Equity analyst UK & Europe, UK Long Short

Peter Toeman

Equity analyst UK & Europe

Accelerating Tomorrow’s Independent Research

Boost Research

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Equity Bottom-Up

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  
<h2>Hargreaves Lansdown: What does it do ?</h2>
Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK's largest direct to investor platform administering £86bn of investments for more than 1.1m active clients
<h2>Why is it in the Short portfolio ?</h2>
Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/444/original/port%202.PNG?1551297124" class="editor-image img-responsive" data-smartkarma-image-id="80444"></figure>
<div class="content-caption">S&amp;P Capital IQ</div>

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  
Hargreaves Lansdown: What does it do ?
Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK's largest direct to investor platform administering £86bn of investments for more than 1.1m active clients
Why is it in the Short portfolio ?
Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

S&amp;P Capital IQ

Hargreaves Lansdown (HL/:LN) No Flow, No Go

Thematic (Sector/Industry)

The UK's principal share index FTSE 100 closed 2018 marginally lower than its level at the start of the Millenium
 In contrast with the lackluster performance of the stockmarket, nominal GDP of the UK economy almost doubled over the period
Relative to the domestic economy FTSE 100 looks marginally undervalued which may explain the rebound seen in the first month of this year
On the other hand, courtesy of the political decision to leave the European Union, the outlook has never been more uncertain
Major structural change involving tearing up a 40 year arrangement with the UK's largest trading partner is bound to have significant and unpredictable consequences 
We offer a long/short portfolio of UK stocks designed to exploit emerging themes

The UK's principal share index FTSE 100 closed 2018 marginally lower than its level at the start of the Millenium
 In contrast with the lackluster performance of the stockmarket, nominal GDP of the UK economy almost doubled over the period
Relative to the domestic economy FTSE 100 looks marginally undervalued which may explain the rebound seen in the first month of this year
On the other hand, courtesy of the political decision to leave the European Union, the outlook has never been more uncertain
Major structural change involving tearing up a 40 year arrangement with the UK's largest trading partner is bound to have significant and unpredictable consequences 
We offer a long/short portfolio of UK stocks designed to exploit emerging themes 

FTSE 100: Twenty Years of Going Nowhere (Almost)

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to identify a portfolio of UK shorts and occasional longs.   
Lloyds Banking: What does it do ?
Lloyds Banking Group is the UK's largest retail bank with a 20% share of both consumer credit and mortgage lending. It has no investment banking activities or overseas activities.
Why is it in the long portfolio ? 
After a 10 year period of rehabilitation post the Financial Crisis the group is now profitable at the statutory level and generating a healthy double return on tangible equity (ROE). This year the consensus expectation is for a dividend of 3.3p per share (+7%) leaving the shares on a yield of 5.7%. In addition management completed a GBP1bn share buyback, the combination of buy-back and divided represents 4.7p per share or an effective yield of 8.1%. If future projections prove correct then the ROE should morph into the mid-teens by 2020. A return at this level should be sufficient to lift the shares well above book value. 
What are the risks ?
A key risk is economic dislocation from Brexit. Management believe that EU exit along the lines of the current withdrawal agreement will be compatible with only a marginal increase in credit losses.

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to identify a portfolio of UK shorts and occasional longs.   
Lloyds Banking: What does it do ?
Lloyds Banking Group is the UK's largest retail bank with a 20% share of both consumer credit and mortgage lending. It has no investment banking activities or overseas activities.
Why is it in the long portfolio ? 
After a 10 year period of rehabilitation post the Financial Crisis the group is now profitable at the statutory level and generating a healthy double return on tangible equity (ROE). This year the consensus expectation is for a dividend of 3.3p per share (+7%) leaving the shares on a yield of 5.7%. In addition management completed a GBP1bn share buyback, the combination of buy-back and divided represents 4.7p per share or an effective yield of 8.1%. If future projections prove correct then the ROE should morph into the mid-teens by 2020. A return at this level should be sufficient to lift the shares well above book value. 
What are the risks ?
A key risk is economic dislocation from Brexit. Management believe that EU exit along the lines of the current withdrawal agreement will be compatible with only a marginal increase in credit losses.

