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Weekly – Investment Adviser 20 September


Equities Bonds
MSCI World +16.8% CHF Corp +3.2%
S&P 500 +19.9% US Govt +6.9%
Stoxx 600 +15.8% US Corp +12.1%
Nikkeï +10.1% US HY +11.7%
SPI +23.6% EUR Gvt +9.6%
Chine +30.3% EUR Corp +7.4%
Emerging +5.8% EUR HY +8.2%
Currencies Commodities
USD index +2.2% Gold +17.0%
EURUSD -3.5% Silver +15.0%
EURCHF -2.7% Brent +21.6%
USDCHF +1.0% CRB index +5.3%
USDJPY -1.5%
EM FX -2.2%


Numbers are crucial for China

Number 8 is magic; this is a lucky number. In 2018, the inauguration ceremony of Olympic games in Beijing took place, on August 8th at 8.08 pm. The most famous section of the Great Wall – called Huanyaguan – spells a tower with 8 sides. Hence, the word pagoda has the same meaning. In the Taoist culture, number 8 symbolizes plenty and comprehensiveness. The Yin and Yang symbol features 8 directions (linked to basic elements).

Number 9 also spells a lot, essentially from a political standpoint. The Marxist ideology began to spread widely in the country in 1919, after the May Fourth movement (an anti-imperialist, cultural, and political movement, which grew out of student protests in Beijing). Mao established the People Republic of China in Beijing on October 1st, 1949.

More recently, years that end with a 9 resonated negatively. Indeed, the Great Chinese Famine, which killed more than 15 million citizens, started in 1959. Tiananmen took place in Spring 1989. In a mischievous blink of history, Communism experienced a major defeat on November of the same year, with the fall of Berlin Wall. With the ongoing revolt of Hong Kong, 2019 is gradually reinforcing the ¨evil power¨ of years ending with a number 9.

The upcoming celebration of PRC’s 70’s anniversary is particularly sensitive for President Xi


Hong Kong, a strategic dilemma for China

In Taiwan, the latest annual poll conducted (June) by the National Chengchi University shows that 56.9% of respondents identify themselves as Taiwanese, while a mere 3.6% identify as being Chinese (36.5% as both Taiwanese and Chinese). Similarly, most Hong Kongese less and less identify as Chinese.

The good news from the communist party standpoint, is that Hong Kong demonstrators have had no support in Mainland China. Authorities expect sort of a remake of the 2014 – short-lived – orange umbrella revolt. It also expects that the visible negative economic impact of demonstrations will definitely weaken opposition. Actually, retail sales collapsed more than 10% last July (YoY figures). Tourists arrivals are in a free fall too.

As a – late – concession, Governor C. Lam promised to withdraw the controverted extradition bill project. But in practice, no dialogue has begun between protesters and the government yet. And the demands of people in the street have expanded towards more democratic – sensitive – topics.

Xi attempts to play a demonstration’s shortness of breath
But still, Chinese global (geo)politics should not allow for a rapid resolution

  • Xi, like other fellow international populist leaders, is under short-term pressure
  • Despite its latest strong posture, China could be more conciliatory during upcoming bilateral trade talks with the US
  • In such a scenario, the latest stabilization of the Yuan may prove sustainable, like in Q4 18 – Q1 19
  • We maintain our exposure to the Vontobel China Leaders into out tactical certificate


Fixed income. The end of “whatever it takes”

For his last ECB Governing Council, Draghi delivered what he could. The ECB announcements were in line with expectations of a 10 bps rate cut and mitigating measures for banks. It signaled that rates could be further reduced.

The ECB introduced 2 measures to mitigate some of the negative rates adverse effects. The new TLTRO (III) is more generous. Banks will access ECB loans for 3-years at -0.5% under specific loan lending criteria. So, banks will favor it more than issuing senior unsecured debts.

