A tactical retreat?



US indices rose on Thursday led by technology and financial stocks which rebounded after several days of declines. The US indices are down just over 1% to date this week, with Asian and European markets faring much worse (Shanghai is now down 20% since February), in a week that has been dominated by trade tension fears. Around $34 billion in tariffs are due to go into effect shortly, but the big question is “will there be more coming down the line?”

China’s CSI 300 has lost more than 22% this year, officially categorising it as being in a bear market.

A notable development was a pick-up in the Nikkei Volatility Index to levels not seen since April, with this seemingly linked to traders’ uncertainty about White House policy.

Relative outperformers on the day included touch screen technology expert Nissha Co (+3.5%), Sony (+2.3%), and Nintendo (+1.3%).

In Hong Kong energy shares were strong performers, tracking crude oil futures prices higher. Oil and gas supermajor CNOOC added to gains the day before by rising another 3.8%. Lens maker Sunny Optical was also a relative outperformer, advancing 1.5%. Mainland China related property developers were weak on the latest moves by authorities to tighten the property market in certain cities. The Macau casino sector underperformed again with MGM China losing over 2%. We have seen significant deleveraging in the Hong Kong, and the casino sector which has performed strongly has succumbed to heavy profit taking.

BHP was higher yesterday, rising 1.8% and also of course has a big energy angle. The current sale of the US shale assets is also coming at the right time given strength in energy prices. BHP is also a proxy for the resource sector generally, and with the financial year coming to a close it insightful that the shares have risen some 45% over the time. This has been symptomatic of broader strength in the commodity complex.

Our 6,600 ASX200 target for 2018 should be comfortably met if the financials can also turn around in tandem. We still see higher yields as a key driver, and in addition to the banks will also be positive for the insurance sector. On this note QBE has had 12 months to forget, but a brighter session yesterday, with the shares up 2.7%. We have reduced our exposure to QBE but the stock is probably at the bottom. The technical picture remains weak, although that said from a value perspective there is upside risk provided there are no more downgrades or negative surprises. The market remains very sceptical.


The North American movie box office hit $6 billion in gross sales for the year on Tuesday, becoming the first time for the market to crest that level before the end of June, according to the National Association of Theatre Owners and comScore.

Before now, last year was the closest to attaining the $6 billion mark before the midpoint of the year, with sales of $5.64 billion by the end of June. Prior years were even further shy of the mark. The year-to-date tally is 9% higher year-on-year and on pace to top 2016’s record $11.3 billion in box office takings, even if the action at the box office moderates somewhat.

Walt Disney and its team of box office superheros have been a driving factor in setting the industry up for a new record in 2018. Marvel’s Black Panther become a cultural phenomenon in the United States when it opened in February and has smashed all box office expectations. The movie set largely in the mythical African nation of Wakanda has taken in almost $700 million (~$699.8m) in ‘domestic’ (i.e. US & Canada) ticket sales, representing 52% of its global tally of $1.346 billion.

It has only been surpassed at the global level by Avengers: Infinity War, with a worldwide tally of $2.032 billion to date. Still Infinity War still has a lower $670.7 million tally at home. For Disney, Pixar’s Incredibles 2 provides lighter hearted box office fare, but has fared well during its short tenure (13 days) at the box office, with $384.2 million domestic and $518.8 million worldwide. With a wider rollout to come, the global number will rise materially. Disney’s Star Wars box office relative “failure” Solo: A Star Wars story is still in sixth place in the domestic box office with $203.2 million at home.

Overall, Disney has taken 36.4% of the domestic box office to date. Fox movies took fourth and tenth spot domestically, with Deadpool 2 and The Greatest Showman respectively. And that is without some of its biggest franchise such as X-Men and of course the upcoming Avatar sequels. It is easy to see what a powerful combination the two companies would be in the media content world.

Disney looks to be in pole position to beat out Comcast in the bid to acquire most Fox’s assets after recent developments including its higher bid, the backing of the Murdoch family and the US Department of Justice.


Chinese online search engine Baidu Inc’s US$1 billion share buyback seems to be too big or too small. Markets have been rocky over the last six months but the internet giant has still outperformed the S&P 500 since the beginning of the year and maybe could have afforded more generosity. But on the other hand the company wants to reinvent itself as the leader in artificial intelligence (AI) and computing, both of which are costly endeavours.

The US$1 billion share buyback is relatively small if compared against the US$18 billion in cash and equivalents reported by the company as of March 2018. Earnings for the first quarter for the company more than tripled year-on-year to US$1 billion, more than twice the amount the street was expecting. The planned US$1 billion buyback will take place over twelve months, leaving executives with some breathing room.

There has been a wider selloff in Chinese technology companies recently over the trade war fears, a problem the company can’t through money at. The resignation of Chief Operating Officer, Lu Qi rattled the market in May with punters knocking US$9 billon off the company’s market value in reaction.

The company is planning on focusing on what investors want it to become – a market leader utilizing established expertise in coding to take on rivals who are also trying to make big moves in AI and driverless car among others.

The war for talent is fierce between Baidu and competitors Alibaba and Tencent. In a report by Chinese firm Iyiou, it showed that 90% of AI companies lost money in 2017. Baidu spent US$500 million on research and development last quarter – they could have tripled that by using the US$1 billion in planned share buyback.


Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in: CNOOC, Sunny Optical, Baidu, Nissha, Sony, Nintendo, MGM China, BHP, QBE and Disney.


Carpe Diem!

CEO | Fat Prophets
Find out more about Fat Prophets Global Premium Stock Research by registering your details below: