Newsletter, January 17, 2019
Environment, Society and Governance
According to the Financial Times, companies that score highly in ESG (Environment, Society and Governance) terms outperformed their benchmarks by 81 to 243 basis points during a four year to period ending in 2018. The main reason for this phenomenon is that these companies understand that markets and the society are changing towards a more environmentally friendly and society favorable way of doing business. Higher R&D expenses lead to efficient innovations that are both beneficial to the environment and to the society and also help bring down production costs. As a result profit margins grow and this reflects to the stock price.
Rates, Bonds and Inflation
The Fed Funds rate stands currently at 2.5% after 4 increases that occurred throughout the year 2018, supporting growth in the economy, while prices remain stable. The 10-year bond yield is at 2.7%. The 10-year German bond is at 0.24% and the ECB’s Main Refinancing Operations rate stands at 0% reflecting that the economy is still in need for stimulus and inflation misses the target of below but close to 2%. Also, in the UK, the interest rate was increased to 0.8% and the Bond rate is at 1.26%, with uncertainty looming over the future of UK’s economy. When it comes to Japan, the interest rate is at -0.1% and the bond rate at 0.014%, with the Bank of Japan maintaining its accommodating policy. Lastly, the the People’s Bank of China kept the rate at 4.35%, preserving its neutral monetary policy whereas the bond rate is currently at 3.357%. [Data as of beginning of 2018]
U.S. Banking Sector and Multiples
Concerning the U.S. Banking Sector, the Median Valuation Multiples for the M&A Deals is 23.1x (Price / LTM Earnings) and 176% (Price / Tangible BV). Regarding the Price / LTM Earnings ratio, it is worth mentioning that the Northeast region is leading with a 25.6 multiple, while the median is higher than any other year, since 2006. On the other hand, the West has the highest Price / Tangible BV Multiplier (194%) and the ratio has grown, but has not yet achieved the 2008 levels.
Limited Partnerships or Family Offices?
After the crisis of 2008 a lot of investment portfolios yielded poor returns, despite previously having been considered sufficiently diversified. This resulted in many investors opting to manage their capital personally or in-house, a trend so evident to the community that some question the future of limited partnerships with family offices. However, it is important to note that family offices and institutional investors continue to invest as a LP and this behavior is still considered the norm. It is worth remembering that fund managers are still very much needed, as family offices are not capable of closely monitoring and managing all their investments directly, so only a small part of them is handled personally.
High Volatility and Big Sell-offs
During 2018 we have witnessed high volatility to all the major stock markets and at the ending of the year a very noticeable sell-off has occurred. Both the S&P 500 and the Dow Jones Industrial Average have lost more than 6%. The FTSE 100 Index has lost 13% and the German Stock Index DAX has lost around 18%. Regarding the Asian Markets, Nikkei 225 was down 12% and the Hong Kong Hang Seng Index was down 14%. Finally we should also note that the MSCI AC Asia Pacific Index was down 16%.
Recent Research Reports, Articles & Posts:
Companies recently followed by VRS: FCA Group, Renault, Karatzis, OPAP, Danone, Mondelez, Vestas, Peugeot, Aegean, Beiersdorf, Bayer, FG Europe, Siemens, Philips, Quest
The Strategy of Not Disclosing Unit Sales for Apple
Apple said it would stop providing unit sales for iPhones in fiscal year 2019. This can be interpreted as a step toward becoming more of a services oriented business. We should also note that the smartphone market has matured and growth is harder to find. Global shipments of smartphones fell 8% in the third quarter, compared with a year earlier and Apple in its fiscal fourth quarter reported that iPhone unit sales were about the same as a year earlier.
REITs and Returns
Real Estate Investment Trusts tend to underweight retail property and prefer investing in logistics, warehouse and industrials. This trend is a result of the increased demand in warehouses and last-mile logistic facilities, necessary for e-commerce firms to store their goods and provide same-day delivery to customers. Industrial properties offer higher rental rates since demand for industrial space rises, resulting in stable cash flows for the REITs. The aforementioned, imply an increase in construction of new facilities to meet the extensive needs.
The Role of Third Party Valuation Firms
By hiring third party valuation firms, private equity firms can save time and allocate more resources to focus on deal making-related work. Moreover, investors expect transparency into valuation estimates and auditors require detailed support of figures used in financial statements, so third party valuers are indispensable. Finally, third party firms can be more independent and more efficient than an internal investment team because they have access to vast databases and their teams consist of many experienced professionals in specific fields of valuation.
Expected vs Historical Beta
Presenting stocks’ historical beta as an equivalent for expected beta is, unfortunately, one of the topics poorly explained by the members of the Finance community. Research has shown that not only do historical betas fluctuate from one day to the next but they also vary depending on which index they are being calculated. In a two-month period, professor Pablo Fernandez proved that 77% of the companies analyzed presented a maximum daily beta more than two times bigger than their minimum daily beta. So, can we say with confidence that high-risk companies have higher historical beta than low-risk companies?
Please note that this newsletter has been prepared with the valuable contribution of :