weekly equity revie · 7/12/2016 · q2 earnings season 12 july, 2016 q2 earnings season kicks-off...

Weekly Equity Review

Ucap Hong Kong Asset Management Limited

12th Jul 2016

Equity Strategy Highlights

� Global Markets Highlights

� The S&P 500 made a new high following a strong job report. Sectors performance divergence continues

to grow, driven in particular by the low interest rates environment.

� US earnings season kicks-off officially as JPMorgan reports on the 14th.

� Important Events This Week

� Tuesday: US Wholesale Inventories

� Wednesday: Japan Industrial Production

� Thursday: Bank Of England, US PPI, US Jobless claims

� Friday: US Retail Sales, US CPI

12 July, 2016

Equity Strategy Highlights

� Global Leaders – 2016

� The US portfolio is still lagging. Our US Global Leaders portfolio suffers from exactly the same issue as the

market is driven by 2015 laggards and purely interest rate related stocks such as utilities. We continue to

believe that companies with robust growth profile and strong cash flow generation will ultimately

perform better over the long-term.

� The European Portfolio remains very strong compared to indices.

� Europe: -1.4% YTD vs Euro Stoxx at -10.2% YTD (8.9% alpha).

� US: 2.0% YTD vs S&P at 5.4% YTD (-3.4% alpha).

� Stock-Picking List – 2016

� The average performance of our Stock-Picking YTD is +0.47%. The average alpha is +238 bps.

� We have closed positions for the time being.

12 July, 2016

Q2 EARNINGS SEASON

12 July, 2016

Q2 Earnings Season

12 July, 2016

Q2 earnings season kicks-off this week with JPMorgan reporting on Thursday prior to market open.

On Friday Wells Fargo and Citigroup will release earnings followed by Bank of America on Monday.

The following chart shows the Q1 earnings distribution for the S&P 500 and the S&P 350.

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

11 July 18 July 25 July 01 August 08 August 15 August

Earnings date distribution by week, weighted by market capitalization (in $Bn)

S&P 500

S&P Europe 350

Q2 Earnings Season Kick-Off

� The second quarter of the year took investors on a bumpy ride and was highlighted by the Brexit.

� Demand for safe haven assets has jumped strongly since with 10-year government bonds yields reaching

record lows in the US, UK, Germany and Japan. Gold and silver trade at their highest level in two years.

� To the surprise of many, US markets have recovered from the losses post Brexit and the S&P 500

reached a record high yesterday of (2’143), gaining more than 4% YTD.

� Earnings are projected to fall for the fifth consecutive quarter for the first time since Q3 of 2008.

At the same time, sales are expected to fall for the sixth straight quarter.

� Projections at the beginning of the period called for a 2.8% drop in earnings, which has fallen to -5.6%.

� Investors will be looking to gain some insight into how companies (especially European) will be

affected by the Brexit. On top of this, many are seeking for information on growth prospects in

China.

� Analysts project revenue and earnings growth to return in Q3.

12 July, 2016

US Earnings Prospects

12 July, 2016

7.5% 6.4%3.1% 2.2%

-2.2% -2.6% -4.8% -7.2%-12.3%

-77.1%

-5.6%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Earnings Growth

10.9%7.7%

5.4% 4.2%2.0% 1.4%

-1.3%-4.2%

-6.8%

-26.9%

-0.7%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Revenue Growth

Revenues are projected to fall by 0.7%, with energy and materials leading the laggards.

Earnings are expected to fall by 5.6% in Q2 as energy once again weighs down on the index. Of the 113

companies that have issued EPS guidance for Q2, 72% has been negative.

Ex Energy, earnings are projected to fall 2.1%.

Following the rally in oil prices it will be interesting to

see guidance on capex for oil companies.

US Earnings Prospects

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1'000

1'200

1'400

1'600

1'800

2'000

2'200

07

.11

10

.11

01

.12

04

.12

07

.12

10

.12

01

.13

04

.13

07

.13

10

.13

01

.14

04

.14

07

.14

10

.14

01

.15

04

.15

07

.15

10

.15

01

.16

04

.16

S&P 500

Prices 3M Earnings Momentum

12 July, 2016

Expectations have rebounded in the past quarter as seen in the earnings momentum below and the

market seems to have already priced in better than expected earnings and an improvement in the

coming quarters.