Lloyds Banking Group (LLOY LN): Growth Who Needs It?

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Turkiye Vakiflar Bankasi Tao / Equity Bottom-Up

We carry out an analysis of 650 bank shares. This time around, we use an earnings yield (inverse of PE ratio) based on ROE/PB, franchise valuation, and a negative technical momentum indicator (RSI). This is thus a screen heavy on valuation which pinpoints out-of-favour stocks.This time we do not use a risk filter. The PER screen arguably does that for us.We are somewhat cautious about using a PER screen. Earnings can be easily manipulated and they can change dramatically, especially in the jurisdictions which show up as "cheap". Banks for example may use low impairment charges to boost their bottom line.<div class="content-highlight">
In fact, the top quintile strikes us as a collection of risky opportunities. What comes through, mainly due to the inclusion of an earnings yield ranking, is the risk of growth and growth of risk. This is what a low PER reveals.
The market thus apportions a low valuation, backed up by franchise valuation, to a number European and mainly Japanese lenders. From EM, China, Turkey, and South Korea stand out. Sri Lanka and Nigeria feature from frontier land. 
</div>At the other end of the spectrum, in quintile 5, are less risky US banks mainly but also lenders from other jurisdictions such as Indonesia. Perhaps valuation risk is at its greatest here. But then again, maybe the optically cheap opportunities are flagging up the build up of risk and poor earnings ahead.In the screen, the lowest rankings represent the best optical opportunities. But they carry, arguably, the greatest risk.

We carry out an analysis of 650 bank shares. This time around, we use an earnings yield (inverse of PE ratio) based on ROE/PB, franchise valuation, and a negative technical momentum indicator (RSI). This is thus a screen heavy on valuation which pinpoints out-of-favour stocks.This time we do not use a risk filter. The PER screen arguably does that for us.We are somewhat cautious about using a PER screen. Earnings can be easily manipulated and they can change dramatically, especially in the jurisdictions which show up as "cheap". Banks for example may use low impairment charges to boost their bottom line.
In fact, the top quintile strikes us as a collection of risky opportunities. What comes through, mainly due to the inclusion of an earnings yield ranking, is the risk of growth and growth of risk. This is what a low PER reveals.
The market thus apportions a low valuation, backed up by franchise valuation, to a number European and mainly Japanese lenders. From EM, China, Turkey, and South Korea stand out. Sri Lanka and Nigeria feature from frontier land. 
At the other end of the spectrum, in quintile 5, are less risky US banks mainly but also lenders from other jurisdictions such as Indonesia. Perhaps valuation risk is at its greatest here. But then again, maybe the optically cheap opportunities are flagging up the build up of risk and poor earnings ahead.In the screen, the lowest rankings represent the best optical opportunities. But they carry, arguably, the greatest risk.

Global Banks: The Optically Cheap Carry Most Risk

In <a href="https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved" target="_blank">https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved</a>, we set out to pinpoint banking assets with poor technical momentum, strong fundamental trends, and cheap valuations.We drilled into detail to find the most unfashionable and cheapest banks in the world. Using a combination of technicals, fundamental momentum, and franchise value, we ranked over 500 banks from the latest reporting season and allocate a score to capture relative attractiveness or ugliness. For fundamental momentum, we utilised our PH Score™. In some cases, most notably Turkey, the full weight of deterioration from FX and rate mismatch, under provisioning, and under reported asset quality erosion, has yet to flow into fundamental trends and metrics. So we added that caveat.<div class="content-highlight">Today, we add a risk screen (basically an implied CDS) to the original model to better capture risk-adjusted rankings of valuation, fundamentals, and technicals.</div>So what does our enhanced model show?<ul>
<li>Well, as one might expect, there is a greater weighting in the top quintile from lower risk US banks which offsets their low franchise valuation score.</li>
<li>There are far fewer "cheap" Japanese banks now in the top quintile given the elevated risk.</li>
<li>Most of the top names are the same. Even considering the higher implied CDS of Turkish, Russian, and South Korean lenders, their valuations and/or RSIs score are appealing while their fundamental momentum for now remains firm. (How long this will last in the case of Turkey is a mute point).  Their risk ratings, in some cases, are as stressed as Unicredito, Commerzbank, Chinese, Japanese, or Nigerian lenders. Does HSBC carry more risk than Sberbank?</li>
<li>At the other end of the spectrum, one finds Indonesian banks. While their risk may not be as high, their valuations and fundamental progression are subpar. They generally do not score well.</li>
</ul>In short, if you think that Brexit will not be as bad as it may appear (UK banks feature prominently) or that Turkey or Russia are oversold, or even investable, or that EM exposures at BBVA and Santander plus Raiffeisen and Erste are factored into the price, then opportunity knocks. The key is to weigh what things will look like in say 5 years. And to eschew the noise and herd mentality. Of course, Venezuela is a model of how not to do things. Let us hope the regional refugee crisis there will not be repeated in any of the high risk jurisdictions in the table below.

