European earnings and the emerging markets: Adecco, Nestle, Coca-Cola Hellenic

Earnings: cannot live without them but when they appear to have been constantly coming out for weeks and weeks even the most enthusiastic investor sags a little.

So the better news is that by my estimations this week is the last big earnings week for the Q2 period. Nevertheless a little bit of catching up to.  First Adecco which I last looked at a year ago (link here) and which actually has had a good last year (away from Financial Orbit I noted the CHF70 level the shares fell back to a couple of months ago as a good trading opportunity - which I undertook and also traded out of).

Looking through the results they issued earlier in the week, two aspects struck me.  First the two geographic parts of their business with relative momentum was Europe and the Rest of the World...and not North America...

 ...which probably helped pull down the overall perception of the group's revenue analysis sequentially from the first '+' for years back to a '='.

That sounds like a world where the convention of US strength is perhaps overdone (and I would argue this is akin to the conclusions of my latest Financial Orbit Speaks available in a tab at the top of the page).  

Want another indicator of potential emerging market relative demand?  Then take a look at Nestle's numbers from earlier today.  

With full year numbers reiterated the operational positives were probably centred on the control of costs (albeit allowing a clear expansion of marketing spend).  The new CFO also made some noises about further ongoing initiatives on the cost control side which shareholders will appreciate (as we will see when we look at the share price chart in a moment). 

Divisionally there was less of major excitement with major trends as we were previously (although at least organic growth was positive for all divisions).  

I concluded in my last review of the company (link here) that below CHF70 was a always a level to get more excited about Nestle shares.  With a higher teens EV/ebit ratio (and despite modest leverage, a 3%+ dividend yield etc.) this remains the case.  Certainly a higher quality name - and one which is also still highlighting the relative momentum for them in the emerging markets. 

Finally I have a piece coming out on Share Prophets tomorrow about today's Coca-Cola Hellenic Bottling numbers.  Suffice to say the growth in their emerging markets business was also noted: 

Kind of interesting given the current sentiment malaise regarding the emerging markets that you can still find interesting stocks with exposure to the still structurally interesting space.  

Another indication of why you should like specifics like companies and not generalities like indices currently. 

Charts today - active management, EM debt, consumers/oil & who is buying gold

A selection of charts that I have come across today.

A super piece in today's Financial Times on active fund management is backed up by some excellent graphics.  Despite the industry having a difficult time with active management in 2014 (on average) I am excited about such a positioning in 2015 given the volatile backdrop across global asset classes.

In yesterday's Stories we should be thinking about I mentioned emerging market debt in passing and the following two charts show this asset class is at an interesting point due to the sheer size of the sell-off...

 ...and the sheer size of the recent issuance:

 Of course two points that are necessarily inter-linked.  Ultimately with emerging markets good value at an equity level, I would make a similar conclusion on the debt too.

Lower oil prices have clearly been an issue for many commodity producing countries around the world but for consumers and companies looking to reduce input costs it is good news.  This graphic nicely updates US gas (aka 'petrol') prices:

Gold has been a positive theme for me for a number of years now and despite recent volatility I still perceive value - especially in companies such as Randgold Resources.  Another reason for being strategically positive about gold is just who is continuing to accumulate it as nicely indicated by this chart:

"The Bank of International Settlements says something interesting (honest)"

My latest post as a Yahoo Finance Contributor titled "The Bank of International Settlements says something interesting (honest)" can be found here.

Asia today and charts today

A seemingly benign backdrop as evidenced not just by the US GDP numbers...

...but also by Moody's reporting that now 80% of their ratings are 'stable' (compared to just over 60% two years ago).  A long bull run always helps:

In Asia I note that the Japanese 10 year bond is kicking around all-time lows near 45 basis points. 

A normal economy?  Not at all...otherwise the real bond yield profile would not look like this:

Interesting too in Asia that there has been such an uplift in Hong Kong rights issues.  Tapping a benign market whilst it is there?