Strength of the USD Pressuring Earnings

12 July, 2016

Many companies cited a strong dollar to have been an adverse factor on EPS in Q1 and expected a

turnaround in the second half of the year. However the panorama has drastically changed following the

Brexit as the dollar has strengthened. The Dollar Index stands at 96.60 today vs. ≈94.50 in mid April.

US Banks Likely to Continue Struggling

� The outlook for US banks has deteriorated over the past month following the Brexit but remain

stable after clearing the Fed stress test.

� Net interest margins will remain pressured as the probability of a rate hike this year has almost faded

away despite Friday’s strong job report.

� The probability of a rate hike stands at just 29% in December.

� The yield curve continues to flatten with the difference between the US 2Y and 10Y Treasuries standing

at 0.82%.

� Investment banking revenue is likely to continue slowing as more companies reconsider acquisitions or

IPOs.

� There have been several news articles recently on further job and bonus cuts in the sector as a way to

battle lower income.

� Combined net income at the six biggest US banks (Goldman Sachs, Wells Fargo, JPMorgan, Bank of

America, Citigroup and Morgan Stanley) is projected to fall by 18%.

12 July, 2016

INVESTMENT IDEAS

12 July, 2016

Global Leaders

12 July, 2016

The Global Leaders are quality companies that we believe are fit for a long-term investment.

We launched this strategy in August 2011. Please read our special report for a full explanation of this strategy.

