Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

TSMC (Taiwan Semiconductor Manufacturing) / Technical Analysis

TSMC (Taiwan Semiconductor Manufacturing)

Emerging market equities have been one of the worst areas to invest in 2021, but we see early signs of positive change. With the US dollar failing to break above resistance at $93.50 and the MSCI EM ETF (EEM-US) displaying a false breakdown at $52, we believe now is an opportune time to add exposure to emerging market equities. To be clear, we are not getting overly bullish on EM; we have favored developed int’l (EAFE) over EM since May, and we are now shifting back to a neutral stance between the two. We see reason to believe the tide is shifting in EM’s favor. Below we highlight attractive and actionable themes within EM.

Emerging market equities have been one of the worst areas to invest in 2021, but we see early signs of positive change. With the US dollar failing to break above resistance at $93.50 and the MSCI EM ETF (EEM-US) displaying a false breakdown at $52, we believe now is an opportune time to add exposure to emerging market equities. To be clear, we are not getting overly bullish on EM; we have favored developed int’l (EAFE) over EM since May, and we are now shifting back to a neutral stance between the two. We see reason to believe the tide is shifting in EM’s favor. Below we highlight attractive and actionable themes within EM.

Shifting Exposure To Emerging Markets; Buying TSMC/Taiwan Semi, ICICI Bank, Many Others

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Powszechna Kasa Oszczednosci B / Equity Bottom-Up

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and Slovakia<div class="content-highlight">A FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.</div>

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and SlovakiaA FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.

PKO: Not as Bad as It Looks but Still Unappealing

We have been pretty negative on Polish banks this year: <a href="https://www.smartkarma.com/insights/polish-banks-latest-fundamental-trends-and-valuations-instil-caution" target="_blank" data-smartkarma-citation="insights:29744" rel="noopener">Polish Banks: Latest Fundamental Trends and Valuations Instil Caution</a> . There are some structural issues that will not go away. But we will focus on a different issue today.Recent reports in November concerning a Supreme Court ruling on zloty conversion sent shares plunging. The court said that the loans could be converted back into zloty without cancelling the contract. It added that the interest paid by borrowers would continue to depend on Swiss franc interest rates, which are considerably lower than the zloty equivalent. The ruling only applies to one case. But investors worried that the ruling, the first since the EU’s top court delivered its own landmark ruling a few months back on how to deal with such mortgages, could set the tone for other cases, and require Polish banks to reimburse tens of billions of zlotys to customers. Bank Millennium fell almost 4 cent on the news, while Santander Polska dropped 3 per cent, and PKO  slid 2.9 per cent. The Polish currency weakened to its lowest level against the euro since the start of October. Overnight, PKO became the most oversold bank globally. Shares have since, somewhat inevitably, bounced from an oversold position.<div class="content-highlight"><a href="https://www.smartkarma.com/entities/pko-bank-polski-sa" target="_blank" data-smartkarma-citation="entities:27058:1" rel="noopener">PKO PW</a> , Poland's biggest lender, scores pretty well at 7.8 on our value-quality gauge, the PH Score™, driven by core Profitability and Efficiency gains among other variables. Other lenders in Poland score less well such as Bank Millenium, BHW, PEO, and SPL. In fact, they generally exhibit subpar scores. Perhaps, a pairs trade might be compelling, going long PKO and short one of the aforementioned banks.</div>The bank is moving in the right direction, as gauged by Fundamental Momentum, but shares are being held back by aforementioned concerns relating to zloty conversion. It is almost impossible to predict a worse case scenario given regional courts will take a different stance with varying solutions. The worse case "hit" to Polish banks is  thus tricky to say the least but 60bn zloty for the entire system has been mooted, spread over years.In short, we believe that the perception of risk regarding the ongoing zloty conversion is overplayed and we see the System withstanding even a prolonged worse-case scenario. (This is not to say we are mindful of other issues such as State control and the level of Polish Debt on bank books).In the mid-1960s, Warren Buffett bought 5% of American Express, shares then battered by an infamous salad-oil scandal with American Express viewed as liable for $60 million in damages. (In the "Great Salad Oil Swindle", AMEX eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes). Buffett correctly recognized that the competitive advantage of American Express’s consumer monopolies was still very much intact. Though different, we can see PKO maintaining an enviable competitive banking franchise (maybe not the "compounding machine" of AMEX but still a 11% ROE bank) and overcoming bouts of extreme negativity. <div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>