 Of course there has been volatility in some emerging markets...

...not helped by lower commodity prices as nicely captured in this simple graphic on China:

And there are still underlying material challenges...such as perceived inequality and related protests.  Perhaps it was a sensible thing that the US indices did not rack up another all-time high yesterday: 

Charts today - EM flows, impact of a rising US dollar, oil, payment/reserves currencies and seasonality

Charts today include some improvement in EM flows (although still below 2010-13 averages)...

 ...but the rising US dollar has crimped globally focused companies listed in the US:

Another reason for US dollar strength...big geopolitical shift:

 Interesting payments/reserves currency split.  Note the pre-eminence of the US dollar and the euro for reserves at least today...

As we move into Q4 tomorrow, historically been a strong period for performance for markets...

...although volatility tends to peak in October.  Something to think about for the upcoming month.

And the fund managers of the world say...

It is Bank of America-Merrill Lynch Fund Manager Survey day...always an interesting point of the monthly cycle.  So what really strikes me?  First, those regarding the markets as overvalued are at a 14 year high.  Can everyone remember what happened back in 2000?

We can go higher though (1999 showed that) but a really interesting chart.  Don't get too long...

Second, what a striking bond versus equity diagram below. How many times has this peaked at prevailing over the last decade?  A break here would show a real paradigm shift.  Certainly possible given high bond allocations...but with it huge asset allocation implications:

Then there is 'the most crowded trade' with high yield replacing long EU peripheral debt as the most extended/popular choice.  Seems about right to me...and another reason for being cautious on fixed income.    

Finally some interesting changes in emerging market country preferences.  Whilst India is still the most popular note the turnarounds in Russia and China from a net negative positioning to a net positive one.  Kind of interesting - and certainly fits in with my perception of where relative stock picking value is.   

Some interesting conclusions...

Charts today - Portugal, debt, emerging markets and bitcoin

Charts today has to really start with a Portugal-related chart given the volatility and influence of events in that market yesterday.

Here's the country's default rate probability.  So...a sharp uptick...but look at that downward risk suppression over the last year.

So it was a relevant move yesterday but either we have not seen anything yet...or it will prove just to be a storm in a teacup.  My view...the only hope is further policy accommodation measures by the European authorities.  Unfortunately that is not guaranteed with, I feel, much more discussions and disagreements to come over the next few months.  So more volatility to come - and volatility measures remain hugely suppressed versus history.  

Reiterating this I noted in a tweet from @RAsquawk that:

'Goldman downplaying Portugal - wont have systemic implications 1) limited asset size 2) low Foreign bank exposure 3) ECB liquidity backstops'

Oh dear...

Debt build up does not help as well...and this is nicely shown by the graphic below.  Guess who has been building up debt and growing more slowly?

So how about the emerging markets.  They have had a different year with some clear local market/currency performance differentials between (say) Brazil/India and China/Russia...

...but despite this emerging market political confidence is rising.  For example - following his geopolitical putsch of earlier this year - Mr Putin is stirring...

'In an interview published on Friday, Putin framed his tour of Brazil, Cuba and Argentina as part of an effort to build a multi-polar world at a time when he is isolated by sanctions over Ukraine and his relations with the West are at their frostiest since the Cold War.  Russia sees strong relations with Brazil as "strategically important" in opposing Western clout, he said, ahead of next week's summit with fellow BRICS nations, which includes China, India and South Africa'

On a similar front, I liked this investment bank report that 'the 20 emerging nations currently only represent less than half of their fair share of the global capital market universe - accounting for only 22 percent of global equity market capitalization, and a 14 percent of the global corporate and sovereign bond markets...However, by 2030, emerging markets' share will increase to 39 percent, and to 36 percent and 27 percent respectively for corporate bonds and sovereign bonds'

And the influence of this?  Well China rises to second place in the global capital markets ladder. Other countries set to climb the capital markets ladder include Saudi Arabia, which will rise to sixth position from 10th, Indonesia, to seventh from 12th and Turkey rising to 10th from 17th by 2030.

