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Who are we?
Financial analyst with 3y experience of the financial markets and financial analysis, both fundamental
and chartist.
The investment strategy
The investment supports and securities we deal with will only be the following (and not necessary all
of them at the same time):
-buy orders on shares we estimate clearly undervalued or with a low value compared to their
intrinsic fundamental value. These shares will be identified using both fundamental and technical
analysis (fundamental analysis will permit us to identify medium-to-long term opportunities whereas
technical analysis will be used to take profit of market trends on a short-term basis). These shares will
be necessary correlated to different sectors (at least 5 sectors and sub-sectors) in order to diversify
away as much as specific risk as we can, to limit the risk of loss. In a second time and if opportunities
are identified, we will also execute short-sell orders;
-index trackers in order to 1/ smooth the risks and to have a greater correlation to the market
portfolio (in Europe); 2/ follow indices we view positively; 3/ gain an exposure on specific ETF that
replicate a part of the market (Europe Select Dividends, USA Leveraged, World HealthCare, MSCI
Japan) in an objective of diversification of returns, and risk reduction;
-exposure to bonds, with a bias on government and high-quality corporate bonds, to lower the
volatility of our portfolio and to profit of yield and prices variations if opportunities are identified.
-exposure to commodities through futures, preferably in a situation of backwardation.
The restriction to 4 simple products will thus help us to manage a simple investment strategy and to
have a clear view of our performance without investing in too complex derivatives.
As our wish is to limit the risk taken, we will hedge our positions by three means:
1/ stop-loss orders (in the case of buy orders on shares) in order to liquidate our position if the
tolerance threshold (low) is broken, to limit the loss. This strategy has no cost.
2/ hedging by taking a position in two products which are negatively correlated. This strategy has also
no specific cost.
3/ hedging by buying put options (in the case of a buy order for a share) or by buying call options (in
the case of a short-sell order for a share). This strategy is costly and implies to have a good
concordance between the size and maturity of the underlying and the size and maturity of the option
contract. This also implies a closer relationship with a broker to have a full access to the market, which
also costs more.
The above strategy will be maintained by tacit renewal and can be subject to amendments and
reallocations depending on the financial context.
Objective in terms of return and fees
We expect a return of 5% (net) in 2013 given the relatively slower growth rate of financial markets
and financial securities (especially shares) in Europe and in France. 5% will be a satisfactory return as
the risks taken will be low (stop loss orders, hedging with options if necessary). Our expectations of
return are relative, that is to say compared to the market, except in the situation of a brutal fall of
major indices. Our strategy will nevertheless limit the theoretically possible losses.
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No fee will be charged if the relative excess return of the fund is below the French benchmark which
will be calculated on the SBF 120 (French index constituted by the 120 biggest capitalizations of the
country). OR EUROSTOX?
We propose a 10% commission on the gains calculated on the return (i.e. if the market return is +5%
and the fund return +7% for a fund size of USD 100,000 with a return of USD 7,000, the fees would
be USD 700.
How we will proceed, and the example of a decision
A selection of an investment will be based on:
-macroeconomic trends (the way we can liaise macro news, trends, and outlook to the expected
performance of a specific investment (in a medium- or long-term perspective),
-fondamental analysis to assess whether a share is currently undervalued or overvalued,
-our own technical analysis to identify opportunities (both for buy and sell orders) by using technical
indicators,
-opinion of brokers (analysis of the consensus of the market) in order to decide the size of our
investment,
-underlying risks (we will have a preference for low and moderate volatilities), identified by
measuring previous trends.
Once a buy or sell order is done using fundamental analysis and consensus view, we hold the stock on
a medium or long-term basis while hedging if necessary. We will also actively seek to increase the
efficiency of our fund allocation if technical indicators point out to short-term opportunities (i.e. we
are long on stock A and long on stock B, we identify technical ‘sell’ indicator on stock B and ‘buy’
indicator on stock A, we reallocate funds by shortening stock B against stock A so we double a part of
our exposure on A and neutralize a part of our exposure on B and thus benefit from the bigger rise of
A and do not lose anything on B, before returning to the initial position).