The restart, as from November 1st, of the asset purchasing program was a mixed bag. Its size is modest (EUR 20bn per month). However, for the first time, it would last as long as necessary. The ECB did not change any of its modalities (scope, size limits). This was disappointing. An unprecedented revolt took place within the Board. The Bank of France Governor Villeroy de Galhau, his Dutch colleague Knot and Bundesbank President Weidmann pressed against an immediate resumption of bond purchases. They were joined by Austria and Estonia, as well as members on the ECB’s Executive Board and the markets chief.

The ECB launched a two-tier system for reserves remuneration to mitigate the cost of negative rates. Up to 6 times banks’ required reserves will be exempt from the negative rates. This is not very generous. It will only reduce costs by EUR 2bn per annum for the banking sector.

The ECB did not go for a higher number as this would allow banks with low levels of excess liquidity (in Italy and Spain) to increase their excess reserves to profit from the 0% charge under this system. In other words, the incentive to sell negative yielding bonds to increase excess reserves and to have it charged at 0% is limited.

This system aims to protect the credit transmission channel. This also suggests that even bigger policy packages are not likely to boost growth or inflation. Unlike the first QE in 2015, financial conditions are already very expansionary. So, even if extra easing is beneficial at the margin, fiscal policy should play a bigger role. Policy makers in Germany should only announce additional stimulus mostly in response to recessionary conditions.

  • The ECB has very little monetary maneuver left. This package will not be enough to significantly raise inflation
  • German bond yields have already reached a low point as the ECB cannot lower more rates


Currencies. Back to basics

The intuitive response to more ECB easing should be a lower currency. However, there are factors that will limit any downside move for the EUR. First, the tiering system has been put in place to reduce the currency impact of lower rates. Furthermore, it suggests that rates are close to their lower limit. Then, with lower US yields since the beginning of the year, the yield spread is less supportive. Looking at the EUR/USD vs. the 2- and 10-year yield spreads, it has diverged. Until now absolute rates levels have driven the currency. It also suggests that the EUR/USD is simply undervalued based on the rate spreads. And at the very least, the EUR has discounted a too aggressive ECB easing. The main near-term risks comes from Germany falling into a recession and the Fed.

Looking at the speculative positioning, investors are net short EUR/USD, but not excessively. Given the ECB tone, a short covering is underway.

  • Stay long EUR vs. USD


Equities. Violent come-back of the Value segment

The US 10-year US jump from 1.45% on September 4th to 1.91% last Friday pushed last week investors to rush into the Value segment, i.e. banks, insurers, industry, materials and energy. We are therefore witnessing a major sectoral rotation. Too much pessimism this summer? Would interest rates have reached their lows? The Value segment includes companies that have an intrinsic value greater than the stock market price, undervalued companies in relation to their balance sheet fundamentals (equity value, replacement value or liquidation value). Value companies are characterized by lower valuations and higher risk than peers. Growth companies are characterized by higher valuations than broad market, high and sustainable earnings growth over the time, and less sensitivity to economic conditions.

This has led to a rally for companies with low PE ratios and low P/Book Value ratios. It was mainly the banks that reacted strongly. Investors seem to want to come back to companies with low valuations. Practically, in recent quarters, many technology IPOs (momentum/growth) experienced mixed successes like Uber, Lyft and WeWork’s IPO fiasco.

The S&P 500 Value offers more attractive valuations with an estimated PER of 15x 2019 and a dividend yield of 2.4% compared to the estimated PER of 22.5x 2019 and dividend yield of 1.5% for the S&P 500 Growth.

The comeback of the Value/Cyclical segment is for the moment a correction of August’s exaggerations. The cautious positioning had become overcrowded. However, for the Value segment to continue to outperform, it will require 1) more positive expectations about overall growth and inflation, 2) stopping the fall in interest rates and 3) a positive yield curve. Investors must perceive a reflationary environment, which will come with economic stimulus programs, infrastructure and/or a Green New Deal, a sort of Marshall plan for the “rescue” of the Earth.