Benchmark: S&P 500Benchmark: Euro Stoxx 50

� European Portfolio � US Portfolio

*Since

August 2011

Portfolio Benchmark Delta Annualized Portfolio Benchmark Delta Annualized

Performance 92% 51% 40.9% 14% Performance 112% 94% 18.5% 17%

Performance YTD -1.4% -10.2% 8.9% Performance YTD 2.0% 5.4% -3.4%

Volatility 52.1% 39.5% 12.6% Volatility 60% 53% 7%

Max DrawDown -53.9% -49.8% -4.1% Max DrawDown -55% -51% -5%

-15

5

25

45

65

85

105

EU Global Leaders Benchmark

-11

9

29

49

69

89

109

US Global Leaders Benchmark

Global Leaders – Current List

� European Portfolio � US Portfolio

12 July, 2016

Name Weight Mkt Cap ($bn) Sector

Novo Nordisk 7.08% 141 Health Care

Sanofi 6.68% 103 Health Care

Inditex 6.61% 100 Consumer Discretionary

Nestlé 5.91% 239 Consumer Staples

Vinci 5.60% 44 Industrials

Fresenius 5.52% 40 Health Care

Unilever 5.29% 137 Consumer Staples

Essilor 5.13% 28 Health Care

BATS 5.10% 115 Consumer Staples

Philips 5.00% 24 Industrials

L'Oréal 4.99% 102 Consumer Staples

Dassault Systemes 4.80% 20 Information Technology

Reckitt Benckiser 4.62% 70 Consumer Staples

Roche 3.87% 217 Health Care

Ab InBev 3.82% 202 Consumer Staples

Novartis 3.79% 199 Health Care

LVMH 3.20% 84 Consumer Discretionary

Allianz 3.10% 72 Financials

AXA 2.97% 58 Financials

Heineken 2.93% 54 Consumer Staples

Daimler 2.05% 72 Consumer Discretionary

BMW 1.95% 55 Consumer Discretionary

Name Weight Mkt Cap ($bn) Ticker

Johnson & Johnson 5.10% 333 Health Care

Exxon Mobil 5.05% 389 Energy

Apple 4.92% 525 Information Technology

Microsoft 4.92% 402 Information Technology

Alphabet 4.86% 483 Information Technology

Facebook 4.66% 326 Information Technology

Merck & Co. 4.63% 160 Health Care

PepsiCo 4.60% 152 Consumer Staples

Bristol-Myers Squibb 4.51% 123 Health Care

JPMorgan 4.42% 224 Financials

Costco 4.39% 68 Consumer Staples

Starbucks 4.31% 83 Consumer Discretionary

Honeywell 4.28% 88 Industrials

Nike 4.11% 93 Consumer Discretionary

Accenture 4.01% 74 Information Technology

AT&T 2.60% 267 Telecommunication Services

Verizon 2.57% 229 Telecommunication Services

Amazon 2.46% 342 Consumer Discretionary

Altria 2.36% 135 Consumer Staples

Philip Morris 2.27% 157 Consumer Staples

Walgreens 2.24% 89 Consumer Staples

Wells Fargo 2.23% 238 Financials

Reynolds 2.20% 76 Consumer Staples

Walt Disney 2.17% 159 Consumer Discretionary

Visa 2.15% 177 Information Technology

CVS 2.04% 102 Consumer Staples

Time Warner 2.03% 58 Consumer Discretionary

Mastercard 1.98% 97 Information Technology

Goldman Sachs 1.95% 64 Financials

Stock-Picking List – Performance

� Hit Ratio 35%

� Hit Ratio Alpha 58%

� Average Perf. 0.47%

� Average Alpha 2.38%

� Nb. of Trades 31

� Open Trades 0

12 July, 2016

Average alpha of each stock strategy when compared to its

index (S&P or Euro Stoxx) over the same holding period.

Average performance of each stock strategy.

Please ask for more details.

Latest Equity Research

12 July, 2016

Date Document Strategy Stocks Covered Date Document Strategy Stocks Covered

July 8, 2016 Key Highlight Global Leaders PepsiCo April 27, 2016 Key Highlight Global Leaders Apple

July 7, 2016 Key Highlight Global Leaders Walgreens April 22, 2016 Key Highlight Global Leaders Essilor

July 4, 2016 Weekly Report Thematic View Nike, Under Armour April 20, 2016 Key Highlight Global Leaders Johnson & Johnson

June 30, 2016 Key Highlight Thematic View JPMorgan, Goldman Sachs, Wells Fargo, Morgan Stanley, BoA April 14, 2016 Key Highlight Global Leaders JPMorgan

June 29, 2016 Key Highlight Global Leaders Nike April 13, 2016 Key Highlight Global Leaders Facebook

June 28, 2016 Weekly Report Global Leaders Reckitt Benckiser, Unilever April 5, 2016 Weekly Report Thematic View Ctrip, Expedia, Priceline

June 20, 2016 Company Primer Global Leaders Heineken April 1, 2016 SWOT Analysis Thematic View Ctrip

June 16, 2016 Key Highlight Global Leaders Inditex April 1, 2016 SWOT Analysis Thematic View Expedia

June 14, 2016 Key Highlight Global Leaders Apple April 1, 2016 SWOT Analysis Thematic View Priceline

June 14, 2016 Weekly Report Global Leaders Accenture March 31, 2016 Key Highlight M&A Hon Hai

June 9, 2016 Company Primer Global Leaders Starbucks March 16, 2016 Key Highlight Global Leaders Apple

June 9, 2016 Company Primer Global Leaders Facebook March 10, 2016 Key Highlight Global Leaders Inditex

June 9, 2016 Company Primer Global Leaders Amazon March 8, 2016 Weekly Report Thematic View 3M, GE, Honeywell, UTC

June 9, 2016 Company Primer Global Leaders Alphabet March 7, 2016 Key Highlight Global Leaders Novo Nordisk

June 7, 2016 Key Highlight Thematic View Bristol-Myers, Juno Therapeutics, Kite Pharma March 4, 2016 Key Highlight Global Leaders Time Warner

June 7, 2016 Weekly Report Tech Leaders Adobe, Broadcom, PayPal February 23, 2016 Weekly Report Thematic View IBM

June 3, 2016 Key Highlight Global Leaders Johnson & Johnson February 19, 2016 Key Highlight M&A IBM

May 31, 2016 Weekly Report Global Leaders Alphabet, Amazon, Facebook February 2, 2016 Key Highlight Global Leaders Alphabet

May 27, 2016 Key Highlight Global Leaders Costco January 29, 2016 Key Highlight Global Leaders Microsoft

May 24, 2016 Weekly Report Thematic View Swisscom, Deutsche Telekom, Vodafone, BT Group January 28, 2016 Key Highlight Global Leaders Facebook

May 17, 2016 Weekly Report Thematic View Heineken January 27, 2016 Key Highlight Global Leaders Apple

May 11, 2016 Key Highlight Global Leaders Amazon January 25, 2016 Key Highlight Earnings Eiffage

May 5, 2016 Key Highlight Global Leaders Time Warner January 15, 2016 Key Highlight Global Leaders JPMorgan