The examples of Societe Generale S.A. and LVMH
The graph and the following illustrations show how we proceed regarding the alliance between
technical and fundamental analysis. In this document we will offset fundamental analysis for practical
reasons due to the long investment decision process if the analysis is realized by ourselves (analysis of
the strengths and weaknesses of the company vs. the economic and competitive context, analysis of
the financial statements and the strategy of the firm, ratio calculation and comparison with peers,
assessment of the objective valuation of the investment…).
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We see above that the consensus on Société Générale S.A. is positive with 15 major banks and
boutiques having a BUY opinion, 11 being quite neutral, and 4 having a SELL opinion. We view the
stock positively as it is still worth less than 18% of its historical highest levels, although we do no
estimate it could rise above 40% of this level. The growth potential is real and the stock is highly
correlated to the financial context in Europe with a lower exposure on PIIGS since 2012. As ECB
lowered its main rate at 0.5% on 2 May, money is cheap and liquidity encouraged which is a positive
context for banks like SocGen. We are thus long on the stock.
Below is the study of technical indicators, reflecting our opinion on a ST basis, with the trend touching
the low Bollinger band. RSI was also low at this time, very close to 30, confirming the BUY signal.
And as the stock declined to 25 (a major threshold for the share) we also observe a diminution of
volumes. This seems to be a good timing to buy or reinforce a position on SocGen, with a stop-loss
order at 24 or 24.5.
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Below is the result of this strategy: the stock increased from 24.8 to 27.8 in a week, accounting for an
increase of 12.1%.
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>>> The same exercise can be done for LVMH (below). The result is a + 8% growth in a week.
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The sectors we view positively in 2013 in Europe
1/ Even if the volatility is still quite high because of the exposure of the sector to macroeconomic
trends and political news, especially in Europe where the situation could rapidly change, we still
positively view the securities of the financial sector, especially shares. Indeed, these securities remain
rather cheap especially in France where the sector recovered well since the collapse of major indexes
during the summer 2011. Shares like Societe Generale could be still interesting in 2013, but an
arbitrage towards lower volatility but also lower return expectations could be done on BNP Paribas
which is the bank we view as most suitable for correct returns and a minimization of the risk. The
insurance sector will probably not represent such good buying opportunities but still, stock-picking
could be the right choice with Axa for instance, which is not properly valued to our view. Large
capitalizations should be preferred, with heavy exposure to emerging countries.
2/ We are positive on resources & energy sector, even if crude oil prices will probably rise only
moderately in 2013 thanks to the new autonomy of the USA on this matter. However the demand is
expected to remain strong because of emerging countries and very correct growth perspective in
China. Regarding the opportunities to be found on European markets, we would chose to have an
exposure on oil services companies (Technip in France for instance). Other companies which are
linked to the sector such as CGG Veritas could be a right choice.
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3/ Technology companies with high value-added products can also be interesting. 2013 is an important
year where recovery is expected to increase in North America and stabilization in Europe is also
probable. The world’s demand and GDP are expected to be of a better quality in 2013 compared to
2012: in this context, even if growth in Europe will remain sluggish or slightly negative, companies
which sell technological products will meet opportunities. Hence we are positive on aero spatial &
defence (EADS, Safran, or Thales in France) for instance.
4/ Luxury goods still benefit from a correct growth potential in France. LVMH and the luxury division
of PPR and Cointreau should register growth rates between +5% and +10% in 2013 (source: S&P). In
spite of more moderate profits this year, luxury goods companies have the potential to outperform the
market of other consumer goods which will be very limited in their growth by austerity measures in
Europe and higher unemployment rates. We expect overall consumption to fall in 2013 in most
European countries.
5/ Other opportunities could be found on the automotive sector. We are not clearly buyers on this
sector, especially in France. But given the huge fall of French constructors (PSA-Renault) in 2012, it
is possible to see better news in 2013 on the valuation side of such groups. The exposure to emerging
countries is reinforcing for both companies and their advantage on electrical vehicles could be a
winning bet over the medium-term. But this remains speculative given the still heavy cash
consumption of PSA and the recent strong growth of the value of Renault share. German companies
are also clearly to be followed this year. And the companies which work with several constructors
such as Michelin, Valeo and Plastic Omnium in France could be interesting opportunities.
