up on shelves.More than offsetting the downward inventory calculation was a large revision to consumer spending, primarily the services-related category.Consumer spending grew at a 3.6% rate in the second quarter, one of the best performances of this recovery and constituting almost two thirds of total GDP growth.Most of the construction-related categories were also revised higher.Analysts: Robert Johnson CFA &amp; Roland CzerniawskiFull report below the fold...&nbsp;

Growth in the second quarter was revised up from 3.7% to 3.9%, beating the consensus estimate of 3.7% growth.It was what economists like to call a high-quality revision as the contribution from inventory expansion was now just 0.2% instead of 0.4%, meaning fewer goods were piling up on shelves.More than offsetting the downward inventory calculation was a large revision to consumer spending, primarily the services-related category.Consumer spending grew at a 3.6% rate in the second quarter, one of the best performances of this recovery and constituting almost two thirds of total GDP growth.Most of the construction-related categories were also revised higher.Analysts: Robert Johnson CFA &amp; Roland CzerniawskiFull report below the fold...&nbsp;

U.S. Economy Picks up the Pace: We're bumping up our 2015 GDP forecast

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

China Resources Beer Holdings / Event-Driven

In the past week and a few days, The&nbsp;proposed&nbsp;AB InBev transaction for SABMiller ("MegaBrew") has sent CRE NEWBREWCO from&nbsp;the equivalent of HK$12.25 pre-div (which was just below the Partial Offer price of $12.70), to $14.30 as of Friday's close ex-div - up 16.7%.Investors have decided CRE NEWBREWCO could potentially be "in play" in some way shape or form because SABMiller owns the 49% minority interest of CR Snow Breweries -&nbsp;the complement to CRE NEWBREWCO (291 HK)'s 51% stake. &nbsp;The possibilities are:<ul><li>No MegaBrew deal,</li><li>Megabrew causes a sale of the 49% stake to someone else,</li><li>MegaBrew causes a sale of the stake to CRE, and/or,</li><li>CRH walks away from CRE.&nbsp;</li></ul>Investors should think about what they are expecting... (or hoping&nbsp;for)More below the fold.

In the past week and a few days, The&nbsp;proposed&nbsp;AB InBev transaction for SABMiller ("MegaBrew") has sent CRE NEWBREWCO from&nbsp;the equivalent of HK$12.25 pre-div (which was just below the Partial Offer price of $12.70), to $14.30 as of Friday's close ex-div - up 16.7%.Investors have decided CRE NEWBREWCO could potentially be "in play" in some way shape or form because SABMiller owns the 49% minority interest of CR Snow Breweries -&nbsp;the complement to CRE NEWBREWCO (291 HK)'s 51% stake. &nbsp;The possibilities are:No MegaBrew deal,Megabrew causes a sale of the 49% stake to someone else,MegaBrew causes a sale of the stake to CRE, and/or,CRH walks away from CRE.&nbsp;Investors should think about what they are expecting... (or hoping&nbsp;for)More below the fold.

CRE NewBrewCo Outperforming on MegaBrew?   Sounds Thingish. Take a Page from Pooh

Having looked deeper into the potential merger between&nbsp;Anheuser-Busch InBev and SABMiller, we stand by our&nbsp;initial estimate of GBX 3,900-GBX 4,000 as the level at which&nbsp;AB InBev would neither create nor destroy value.This&nbsp;implies 10% upside to the current market valuation, which&nbsp;gives AB InBev some room to offer a premium to the current&nbsp;market price while still creating value.Valuation aside, we&nbsp;believe the combination of the world's two largest brewers&nbsp;(hereafter named "MegaBrew") would create a high-quality&nbsp;business with long-term growth opportunities.Analyst: Philip Gorham, CFA, FRMFull report below the fold.....

Having looked deeper into the potential merger between&nbsp;Anheuser-Busch InBev and SABMiller, we stand by our&nbsp;initial estimate of GBX 3,900-GBX 4,000 as the level at which&nbsp;AB InBev would neither create nor destroy value.This&nbsp;implies 10% upside to the current market valuation, which&nbsp;gives AB InBev some room to offer a premium to the current&nbsp;market price while still creating value.Valuation aside, we&nbsp;believe the combination of the world's two largest brewers&nbsp;(hereafter named "MegaBrew") would create a high-quality&nbsp;business with long-term growth opportunities.Analyst: Philip Gorham, CFA, FRMFull report below the fold.....

Payback Period Longer Than Previous Deals

United States

Anheuser-Busch InBev NV brews beer.  The Company manufactures ale, lager, stout, and bitter beer.  Anheuser-Busch InBev owns brands that are both nationally and internationally prominent.  The Company has production plants in Europe, the Americas, and Asia.

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Anheuser-Busch InBev (BUD US)

Many (un)happy returns in EM; governance and the vicious circle

This report examines the underlying governance factors that have driven EM underperformance over the last five years.Brazil, Russia, Malaysia and...

John-Paul Smith

Morningstar Consumer Observer: Shopping for the CPG Brands Best Positioned for a New Era in Commerce

Seismic changes are affecting the consumer packaged goods industry as consumers are becoming less brand loyal and supermarkets are under attack...

Morningstar, Inc.

U.S. Economy Picks up the Pace: We're bumping up our 2015 GDP forecast

Growth in the second quarter was revised up from 3.7% to 3.9%, beating the consensus estimate of 3.7% growth.It was what economists like to call a...

Morningstar, Inc.

CRE NewBrewCo Outperforming on MegaBrew? Sounds Thingish. Take a Page from Pooh

In the past week and a few days, The proposed AB InBev transaction for SABMiller ("MegaBrew") has sent CRE NEWBREWCO from the equivalent of...

Travis Lundy

Payback Period Longer Than Previous Deals

Having looked deeper into the potential merger between Anheuser-Busch InBev and SABMiller, we stand by our initial estimate of GBX 3,900-GBX 4,000...

Morningstar, Inc.

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