May 4, 2016 Key Highlight Global Leaders CVS January 13, 2016 Key Highlight Global Leaders Time Warner

April 29, 2016 Key Highlight Global Leaders Amazon January 8, 2016 Key Highlight Global Leaders Walgreens

April 28, 2016 Key Highlight Global Leaders Facebook January 7, 2016 SWOT Analysis Thematic View Siemens

SECTOR VIEWS

12 July, 2016

Our Strategic Views – Sectors

12 July, 2016

GICS

SectorUS EUROPE

Information

Technology

US Technology remains the most attractive investment space in

terms of:

� Growth potential,

� Reasonable valuation,

� Potential cash return,

� Stock picking opportunities.

Stay long but the Tech sector is tiny in

Europe.

Financials

US Banks will ultimately benefit from the US economic recovery and

rising interest rates. However, despite the expected rate hike,

inflation remains low and yield curves continue to flatten.

The Brexit has a short term negative impact but we believe that

ultimately, US banks will came out stronger. Stay neutral.

European banks continue to face headwinds

from low rates and structural issues….

And the Brexit has worsened things … avoid

the sector.

Healthcare

Pharma are on multi-years upcycle:

� Earnings, M&A activity and positive drug developments continue to support the sector.

� Prices and valuations have risen, but the sector has lagged over the past quarters, offering investors an

attractive entry point.

Our Strategic Views – Sectors

12 July, 2016

GICS

SectorUS EUROPE

Consumer

Discretionary

Consumer Discretionary stocks benefit from the relatively resilient

US market. But valuation is a bit too high to warrant some further

outperformance.Those three sectors are heavily tilted

towards exporters.

Overweight Staples as they continue to be

supported by low rates and by weaker

European currencies following the Brexit.

Consumer

Staples

Consumer Staples are expensive but continue to be supported by

low US long rates.

IndustrialsOverweight as 2015 headwinds are abating. Stay long defense stocks

as geopolitical factors will keep the pressure on defense spending.

Energy Oil prices have stabilized but the CAPEX remain low. Stay long the integrated Big Oils but avoid services.

MaterialsCommodities remain under pressure due to declining emerging markets demand, overcapacity and a strong dollar.

-> Be careful with miners. Stay neutral chemicals.

UtilitiesStay Neutral as the sector is a play on long rates and other sectors

offer better fundamentals.

Avoid the sector as it is plagued by political

intervention in France and Germany.

Telecom

ServicesStay Long on low interest rates.

Stay Long on low interest rates and as the

weaker European currencies are supporting

some carriers.

Our Strategic Views - Sectors

12 July, 2016

The Following charts are a recap of our sector view as well as the relative size of each sector.

How to Invest

12 July, 2016

GICS Sector US EUROPE

Information

Technology

Best Investment proxy:

• Technology SPDR ETF (XLK).

Favorite Stocks:

• Payment Technologies: Visa, MasterCard, PayPal.

• Software: Microsoft, Adobe.

• Hardware: Apple.

• Media: Facebook, Alphabet.

• IT Services: Accenture, IBM.

Best Investment proxy: No Liquid Tracker.

Favorite Stocks:

• Software: Dassault Systèmes.

• Semis : ASML

Financials


• Financials SPDR ETF (XLF).

• Banks only: Banks SPDR ETF (KBE).

Favorite Stocks:

• Banks: JPMorgan, Wells Fargo, Goldman Sachs.


• Eurozone Banks: iShares Estoxx Banks ETF (SX7EEX

GY Index).

• Pan-European Banks: Lyxor Stoxx 600 Banks (BNK

FP).

Favorite Stocks:

• Insurance: Allianz, AXA.

Healthcare


• Healthcare SPDR ETF (XLV).

• Pharmas only: Pharmaceuticals SPDR ETF (XPH).

Favorite Stocks:

• Pharmaceuticals: Bristol-Myers, J&J, Merck.


• Lyxor Stoxx 600 Healthcare (HLT FP).

Favorite Stocks:

• Pharmaceuticals: Novo Nordisk, Roche, Sanofi.

• Equipment and Services: Fresenius, Essilor.

How to Invest

12 July, 2016


Consumer

Discretionary


• Cons. Disc. SPDR ETF (XLY).

Favorite Stocks:

• Media: Disney, Time Warner.