6/ Three sectors to short-sell or at least to abandon in 2013: construction and building, telecoms,
consumer goods.
As a conclusion, we could also add that Google and Samsung will probably be to follow in 2013, as
well as Amazon. For the particular case of France, Iliad will also present opportunities. On the
commodities side, coffee is expected to be well-valued, we also expect oil to remain quite stable and
gold to stabilize at low levels given the reallocation already observable on the markets, before growing
again as this commodity still is a refuge security.
The summary of our expectations on all sectors in Europe and particularly France is as follows:
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* In green: sectors we expect they will outperform the market
* In yellow: sectors we expect they will be in line with the market
* In red: sectors we expect they will underperform the market
Annexes
Macroeconomic context
As far as interest rates are concerned in the four economic zones under review (US-UK-EurolandChina), we can outline two different approaches in terms of monetary policy.
On one hand, central banks of the advanced economic zones (US, UK and Euroland) have all ran
accommodating monetary policies by pushing and keeping their key interest rates down to historical
lows:
- 0.25% for the Federal Reserve since December ’08,
- 0.50% for the Bank of England since March ’09,
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0.75% for the European Central Bank since July ’12.
Main interest rates
8.00%
Fed
ECB
BoE
BoJ
7.00%
PBC
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
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Se 0
p1
D 0
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D 1
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M 1
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D 2
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0.00%
Data extracted from global rates database
The obvious reason for these monetary policies is the need to kick-start the economies and boost
growth by keeping money cheap. Epicentre of the 2008 financial crisis, the US cut their key interest
rate down dramatically in only a few months, followed quickly by the UK, which cut its key rate in
under a year. The ECB, however, reduced its key interest rate gradually until July ’12.
The difference of behaviour between the Fed/BoE and the ECB are largely due to the difference of
mandate given to these institutions: the BoE and the Fed assume a broader role in their respective
economy, targeting both inflation and unemployment/growth, than their European counterpart, which
until recently had a mandate to target the inflation only.
On the other hand, China too is running a more accommodating monetary policy. In July ’12, the
PBoC cut the borrowing rate down to 6% and the deposit yield rate to 3% for the exact same reason as
US/UK/Euroland, to shoulder its slackening economic growth. Of course, the Chinese economic
landscape is radically different than that of advanced economies as the slowdown experienced by
China in ’12 still meant a 7.8%-output growth (down from 9.3% in ’11).
Overall, considering the sluggish state of the economy worldwide, it is likely that central banks across
major economic zones will seek to keep key interest rates low as long as possible without triggering
inflation or a bubble on an asset class. We think this trend should last through 2013-early 2014.
After that, the likeliest scenario is an uncoordinated departure:
Federal Reserve would lead the way, raising their interest rate gradually once the recovery settles in
and the unemployment decreases (H2 2014);
ECB will most likely have to keep its interest rate down a while longer, probably until 2014-2015, and
could very well do so given that inflation expectations remain fairly low (around 2%). The ECB could
even lower its key rate again in 2013 if the EUR were to rise against other currencies, threatening the
economic recovery.
The BoE faces a different challenge as its Fed-like policy is yet to produce the same results, i.e. a
lasting economic recovery, but is producing a higher than expected inflation. With an upcoming
change of governor, BoE seems to be at crossroads and could either amplify monetary easing by
pushing rate down to zero, an option we see as unlikely, or scale back its ambition and assume a
stabilizing role until enduring growth materializes, probably in 2015.
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The BPoC too must walk a fine line, arbitrating between backing the economic growth and avoiding a
bout of inflation, a real estate bubble and the accumulation of non-performing loans in the banking
system. Given recent emphasis put on rebalancing the Chinese economic model and fighting sky-high
property prices, it is our view that the BPoC will eventually adjust key borrowing and deposit rates in
2013 to reduce lending production.