The rise and rise of the economic/political impact and influence of the emerging markets remains a huge theme.

As does potentially bitcoin.  What an interesting chart...even if you inflation adjust up the 1995 internet spend.

Standard Chartered - back under 1200p

Not the greatest statement from the emerging markets focused (but London and Hong Kong listed) bank Standard Chartered yesterday.  As the Lex Column (paywall generally) noted:

'The bank gave a new target for first-half group income to be “down by a mid single-digit per cent”; the previous goal was modest growth. The company avoided the words “profit warning” but expressed a desire to be more transparent about its expectations...The bank did say that the main
drag was the financial markets segment, including equity, commodity, fixed-income and derivative businesses'

So with the share back at/below that interesting 1200p level I noted back in early March what should we be thinking?

Clearly this was just a pre-close statement with more details to come in early August.  I go back though my underlying observation in previous posts that the combination of a 4.5%+ yield and a price:book now of around x1.1 is big picture too low.  Maybe some of the above does pull the return on equity down to nearer the 10-11% transitorily but value for both income and capital growth seekers is increasing.  I certainly have bought more shares below 1200p today.

As an indication of potential 'switch' value take a look at this three year chart comparing Standard Chartered with the JP Morgan Emerging Markets Investment Trust - an interesting recent divergence...

Charts today - emerging market structural factors, excitements, protectionism and generational observations

Quite a widespread selection today. 

I liked this chart from an excellent IMF report on the emerging markets which highlighted some greater structural risks to growth...and unsurprisingly called for more 'structural reform':

So the way to understand rising emerging market bond issuance and falling volumes is apparently investors 'sitting' on their positions.  So if ever a number of investors wanted to sell at the same time...back to the need for on-going structural reforms as per the IMF probably.

Not good news for UK structural positives...

 

This chart from the Reserve Bank of Australia nicely shows that US Dollar denominated commodities have been disinflationary.  What happens if the US Dollar goes up?

LBO leverage excitement...

 

...and too much housing market excitement in the UK induced the Bank of England to apply some prudence rules.  Makes sense as a first shot rather than just a rate rise per se:

Three fascinating charts to finish with.  Rising protectionism (still a low base)?

 The dangers of historical extrapolation (or just it is never exactly the same)?

Great graphic with super detail on demographics/generational factors focusing in on 23 year olds:

Asia today - Chinese property, macro statistics, shadow banking and rise of the yuan

Asia today is really initially a China special.  Not too much new economic news out today apart from the latest property price data:

'In China, new home prices across 70 cities tracked by the government rose 5.6 per cent from a year ago, versus a 6.7 per cent rise in April...On a monthly basis, prices rose in only 15 cities, versus 44 in April, as Beijing clamps down on the shadow banking sector but also tries to encourage more lending from the formal banking system'

Interesting today how many commentators have (inevitably) reported the data as the number of cities where prices are falling...such is the commentary bias!  Until prices fall 5%+ nationally I am not going to worry inherently too much about the Chinese market.

The other obsessions include weak commodity demand...

...reflecting weakening growth conditions:

 

 

Once again to me the medium-term prospects for China are focused on the microeconomic reform area and progress there is not headline grabbing but appears to be on-going.  

 

 

Otherwise, China has received a lot of attention for the growth of its informal shadow banking sector but (as a proportion of GDP) it is not the largest in the world by any means...(2012 data admittedly).

 

So nothing to stop the rise of the yuan? Ultimately probably not...except the Chinese not wanting to 'hit the front' before they are ready. 

 

Finally, inflows into the emerging markets are apparently going up again.  Two observations: first, on this data the Putin/Crimea influence was not high and, second, note the 'fears over US Fed's tapering' alleged influence.  An interesting observation ahead of the FOMC...