  • In the short term, the Value/Cyclical segment should continue to outperform, correcting the negative excesses during summer
  • In the longer term, outperformance will depend on macro developments
  • Value Sectors: Finance, Industry, Materials and Energy


Equities. Prosus, the largest European company in technology / internet / social networks and entertainment

South African Naspers split its South African and international activities. The international activities were grouped together in a company listed in Amsterdam, Prosus, which becomes the largest listed technology, internet and entertainment company in Europe. Finally, a large technology company listed on a European stock exchange. Naspers retains 73% of the capital of Prosus and the balance (27%) is the free float.

Prosus was floated on September 11th at €58.70. The current price is €74, a gain of 24%. Obviously, it’s a success.

Its activities and holdings are in emerging countries, China, India, Russia, Central and Eastern Europe, North America, Latin America, Southeast Asia, Middle East and Africa.

Prosus holds a 31.1% stake in Tencent which is one of the largest Chinese companies, specializing in internet and mobile services, as well as online advertising; it manages the Tencent QQ instant messaging service, the web portal and the WeChat instant messaging application. In December 2018, the subsidiary Tencent Music Entertainment was listed in New York.

Prosus owns 28% of @, the largest email company in Russia.

Naspers owns OLX, the largest classifieds site in India and Brazil, the Letgo mobile platform, competing with Craiglist in the US, and participations in Russia’s largest social network,, India’s online travel site. MakeMyTrip and the Brazilian home delivery company iFood.

The market capitalization of Prosus is €120 billion, which is the value of 31.1% of Tencent’s market capitalization. If we add Mail.Ru Group and the other participations, it would give a value of €130 billion, or €82 per Prosus share. The Tencent share is worth HKD 350 today, but the average of the analysts’ targets is around HKD 410 . If we adjust the price of Tencent to HKD 410, we arrive at a market capitalization of Prosus of €137 billion, that is €90 per share. For the moment, Prosus is therefore a “game” on Tencent in euros.

  • We are positive about Tencent, that we value the share at HKD 420, 20% above the current price (HKD 350)
  • Prosus is a safer investment than Tencent listed in Hong Kong due to political unrest
  • At constant exchange rate, the valuation of Prosus is €82 (€74 today) at 2-3 months and €90 at 6-8 months


Oil. Back to a geopolitical risk premium ?

The conflict between the United States and Iran, and some maritime clashes on tankers, did not translate into a geopolitical risk premium on oil prices. Recessive forces on the global economy had dominated. But still, 25% of world consumption goes through the Strait of Hormuz and the pipelines of the Middle East region. If the Middle East were to ignite, oil prices would ¨explode¨.

The drone attacks on Saudi oil facilities are serious, as Saudi Arabia has just temporarily cut its oil production by 50%, accounting for 5% of global oil production. Saudi Arabia accounts for 10% of world oil production. The 2 largest facilities were affected, Abqaiq (7 million barrels/day) and Khurais (1.5 m b/d). The Houthis of Yemen, probably supported by Iran, are a real danger for Saudi Arabia, and the world economy if crude prices were to rise sharply. Despite the third largest military budget in the world, behind the United States and China, Saudi Arabia remains fragile.

It’s a blow for Aramco which is supposed to go public. Investors’ interest should decrease if facilities are at the mercy of military attacks. Its image of invulnerability is disappearing. It is also a blow for MBS, who has to finance its economic vision through the Aramco IPO.

Due to the growing instability in the region, a risk premium must integrate the price of oil. Depending on the damage inflicted on Aramco, it should be between $2 and $10. The Houthis have announced other major upcoming attacks.

The situation is rather favorable to large European and US integrated companies, unless crude prices should rise sharply, which would weigh on demand of consumer countries and large emerging importing countries such as China and India.

  • The situation in the Middle East is favorable to the European and American oil majors, but a price higher than $100 would weigh on the global demand for crude oil

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