Output Growth
2011a
2012a
2013f
2014f
USA
1.8%
2.3%
2.0%
3.0%
Eurozone
1.4%
-0.4%
-0.2%
1.0%
Germany
3.1%
0.9%
0.6%
1.4%
France
1.7%
0.2%
0.3%
0.9%
UK
0.9%
-0.2%
1.0%
1.9%
China
9.3%
7.8%
8.2%
8.5%
World
3.9%
3.2%
3.5%
4.1%
Figures extracted from the IMF “World Economic Outlook Update”, January 2013
From a broad perspective, 2013-2014 should see a slow and steady improvement of the output growth
across all major economic areas. If you take a closer look, you can make out three distinct economic
zones:
-
-
-
China is by far the most dynamic economy under review. After slowing down to 7.8% in ’12 due
to lower demand from major economic partners, Chinese GDP is expected to bounce back up to
8.2% in ’13 and 8.5% in ’14 driven by partial economic recovery in other economic areas and the
rebound of the Chinese property market. Official targets set for ’13 are an output growth of 7.5%
and inflation at 3.5%, down from 4% last year. The new Chinese government has recently put
emphasis on the rebalancing of the Chinese economy away from exports and towards internal
consumption, which implies a harder clamp down on inflation to free the purchasing power. Li
KEQIANG, China’s new Prime Minister, like Wen JIABAO before him, has made inflation a
top-priority of his government. So far, the Chinese economy is off to a slow start in ’13 adding
pressure on the Chinese government to ease its monetary policy and release loan production from
its tight leash. However, with inflation flaring up already and the ever-present risk of a real estate
bubble fed by cheap bank loans, the Chinese government appears wary and seems ready to trade
slower output growth for lower inflation. Even so, in the absence of a major shock on energy
costs or on the demand from US/Euroland, we believe that China will clear the 8%-mark in
output growth for ’13.
The United States seem to be on track of an economic recovery with output growth forecasts of
2% in ’13 and 3% in ’14. The commitment of the Federal Reserve to stick to low interest rate and
quantitative easing until unemployment gets down to 6.5% has soothed uncertainties. Also, main
macroeconomic indicators such as unemployment rate, housing & construction data and financial
markets are all fairly well-oriented. The political deadlock over the debt-ceiling and the so-called
“fiscal cliff” could however put a damper on the US recovery through abrupt fiscal consolidation.
Nevertheless, we lean towards optimism as regarding the US economy and we are confident that
US growth prospects will be the highest of advanced economies over the next few years.
European countries under review (UK and Euroland) will remain laggards in terms of output
growth. The Euroland is unlikely to put the recession behind until 2014 (-0.2% in ’13) and even
then, the recovery is expected to be anaemic (1.0% in ’14) due to the impact of austerity budgets,
cuts in public spending and massive unemployment. While the situation of the UK looks better at
first glance with growth prospects of 1% in ’13 and 1.9% in ’14, British economy has made a
habit of missing growth targets and is yet to find an alternative growth driver to the subprime-fed
housing boom and financial services. The British government recently revised its official growth
target down to 0.6% for ’13, which we deem more reasonable than the current IMF forecasts.
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Disclaimer
We insist on the fact that investing activities on stock and bond markets are risky. Future performance
cannot be deducted from past performance, and the advices and expectations given in the present
document are not engagements from their authors but only the consequence of an objective analysis
done by financial professionals, based on market data and economic outlooks from recognized
institutions worldwide. Investments have to suit the risk profile, time horizon, and financial abilities of
the investor. The value of any investment or income may go down as well as up and you may not get
back the full amount invested. Where an investment is denominated in a currency other than the local
currency of the recipient of the research report, changes in the exchange rate may have an adverse
effect on the value, price or income of that investment. In case of investments for which there is no
recognised market it may be difficult for investors to sell their investment or to obtain reliable
information about its value or the extent of the risk to which it is exposed.
Advices and analysis in this document are statements of opinion as of the date they are expressed and
not statements of fact. We therefore decline all legal liabilities for financial losses that could occur
consecutively to investments on all type of securities.
This document is not and should not be construed as an offer to sell or the solicitation of an offer to
purchase or subscribe for any investment. Morning-Meeting.com has based this document on
information obtained from sources it believes to be reliable but which has not independently verified;
Morning-Meeting.com makes no guarantee, representation or warranty, and accepts no responsibility
or liability as to its accuracy or completeness. The opinions contained within the report are based
upon publicly available information at the time of publication and are subject to change without
notice.
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