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

<div><div><div>Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche Bank towards the end of 2010 and the start of 2011, at a time when the consensus outlook for EM economies and equities was almost unanimously bullish.</div><div>&nbsp;</div><div>I made a number of tentative predictions and recommendations, which were generally greeted with a combination of indifference and skepticism and on occasion outright hostility among most, though not quite all of the bank&rsquo;s clients.</div><div>&nbsp;</div></div></div><div><div><strong>It seems that we may now be entering the final stage of EM relative underperformance, in line with our expectations in our initiation last year where we posited the relative trade was 2/3rds through.</strong></div></div>

Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche Bank towards the end of 2010 and the start of 2011, at a time when the consensus outlook for EM economies and equities was almost unanimously bullish.&nbsp;I made a number of tentative predictions and recommendations, which were generally greeted with a combination of indifference and skepticism and on occasion outright hostility among most, though not quite all of the bank&rsquo;s clients.&nbsp;It seems that we may now be entering the final stage of EM relative underperformance, in line with our expectations in our initiation last year where we posited the relative trade was 2/3rds through.

A Roadmap of the EM Bear Market and Three Myths about the China Bull Market

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

<p>For many years now, there has been a perception that the banks of Australia and Canada are similar. This stems from the resource-rich nature of each country.</p><p>It may also arise from the exceptional long-term credit ratings for both countries: AAA on Fitch and Aaa on Moodys. &nbsp;Of course this was brought to the fore with the onset of the Global Financial Crisis (GFC) in 2008 and followed by many downgrades.&nbsp;</p><p>Another basis for this may be the fact that the top four banks in each country account for a high 66% (Canada) to 76% (Australia) of total bank system assets. To us though, there remain critical differences that favour Australia, and their banks. First and foremost is public debt to GDP.</p><p>More below the fold....&nbsp;</p>

For many years now, there has been a perception that the banks of Australia and Canada are similar. This stems from the resource-rich nature of each country.It may also arise from the exceptional long-term credit ratings for both countries: AAA on Fitch and Aaa on Moodys. &nbsp;Of course this was brought to the fore with the onset of the Global Financial Crisis (GFC) in 2008 and followed by many downgrades.&nbsp;Another basis for this may be the fact that the top four banks in each country account for a high 66% (Canada) to 76% (Australia) of total bank system assets. To us though, there remain critical differences that favour Australia, and their banks. First and foremost is public debt to GDP.More below the fold....&nbsp;

Australia's Bank's Fare Well vs. Those in Canada

<p>Credit spreads for Deutsche Bank and BNP are rising vertically. This is mostly in anticipation of a Greek default.</p><p>BIS statistics show that Germany, US, and UK as having the most exposure to Greece, at US$56bn &ndash; of which just over half is Germany.</p><p>The issue is not contained to mark downs on Greek exposure, which many would have us believe.</p><p>Risk models immediately change. Banks must incorporate a higher probability of default (PD) for their sovereign exposures in general, and in particular, those in ailing European countries.</p><p>Foreign borrowings of France, Italy and Spain combined are 50x the level of Greece. And this is where banks will have to focus their estimates of increased risk following a Greece default.</p><p>More below the fold.</p><p>&nbsp;</p>

Credit spreads for Deutsche Bank and BNP are rising vertically. This is mostly in anticipation of a Greek default.BIS statistics show that Germany, US, and UK as having the most exposure to Greece, at US$56bn &ndash; of which just over half is Germany.The issue is not contained to mark downs on Greek exposure, which many would have us believe.Risk models immediately change. Banks must incorporate a higher probability of default (PD) for their sovereign exposures in general, and in particular, those in ailing European countries.Foreign borrowings of France, Italy and Spain combined are 50x the level of Greece. And this is where banks will have to focus their estimates of increased risk following a Greece default.More below the fold.&nbsp;

Unintended Consequences of a Greek Default

Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

<p>The overwhelming consensus from interbank futures and most - if not all - market economists is that the RBA will keep policy on hold at this afternoon's board meeting, after delivering a 25 basis point cut last month.&nbsp; Having eased policy twice this year in February and May, I expect the RBA will be reluctant to cut interest rates again in the near term, and will be patient to gauge the impact that these rate cuts will have on consumer and business sentiment.&nbsp; The RBA and APRA will continue to use macro-prudential measures to contain perceived risks stemming from speculative activity in housing.</p>

The overwhelming consensus from interbank futures and most - if not all - market economists is that the RBA will keep policy on hold at this afternoon's board meeting, after delivering a 25 basis point cut last month.&nbsp; Having eased policy twice this year in February and May, I expect the RBA will be reluctant to cut interest rates again in the near term, and will be patient to gauge the impact that these rate cuts will have on consumer and business sentiment.&nbsp; The RBA and APRA will continue to use macro-prudential measures to contain perceived risks stemming from speculative activity in housing.

Macroeconomics

<p>Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian dollar was trading below fair value. &nbsp;After what had been a strong period of out-performance from US dollar earners, I concluded that without the tailwind of A$ over-valuation - which prevailed through most of 2014 - their returns in the near term would be capped. In this post, I show that recent currency appreciation has eliminated the modest under-valuation and been associated with under-performance from US$ earners. The basket is trading on a median 12 mth forward PE of 20x, which represents a 25% premium to the median estimate for the ASX100, slightly higher than historical norms. The premium reflects the fact that offshore earners have strong growth expectations and low betas, thanks to their defensive business models. I highlight that the stocks suffering from the highest level of analyst bearishness remain Cochlear, Treasury Wine Estates and Westfield, which each attract less than 20% of buy recommendations from analysts.</p><p>&nbsp;</p>

Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian dollar was trading below fair value. &nbsp;After what had been a strong period of out-performance from US dollar earners, I concluded that without the tailwind of A$ over-valuation - which prevailed through most of 2014 - their returns in the near term would be capped. In this post, I show that recent currency appreciation has eliminated the modest under-valuation and been associated with under-performance from US$ earners. The basket is trading on a median 12 mth forward PE of 20x, which represents a 25% premium to the median estimate for the ASX100, slightly higher than historical norms. The premium reflects the fact that offshore earners have strong growth expectations and low betas, thanks to their defensive business models. I highlight that the stocks suffering from the highest level of analyst bearishness remain Cochlear, Treasury Wine Estates and Westfield, which each attract less than 20% of buy recommendations from analysts.&nbsp;

A new narrative for the Australian dollar (update)

Australia

National Australia Bank Limited is an international banking group which operates in Australia, New Zealand, Europe, Asia and the United States.  The Group offers banking services, credit and access card facilities, leasing, housing and general finance, international and investment banking, wealth and funds management, life insurance and custodian, trustee and nominee services.

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National Australia Bank (NAB AU)

A Roadmap of the EM Bear Market and Three Myths about the China Bull Market

Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche...

John-Paul Smith

Australia's Bank's Fare Well vs. Those in Canada

For many years now, there has been a perception that the banks of Australia and Canada are similar. This stems from the resource-rich nature of...

Daniel Tabbush

Unintended Consequences of a Greek Default

Credit spreads for Deutsche Bank and BNP are rising vertically. This is mostly in anticipation of a Greek default.BIS statistics show that Germany,...

Daniel Tabbush

Expect no change from the RBA today

The overwhelming consensus from interbank futures and most - if not all - market economists is that the RBA will keep policy on hold at this...

Sam Ferraro

A new narrative for the Australian dollar (update)

Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian...

Sam Ferraro

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