HOLT Macro Overview: Markets priced for perfection March 2017 +44 207 883 3649 [email protected]Michel Lerner, CFA, Global Co-Head of HOLT Market Commentary HOLT credit-suisse.com/holtmethodology Felix Rusli, Head of HOLT, APAC +852 2101 6482 [email protected]
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HOLT Macro Overview: Markets priced for perfection
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Revisions are particularly strong in cyclical sectors
Source: Credit Suisse HOLT
Date: March 2017
7
HOLT
Scope for US CFROI to move up on tax cuts Tax Rates: U.S. vs Global Through Time
Source: HOLT Data. OECD Tax Database at OECD.org/tax. Universe for U.S. effective tax rate is largest companies (ex financials, REITs) by market cap (1,300 firms) ; based on
medians; excludes companies with negative pretax income. OECD average tax rates shown are combined corporate income tax rate - shows the basic combined central and sub-central
(statutory) corporate income tax rate given by the central government rate (less deductions for sub-national taxes) plus the sub-central or state tax rate.
8 THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
US companies with high tax rates could benefit
COMCAST CORP CMCSA Media $163,454 36% $8,252 25%
UNITEDHEALTH GROUP INC UNH Health Care Providers $144,657 36% $8,478 26%
ALTRIA GROUP INC MO Tobacco $126,509 35% $5,458 23%
Universe: S&P 500 (ex Financials, REITS, Inversions and negative pretax income). Companies with five yr median tax rate > 35% and less than 10% foreign sales. Estimated impact on
net income is trailing five year impact of setting the yearly tax rate from as reported to 20%. Top 15 companies sorted by market cap in descending order shown.
9
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Policy risks out of sync with equity market complacency
10
Source: Credit Suisse Executive Panel: Politics
Date: February 24, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Even if earnings recover, valuations look full (US large caps ex-Financials)
11
Source: Credit Suisse HOLT
Date: March 6, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
HOLT market-derived discount rate can be used for valuation signals
A market-derived discount rate is the rate which equates expected future cash flows to the current market value.
FCFF
1 + DR
Forecast
Observe
Solve
Market Enterprise
Value
HOLT Model
12
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Trump potential policies within a historical context
Source: Credit Suisse HOLT, Credit Suisse Global Strategy, Robert Shiller
Note: Pre-1976 the Discount Rates are estimated based on regression to the Trend PE’s (Most recent price/ Trend earnings which is the 10-year trailing average)
**NB: Quartile lines are drawn according to HOLT data back to 1950.
For further details see Wealth Creation Principles 2011, Vol 1 Issue 2 13
Smoot-Hawley tariffsGATT
Uruguay Trade
agreement
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Equities no longer cheap vs. bonds
Excludes Financials & Regulated Util ities
14
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Equi
ty R
isk
Prem
ium
(%)
Equity Risk Premium - USA
Equity Risk Premium 75%ile Median 25%ile
13*Derived Cost of Equity: WACC = (%D)(Kd) + (1-%D)(Ke), Equity Risk Prem ium = Ke - Rf
SolveKnow
Source: Credit Suisse HOLT
Date: March 6, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
The case for Asia remains stronger on a relative basis
15
Source: Credit Suisse HOLT Data
Date: March 14, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Korea- and Hong Kong-listed companies remain relatively attractive within Asia
16
Source: Credit Suisse HOLT Data
Date: March 14, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
The region is also in the m idst of a strong upgrade cycle, benefiting cyclicals more than defensives APAC ex Japan aggregate CFROI revisions
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
The Credit Suisse HOLT Country Ranking Model provides investors with a monthly index ranking of the MSCI AC World countries using a rules-based systematic process. HOLT’s multi-
factor model uses Valuation, Market Sentiment and CFROI® Sentiment to rank each country.
Asia now dominates 4 out of the top 5 markets in the HOLT Country Ranking Model
Source: Credit Suisse HOLT Data
Date: March 14, 2017 18
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Into a recovery, risk-on value/ low quality styles perform best
historically
Source: Credit Suisse HOLT, Data: Global developed, largest 1800, Dec 1992 to Dec 2012.
Note: Styles are ranked from 1 to 8, with 1 being the best-performing and 8 the worst. O:Operations; M: Momentum; and V: Valuations
Overheating Slowdown Contraction Recovery
Best in Class 1 1 4 2 +O +M +V
Contrarian 5 4 5 6 +O -M +V
Restructuring 6 7 11 1 -O +M +V
Quality at Any Price 2 5 3 4 +O +M -V
Yesterday's News 10 8 7 11 +O -M -V
Momentum Trap 8 10 9 8 -O +M -V
Value Trap 7 6 6 3 -O -M +V
Worst in Class 11 11 10 10 -O -M -V
Cyclicals 9 9 8 5
Defensives 3 3 2 9
eCAP 4 2 1 7
19
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
HOLT Best in Class Stocks presenting at the AIC
20
Source: Credit Suisse HOLT Data
Date: March 15, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
China State Construction International Holdings (3311)
Sales Growth (%) Warranted Price
(% Upside/ Downside)
6% HK$ 13.81 (-)
0% HK$ 11.75 (-14%)
15% HK$ 18.86 (37%)
Market Implied Scenario – What’s priced in?
