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WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA?

Takeaway: Our factor analysis of performance across Asian & Latin American equity and FX markets reveals both intuitive and less-obvious trends.

SUMMARY CONCLUSIONS:

 

  • Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.
  • Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

METHODOLOGY:

 

  • In the brief prose below, we walk through the key takeaways from our 17-factor performance model across the 40 country-level equity and currency markets (20 apiece) we track across Asia and Latin America.  
  • To calculate outperformance, we compare the average % change of the respective equity and currency markets where the factor scores below the first quartile to those where the factor scores above the third quartile.  
  • It should be reiterated that the factor scores are all relative to the sample, such that any “high” or “low” reading is associated with the respective quartile and not an arbitrary absolute figure(s).
  • Lastly, the analysis below is not being presented in any way as causal – i.e. the factors aren’t the drivers per se, but rather as common characteristics of leaders and laggards within the samples of market performance.
  • We focus on the top three outperformance deltas across each of the three performance durations, as we believe the factors associated with the most meaningful outperformance may, in fact, be driving the associated market deltas to some degree – likely well beyond what we’d be able ascertain from performing a simple full-sample regression analysis.

 

EQUITY MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: a low sovereign debt/GDP ratio, high growth (YoY real GDP) and expectations of currency weakness over the near term.
  • On a 3M basis, the top three factors associated with outperformance are: expectations of currency weakness over the near term, cheap equity market valuation and a low dividend yield.
  • On a 1Y basis, the top three factors associated with outperformance are: a low sovereign budget balance/GDP ratio, expectations of currency strength over the long term and recent currency strength.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

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WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 4

 

FX MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: high inflation (YoY CPI), high 10Y sovereign yields and high 2Y sovereign yields.
  • On a 3M basis, the top three factors associated with outperformance are: high 10Y sovereign yields, high 2Y sovereign yields and relative equity market weakness.
  • On a 1Y basis, the top three factors associated with outperformance are: high growth (YoY real GDP), expensive equity market valuation and a low sovereign debt/GDP ratio.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

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WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 8

 

KEY TAKEAWAYS

Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.

 

Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

INVESTMENT THEMES

We currently hold the following biases across Asian and Latin American asset classes:

 

  • BULLISH bias on Singapore’s equity market (since 12/21/12; TREND duration)
  • BULLISH bias on Chinese consumer-oriented equities (since 12/10/12; TREND duration)
  • BULLISH bias on Hong Kong’s equity  market (since 11/16/12; TREND duration)
  • BEARISH bias on the Japanese yen (since 9/27/12; TREND and TAIL durations)
  • BEARISH bias on Australia’s equity market and the Aussie dollar (since 6/5/12; TAIL duration)
  • BEARISH bias on the Argentine peso (since 11/4/10; TAIL duration)

 

If a particular country or asset class isn’t on this list, it’s because we either wash out neutral on it from a fundamental perspective or we simply don’t hold enough fundamental conviction in either a long or short thesis at the current juncture.

 

Additionally, we could also be waiting on time decay (i.e. specific catalysts closer to materializing) and/or specific price signals (such as our eventual positive view on Indian equities post a [continued] near-term correction).

 

Please email us if you’d like to dive deeper into any of these ideas and/or if you’d like to further discuss the takeaways and implications of the aforementioned factor study.

 

Darius Dale

Senior Analyst


COMMODITY CHARTBOOK

The charts below illustrate some of the important commodity trends for the restaurant industry.

 

Notable Trends:

  • Beef costs have been trending down YTD, offering JACK, CMG, WEN, TXHR, and others some reason to be optimistic on COGS over the intermediate-term
  • Dairy costs have been volatile but a favorable comparison in 2H13 could support outlook for CAKE, TXRH, and others with exposure to dairy costs, if prices stay at or near current levels.
  • Corn trending lower is a good sign for the restaurant industry, although protein industry news is less than encouraging.  Cargill closed its Plainview, TX, processing plant this month as consolidation continues in an industry under significant pressure.  The cattle herd in North America is shrinking to its smallest size in 60 years.

 

COMMODITY CHARTBOOK - commod table1

 

COMMODITY CHARTBOOK - correl

 

COMMODITY CHARTBOOK - crb foodstuffs

 

COMMODITY CHARTBOOK - corn

 

COMMODITY CHARTBOOK - wheat

 

COMMODITY CHARTBOOK - spybeans

 

COMMODITY CHARTBOOK - rough rice

 

COMMODITY CHARTBOOK - chicken whole breast

 

COMMODITY CHARTBOOK - chicken wings

 

COMMODITY CHARTBOOK - coffee

 

COMMODITY CHARTBOOK - cheese block

 

COMMODITY CHARTBOOK - milk

 

COMMODITY CHARTBOOK - gas prices

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


GENTING: Q4 SHOULD BE A SOLID ONE

We got that good feeling about Genting during our trip to Singapore in mid-December, and the company’s Q4 earnings release should prove that out.

 

 

On December 12th, we summarized our thoughts on Genting in a note to top accounts “GENTING SINGAPORE LOOKING INTERESTING.”  At the time, we thought that improved earnings visibility, market stability, and low expectations could line up to produce a beat and solid commentary during the company’s Q4 release and conference call. 