In https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved, we set out to pinpoint banking assets with poor technical momentum, strong fundamental trends, and cheap valuations.We drilled into detail to find the most unfashionable and cheapest banks in the world. Using a combination of technicals, fundamental momentum, and franchise value, we ranked over 500 banks from the latest reporting season and allocate a score to capture relative attractiveness or ugliness. For fundamental momentum, we utilised our PH Score™. In some cases, most notably Turkey, the full weight of deterioration from FX and rate mismatch, under provisioning, and under reported asset quality erosion, has yet to flow into fundamental trends and metrics. So we added that caveat.Today, we add a risk screen (basically an implied CDS) to the original model to better capture risk-adjusted rankings of valuation, fundamentals, and technicals.So what does our enhanced model show?
Well, as one might expect, there is a greater weighting in the top quintile from lower risk US banks which offsets their low franchise valuation score.
There are far fewer "cheap" Japanese banks now in the top quintile given the elevated risk.
Most of the top names are the same. Even considering the higher implied CDS of Turkish, Russian, and South Korean lenders, their valuations and/or RSIs score are appealing while their fundamental momentum for now remains firm. (How long this will last in the case of Turkey is a mute point).  Their risk ratings, in some cases, are as stressed as Unicredito, Commerzbank, Chinese, Japanese, or Nigerian lenders. Does HSBC carry more risk than Sberbank?
At the other end of the spectrum, one finds Indonesian banks. While their risk may not be as high, their valuations and fundamental progression are subpar. They generally do not score well.
In short, if you think that Brexit will not be as bad as it may appear (UK banks feature prominently) or that Turkey or Russia are oversold, or even investable, or that EM exposures at BBVA and Santander plus Raiffeisen and Erste are factored into the price, then opportunity knocks. The key is to weigh what things will look like in say 5 years. And to eschew the noise and herd mentality. Of course, Venezuela is a model of how not to do things. Let us hope the regional refugee crisis there will not be repeated in any of the high risk jurisdictions in the table below.  

Global Banks: The Last Song on the Dance Floor

United Kingdom

Lloyds Banking Group plc, through subsidiaries and associated companies, offers a range of banking and financial services. The Company provides retail banking, mortgages, pensions, asset management, insurance services, corporate banking, and treasury services.

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Lloyds Banking (LLOY LN)

Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. A tough market...

Boost Research

FTSE 100: Twenty Years of Going Nowhere (Almost)

The UK's principal share index FTSE 100 closed 2018 marginally lower than its level at the start of the Millenium In contrast with the lackluster...

Boost Research

Lloyds Banking Group (LLOY LN): Growth Who Needs It?

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to...

Boost Research

Global Banks: The Optically Cheap Carry Most Risk

We carry out an analysis of 650 bank shares. This time around, we use an earnings yield (inverse of PE ratio) based on ROE/PB, franchise valuation,...

Paul Hollingworth

Global Banks: The Last Song on the Dance Floor

In https://www.smartkarma.com/insights/global-banks-any-takers-for-the-unloved, we set out to pinpoint banking assets with poor technical momentum,...

Paul Hollingworth

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52-week Range

Market Cap (USDm)

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