Brief Multi-Strategy: Global Ex-U.S. Equity Strategy: Cautiously Optimistic Outlook Intact and more

In this briefing:

  1. Global Ex-U.S. Equity Strategy: Cautiously Optimistic Outlook Intact
  2. To China With Love From Russia
  3. EM Cross-Border Capital Inflows Collapse: Investor Turn ‘Risk-Off’
  4. Drug-Fuelled Marriages and Macho Shachos* in Japan

1. Global Ex-U.S. Equity Strategy: Cautiously Optimistic Outlook Intact

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Despite negative recent developments, we have remained steadfast in our belief that weakness in May has presented an attractive time to add exposure. In our June International Strategy, we highlight various themes which lead to this belief, along with areas of the market where we see actionable opportunities within our favorite Groups, spanning the Consumer Staples, Technology, Consumer Discretionary, Services, Health Care, and Financial Sectors.

2. To China With Love From Russia

Last week President Xi Jinping met President Vladimir Putin for the 29th time since 2013 and the second time in two months in St Petersburg. The growing relationship between China and Russia is a hugely important one. It has the potential to redefine global trade patterns and shift the global balance of economic and geopolitical power. Driven by need and by economics, this is relationship that is only set to grow and for that a big thanks goes to Mr Trump.

3. EM Cross-Border Capital Inflows Collapse: Investor Turn ‘Risk-Off’

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  • Cross-border capital flows to Emerging Markets (ex China) plunge by US$75 billion in May 2019
  • Flows into China buck this trend rising by US$10 billion
  • Cross-border flows are sensitive to Chinese economic tempo and US dollar
  • EM investors turn decisively ‘risk-off’ in positioning, but this is a future opportunity

4. Drug-Fuelled Marriages and Macho Shachos* in Japan

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The Japanese drugstore sector has been consolidating fast for a decade led by Aeon’s (8267 JP) Welcia subsidiary, Tsuruha Holdings (3391 JP) and Sundrug Co Ltd (9989 JP), which have taken the top three spots in the sector ahead of the long-time leader, Matsumotokiyoshi Holdings Co (3088 JP).

Last month the latter tried to retake its pole position by opening negotiations to buy seventh-ranked Cocokara Fine (3098 JP). A few days later, however, sixth-ranked Sugi Holdings (7649 JP) began its own negotiations, creating an unusual situation where two companies are publicly bidding for the same target.

(For details on the deal and the likely implications for respective share prices etc, as always I defer to Travis Lundy who has an excellent analysis on this in his Insight here).

A deal with Cocokara Fine is crucial for Matsumotokiyoshi. If it succeeds, it will again lead the sector with a business a third bigger than the current leader. If it fails to woo the smaller firm and Sugi succeeds, however, Matsumotokiyoshi will have fallen from sector leader to the sixth position in three years and will likely want to start wooing current third-ranked player Sundrug Co Ltd (9989 JP). It may even try and negotiate a partial merger with Tsuruha if it doesn’t want to be left behind in what will likely become a sector dominated by three or four major retail groups in the next five years.

Whatever the outcome of the Cocokara Fine deal, further consolidation will occur in Japan’s drugstore sector and M&A will be a key strategy to make this happen.

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