We have been pretty negative on Polish banks this year: Polish Banks: Latest Fundamental Trends and Valuations Instil Caution . There are some structural issues that will not go away. But we will focus on a different issue today.Recent reports in November concerning a Supreme Court ruling on zloty conversion sent shares plunging. The court said that the loans could be converted back into zloty without cancelling the contract. It added that the interest paid by borrowers would continue to depend on Swiss franc interest rates, which are considerably lower than the zloty equivalent. The ruling only applies to one case. But investors worried that the ruling, the first since the EU’s top court delivered its own landmark ruling a few months back on how to deal with such mortgages, could set the tone for other cases, and require Polish banks to reimburse tens of billions of zlotys to customers. Bank Millennium fell almost 4 cent on the news, while Santander Polska dropped 3 per cent, and PKO  slid 2.9 per cent. The Polish currency weakened to its lowest level against the euro since the start of October. Overnight, PKO became the most oversold bank globally. Shares have since, somewhat inevitably, bounced from an oversold position.PKO PW , Poland's biggest lender, scores pretty well at 7.8 on our value-quality gauge, the PH Score™, driven by core Profitability and Efficiency gains among other variables. Other lenders in Poland score less well such as Bank Millenium, BHW, PEO, and SPL. In fact, they generally exhibit subpar scores. Perhaps, a pairs trade might be compelling, going long PKO and short one of the aforementioned banks.The bank is moving in the right direction, as gauged by Fundamental Momentum, but shares are being held back by aforementioned concerns relating to zloty conversion. It is almost impossible to predict a worse case scenario given regional courts will take a different stance with varying solutions. The worse case "hit" to Polish banks is  thus tricky to say the least but 60bn zloty for the entire system has been mooted, spread over years.In short, we believe that the perception of risk regarding the ongoing zloty conversion is overplayed and we see the System withstanding even a prolonged worse-case scenario. (This is not to say we are mindful of other issues such as State control and the level of Polish Debt on bank books).In the mid-1960s, Warren Buffett bought 5% of American Express, shares then battered by an infamous salad-oil scandal with American Express viewed as liable for $60 million in damages. (In the "Great Salad Oil Swindle", AMEX eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes). Buffett correctly recognized that the competitive advantage of American Express’s consumer monopolies was still very much intact. Though different, we can see PKO maintaining an enviable competitive banking franchise (maybe not the "compounding machine" of AMEX but still a 11% ROE bank) and overcoming bouts of extreme negativity. The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

2020 High Conviction: PKO - Not as Toxic as It Seems

MSCI Emerging Markets Index / Technical Analysis

This report highlights actionable themes across the EM universe, including: bullish inflections in the Russian and Thai markets, and a pullback opportunity in India's SENSEX.  We also highlight actionable setups in MSCI EM Energy and Materials sectors and within Taiwanese Financials/Banks.  Finally we uncover a number of attractive bottoms-up opportunities, sorted by sector and market-cap.

This report highlights actionable themes across the EM universe, including: bullish inflections in the Russian and Thai markets, and a pullback opportunity in India's SENSEX.  We also highlight actionable setups in MSCI EM Energy and Materials sectors and within Taiwanese Financials/Banks.  Finally we uncover a number of attractive bottoms-up opportunities, sorted by sector and market-cap.

EM Strategy: Russia and Thailand Bullishly Inflecting; Pullback Opportunity in India

In this report we provide a synopsis of EM markets. We also scour the EM universe for attractive and actionable opportunities, highlighting opportunities within India's SENSEX, global energy and materials sectors, and Asian banks.

In this report we provide a synopsis of EM markets. We also scour the EM universe for attractive and actionable opportunities, highlighting opportunities within India's SENSEX, global energy and materials sectors, and Asian banks.

Poland

Powszechna Kasa Oszczednosci Bank Polski S.A. attracts deposits and offers commercial banking services. The Bank offers all types of banking services present on the Polish banking market, money market and capital market for institutional and individual clients.

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Powszechna Kasa Oszczednosci B (PKO PW)

Shifting Exposure To Emerging Markets; Buying TSMC/Taiwan Semi, ICICI Bank, Many Others

We see early signs of positive change within EM, and we present a strong case as to why we believe now is an opportune time to add exposure.

Vermilion Research

PKO: Not as Bad as It Looks but Still Unappealing

PKO faces diverse headwinds in the form of subpar fundamental trends, risk to management autonomy, and stretched valuations relative to peers.

Paul Hollingworth

2020 High Conviction: PKO - Not as Toxic as It Seems

We have been pretty negative on Polish banks this year: Polish Banks: Latest Fundamental Trends and Valuations Instil Caution . There are some...

Paul Hollingworth

EM Strategy: Russia and Thailand Bullishly Inflecting; Pullback Opportunity in India

This report highlights actionable themes across the EM universe, including: bullish inflections in the Russian and Thai markets, and a pullback...

Vermilion Research

EM Strategy: Remain Overweight India

In this report we provide a synopsis of EM markets. We also scour the EM universe for attractive and actionable opportunities, highlighting...

Vermilion Research

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