 

Since December 12th, Genting Singapore has rallied 23% but a very good quarter could sustain the recent momentum.  A cash heavy balance sheet and significant cash flow generation and budding opportunities in South Korea and Japan provide a nice longer term thesis to compliment the improving earnings picture.   

 

Our confidence on the quarter is partly predicated on our proprietary analysis of Singapore betting tax data and Marina Bay Sands results.  4Q Singapore GGR looks like it will be down 4-6% YoY and up double digits sequentially.  Despite 45% YoY volume growth in their VIP RC business, MBS’s dismal luck led to an 8% YoY decline in GGR in the December quarter, which implies that RWS got a bigger piece of the pie.

 

We estimate that Resorts World Sentosa will report net revenue of S$795MM and EBITDA of S$399MM, 11% and 13% ahead of implied consensus, respectively

 

 

4Q DETAIL:

  • Gaming revenue, net of commissions of S$636M
    • Gross VIP revenue of S$531MM and net revenue of $296MM
      • We expect RC volume to increase YoY to S$16.1BN
        • This would equate to market share of 44% - equivalent with RWS’s lowest share in 3Q11.  Their share last quarter was 47%.
      • Hold of 3.3%
      • Rebate of 1.33%
    • Gross Mass table of S$278MM and S$238MM net of gaming points
      • Drop of $1.2BN, down 4% YoY
        • Market share of 47%, flat QoQ
      • Gaming points equal to 3.3% of drop or S$40MM
    • $148MM of slot and EGT win
      • S$2.9BN handle or 47% market share; flat QoQ
  • Net non-gaming revenue of S$159MM
    • Hotel room revenue of S$58MM
    • S$35MM of F&B and other revenue
    • USS revenue of S$86MM
  • Gaming taxes of S$85MM
  • Implied fixed costs of S$210MM

Early Look

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PM: Solid Quarter

Philip Morris (PM) put up a solid quarter for the fourth quarter of 2012, exceeding expectations for many. PM had constant currency organic revenue growth accelerating to 6.8% versus the tough comp of +8.2% a year ago. EPS exceeded expectations by $0.02 but guided below consensus (range of $5.68 to $5.78) versus consensus of $5.79 - our guidance estimate is $5.71. PM’s results in the quarter shame a number of other large cap staples names whose multiples exceed that of PM.


Stock Report: ConAgra Foods (CAG)

Stock Report: ConAgra Foods (CAG) - HE II CAG 3 30 13

THE HEDGEYE EDGE

We see CAG as a relatively inexpensive name (16.5x calendar 2013 EPS versus the large cap packaged food group trading at 17.8x).  We believe that CAG had additional upside to earnings on a standalone basis and is now in the process of layering in a transformative acquisition that recently closed in Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.  The combination of synergies, accretion and deleveraging should provide a clear path to EPS growth over the next 1-2 years.

 

CAG recently closed the acquisition of RAH for $90 per share in cash. The transaction transforms CAG into the largest private label food manufacturer in North America. Private label grows faster (about 2x the growth of branded in the United States over the past decade), but is much more volatile in terms of top line trends and margins. RAH competes in a number of center of the store categories – cereal, pasta, snacks, sauces, etc.

 

Finally, as commodities continue to decline, both the branded and private label business at CAG should see gross margin tailwinds at a rate disproportionate to the balance of the staples group.

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

The combined entity will have $18.2 billion in revenue, and should be able to grow top line in the 3-5% range, including 1 pt. from private label acquisitions. We estimate that the transaction could be between $0.15 - $0.20 accretive, conservatively and, as mentioned, above we saw upside to consensus prior to the deal with RAH.

 

LONG-TERM (the next 3 years or less)

Merger synergies alone could provide 4% EPS growth. We estimate that deleveraging could provide another 1 to 1.5 pts to EPS growth.  Bottom line, the combined business could deliver 8-10% EPS growth without the benefit of any margin expansion associated with a more benign commodity cost environment.

ONE-YEAR TRAILING CHART

Stock Report: ConAgra Foods (CAG) - HE II CAG chart 3 30 13


Flying High Again

Client Talking Points

Can You Take Me Higher?

The Russell 2000 made another all-time high on Friday as the US stock market marked its sixth consecutive week of upside. Anyone in the perma-bear camp should reconsider their game plan, as you can only fight the broader market for so long before you get creamed. With the US dollar strengthening and heading back into bullish formation, we should continue to see positive momentum in stocks. Strong Dollar, Strong America. Keep in mind that the Bernanke commodity bubble popping and the 10-year yield hovering above 2.0% are a result of #GrowthStabilizing. Provided oil doesn’t hit $130 a barrel, the bulls will continue to win. 

Asset Allocation

CASH 55% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 5% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“BTW very sneaky for Obama to schedule the State of the Union Address for Mardi Gras” -@harmongreg

QUOTE OF THE DAY

We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.” -Carl Sagan

STAT OF THE DAY

The CRB Commodity Index fell -1.3% last week while CRB futures/options contracts shot up +11%.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.49%
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