• E-Commerce: Amazon, Priceline, Ctrip.

• Restaurant: Starbucks.

• Apparel: Nike.


• No Liquid Tracker.

Favorite Stocks:

• Apparel: Inditex, LVMH.

• Carmakers: BMW, Daimler.

Consumer Staples


• Cons. Staples SPDR ETF (XLP).

Favorite Stocks:

• Pharmacies: CVS, Walgreens.

• Food & Beverage: Pepsi.

• Packaged Food: Kraft Heinz, Mondelez, ConAgra,

Tyson.

• Tobacco: Altria, Reynolds.

• Retail: Costco, Wal-Mart, Kroger, Dollar Tree.

• Confectionary: Hershey.



Favorite Stocks:

• Food & Beverage: Nestlé, AB Inbev, Heineken,

Danone.

• HPC: Unilever, Reckitt, L'Oréal.

• Tobacco: BAT.

• Retail: Carrefour.

• Confectionary: Lindt, Barry Callebaut.

Industrials


• Industrials SPDR ETF (XLI).

Favorite Stocks:

• Conglomerates: GE, Honeywell, 3M, United Tech.



Favorite Stocks:

• Infrastructure: Vinci.

• Diversified: Philips.

How to Invest

12 July, 2016


Energy


• Energy: Energy SPDR ETF (XLE).

• Oil services: Market Vectors Oil services ETF (OIH).

Favorite Stocks:

• Exploration & Production: Occidental, Hess, Noble

Energy, Anadarko.

• Oil Refining: Philips 66, Valero.

• Integrated: Exxon, Chevron.

• Equipment & Services: Schlumberger, Halliburton.



Favorite Stocks:

• Integrated: Total, RDSA.

• Refining: Neste OYJ.

Materials


• Materials: Materials SPDR ETF (XLB).

• Gold Miners: Market Vectors Gold Miners ETF

(GDX).

Favorite Stocks:

• Gold Miners: Newmont, Barrick Gold, Newcrest.



Favorite Stocks: na.

• Gold Miners: Randgold.

Utilities


• Utilities SPDR ETF (XLU).





Telecom Services



Favorite Stocks:

• Diversified: Verizon, AT&T.



Favorite Stocks:

• Diversified: Vodafone, Deutsche Telekom.

Disclaimer

12 July, 2016

Ucap Hong Kong Asset Management Ltd has issued this document for information purposes only. This document may not be distributed to the United States, Canada,

Australia or to any other jurisdiction in which its distribution is unlawful. If you require investment advice or wish to discuss the suitability of any investment decision,

you should contact your professional advisers for financial, legal or tax advice when appropriate. This document is not and should not be construed as an offer to sell or

a solicitation of an offer to purchase or subscribe for any investment or service.

Ucap Hong Kong Asset Management Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently

verified. Ucap Hong Kong Asset Management Ltd makes no guarantees, representations or warranties, and accepts no responsibility or liability as to its accuracy or

completeness. Expressions of opinion herein are subject to change without notice.

Members of the Ucap Hong Kong Asset Management Ltd and/or their officers, directors and employees may have positions in any securities mentioned in this

document (or any related investment) and may from time to time add to or dispose of any such securities (or investment).

In the case where this document is distributed in the United Kingdom by a person who is not authorized by the United Kingdom Financial Services Authority; it is only

intended for persons who (i) have professional experience in matters related to investments or (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth

companies, unincorporated associations, etc") of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or to whom it may

otherwise lawfully be communicated by such an unauthorized person (all such persons together being "relevant persons"). This communication must not be acted on

or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and

will be engaged in only with relevant persons.

Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not receive back

the full amount invested. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an

adverse effect on the value, price or income of that investment. In the case of investments for which there is no recognized market, it may be difficult for investors to

sell their investments or to obtain reliable information about their value or the extent of the risk to which they are exposed. Investment in any market may be

extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect, influences. Such characteristics can lead to

considerable losses being incurred by those exposed to such markets.

© Copyright. Ucap Hong Kong Asset Management Ltd 2015 ALL RIGHTS RESERVED

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, whether electronic, mechanical, photocopying,

recording or otherwise, without the prior written permission of Ucap Hong Kong Asset Management Ltd.

weekly equity revie · 7/12/2016 · q2 earnings season 12 july, 2016 q2 earnings season kicks-off...

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