Scenario Analysis
Transitioned from
Contrarian to Best
In Class as CFROI
revisions improved
IBES
Consensus Est.
21 Source: Credit Suisse HOLT LensTM
Date: March 15, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT 22
Source: Credit Suisse HOLT Data
Date: March 15, 2017
HOLT Restructuring Stocks presenting at the AIC
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Bluescope Steel (BSL) Bluescope Steel is currently priced for margins to quickly revert back towards 6% by FY21, leading to a fall in CFROI back to
1%.
Market Implied Scenario – What’s priced in?
23 Source: Credit Suisse HOLT LensTM
Date: March 15, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
The Case for Quality Growth Stocks
24
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Value has outperformed at the expense of Quality—will this continue?
Last 12 Month HOLT Factor Performance (Relative Returns) – Global Stocks
25
Source: Credit Suisse HOLT
Date: February 28, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Economics aside, valuations do not suggest the performance of Value should persist in the US
26
Source: Credit Suisse HOLT Data
Date: February 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
US high quality high growth valuation premium has reverted vs. lower quality low growth
27
Source: Credit Suisse HOLT Data
Date: March 3, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Rolling 12-month relative returns of global high quality & growth stocks against
global low quality, low growth stocks
The underperformance of quality growth has been particularly pronounced in Asia
Universe: Largest 1,000 stocks by market cap in each major region. High (low) Quality & Growth = top (bottom) half of regional universe on HOLT Quality and Growth scores. Source:
Credit Suisse HOLT, Data as of 31/12/2016, extracted from the report, A Bad Year for Good Companies (HOLT Quantitative Strategy Team, 18 January 2017).
PIDILITE INDUSTRIES LIMITED PIDI IND 5.4 99 85 -4.3 19.1 -27 Materials
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
LG Household and Health Care (051900) LG H&H has historically traded at a premium, with market-implied CFROI above consensus forecast CFROI. However more recently, implied CFROI
has declined to near 10-year lows while forecast CFROI has remained relatively stable.
Market-implied scenario: Using HOLT’s MICAP analysis, LG H&H is currently priced to maintain its forecast CFROI of 18% along with 7% asset growth
for a further 15 years. This appears conservative relative to regional peers which have historically priced for a MICAP of 40 years.
Note: MICAP – Market implied Competitive Advantage Period. HOLT assesses the number of years the company would need to maintain its high CFROI in order to justify its current
share price.
31 Source: Credit Suisse HOLT LensTM
Date: March 15, 2017
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Reflation implications for equities
32
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
Inflation: Good for cyclicals
33
Source: CS Strategy Research
Date: November 2016
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
APxJ cyclical laggards classified as Best in Class and
Restructuring
34
Source: Credit Suisse HOLT
Cyclical with less than 10% share price performance YTD. As of March 15, 2017.
Name Symbol CountryMarket Cap.
(bil USD)Sector
Price Perf.
YTD (%)
CFROI
Forecast (%)
HOLT
Upside (%)
Investment
Style
LINK ADMINISTRATION HOLDINGS LTD LNK AUS 2.1 Information Technology 0 22 -8 Best in Class
JB HI-FI LTD JBH AUS 2.3 Consumer Discretionary -5 17 9 Best in Class
WHITEHAVEN COAL LTD WHC AUS 2.2 Energy 10 11 216 Best in Class
SOUTH32 LIMITED S32 AUS 11.4 Materials -2 5 138 Restructuring
SIAM CEMENT PUBLIC COMPANY LIMITED (THE)SCC THA 16.946 9.50 10.11 9.52 0.54 0.37 27
JOHNSON & JOHNSON JNJ USA 317.560 12.33 13.04 12.79 0.37 0.10 25
D R HORTON INC DHI USA 11.552 8.26 8.97 8.99 1.12 0.92 24
REYNOLDS AMERICAN INC RAI USA 82.166 74.38 84.63 90.30 2.36 1.17 23
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
SUMMARY Limited scope to be complacent given how extended valuations now are
Pick-up risk selectively, mostly outside the US
Increase the focus onto stocks with pricing power, strong capital discipline and attractive
valuations
40
CLARITY IS CONFIDENCE
HOLT
THIS IS MARKET COMMENTARY AND NOT A RESEARCH DOCUMENT
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