POSTED BY ANGUS GEDDES
Political and geopolitical uncertainties, along with US$ weakness, and the Fed’s predicament with respect to rate tightening, are underpinning sentiment towards the precious metals sector. All eyes (and ears) will be on the US central bank next week, and cautious rhetoric could further bolster sentiment towards the sector. We are well positioned in high quality producers such as Coeur Mining in the US, Fresnillo and Randgold Resources in the UK, as well as Evolution Mining in Australia.
The recent IPO of Brazilian budget airline Azul in New York and Brazil is though a positive sign. A number of companies have also taken advantage of the slowdown to increase their positions in Brazil. Heineken announced in February 2017 the €1bn purchase of Brasil Kirin which will increase its Brazilian market share from 10% to 19%. British American Tobacco completed the buy-out of its Brazilian unit for £1.7bn in October 2015.
UK soft drinks group Britvic undertook a £56.8m acquisition in Brazil in March 2017 of Bela Ischia. The group also completed the acquisition of Brazilian soft drinks business ebba in October 2015 for £120.8m. Ocean Wilsons recently reported an improvement in trading at its majority owned Brazilian unit Wilson Sons. Container terminal volumes were up 4.8% in the first quarter of 2017 on a year ago while towage increased by 6.3%.
Clearly there are a number of risks with Brazil given the political situation, and associated investor confidence, economic and currency risks. The recent return to economic growth is positive, and I think (while not for the faint of heart), there are a number of reasons why Brazil may yet live up to its potential.
Political instability is not something that will last forever, while pro-growth reforms will bolster the economy. Strength in the key commodity sector over the medium term will certainly help, and this in our view is supported by a robust global demand/supply equation.
We hold Arcos Dorados in the Fat Prophets Global Contrarian Fund which is is the world’s largest McDonald’s franchisee in terms of the number of restaurants and system-wide sales. The company is heavily tied to Brazil’s fortunes, with the country accounting for around 50% of sales.
Plug and Play partners up with Mitsubishi UFJ
According to Bloomberg, the Silicon Valley start-up accelerator Plug and Play is planning to open a Tokyo office as early as this month, to better “link local and global ventures with major corporations.” Bloomberg cited people familiar with the matter as indicating Plug and Play will select 20 start-ups for its first three-month accelerator program and that the partnership will be the first between a Japanese bank and a global accelerator company.
So-called accelerator companies such as Plug and Play act as an incubator to start-up companies and provide an ‘ecosystem’ that gives entrepreneurs a better chance of succeeding to grow their company.
They generally seed investment into the company and link them with other entrepreneurs (from others starting out to serial entrepreneurs with many under their belt), industry experts, academics and other potential investors such as angel investors, venture capital (VC) firms and large corporations.
They also provide general office space and or more company specific space such as labs and have “executives in residence” – generally seasoned business leaders or veteran entrepreneurs who can provide advice, contacts and/or funding. They can be particularly advantageous for new entrepreneurs who are still ‘learning the ropes.’
According to Plug and Play, start-ups in their community have secured over $3.5 billion in funding to date. The company invests in over 160 companies per year and while it is typical for a relatively high failure rate in this area, many companies have become big winners for investors with exits through buy-outs or IPOs. Browsing through the company’s start-up database, there are many recognisable names, with a couple of the larger profile ones Pay Pal (market cap $64 billion) and Lending Club ($2.3 billion).
Source: Plug and Play
Areas of interest seem to include the Internet of Things (IoT), Fintech, mobile technology, retail, health and wellness and Travel and Hospitality to name a few.
Mitsubishi UFJ Financial Group is the biggest bank in Japan and the partnership should provide opportunities to obtain advisory fees from deals linked to companies out of the accelerator and whether it be mergers and acquisitions or helping raise equity capital.
Bloomberg also highlighted that the bank’s venture capital unit, Mitsubishi UFJ Capital would help find potential start-up opportunities and/or invest in them directly. Mitsubishi UFJ is a holding in our Global Opportunities and Asian Managed Account Portfolios. It is also a holding in the Fat Prophets Global Contrarian Fund.
Should the Japanese economy continue trending positively, inflation is likely to pick up and provide the right backdrop for the Bank of Japan to remove its negative interest rate policy (NIRP). If this occurs, it should result in a major positive rerating for the Japanese banks. We also hold positions in several other banks such as Mizuho and Sumitomo, along with regional player Bank of Kyoto.
All other things held equal, an improvement in net interest margins would see return on equity (ROE) increase at the Japanese banks and a higher price to book multiple ascribed by investors.
As a group, the price to book value multiples are amongst the lowest globally in Japan, after years of deflation and a stagnant economy provided a tough backdrop at home for the core basic banking units. But Mitsubishi UFJ has expanded abroad (including snapping up a 23% cornerstone stake in Morgan Stanley during the GFC for a song), and moved into new areas at home.
Like peers, Mitsubishi UFJ is trading on slightly less than 0.6 times forward book value, providing a compelling asymmetric return profile in our view. There is much more scope for an upward rerating to its multiples than downside.
Headwinds from NIRP are already factored into its current earnings profile and at the consolidated level MUFG’s gross profits for year declined just 3.2 percent year-on-year to ¥4.01 trillion in the fiscal year ending March 2017. The small decline mainly the result of the NIRP dragging down interest income, while another factor was the negative impact from currency translation which lowered gains from trading.
The backdrop improved during the second half of the fiscal year, with a better performance from its overseas operations with higher margins from loans and higher fee income from the investment banking business helping.
Overall, profits attributable to owners of the parent dipped only slightly (-2.62 percent) to ¥926.4 billion. Group earnings per share were effectively flat (-0.33%) at ¥68.28, assisted by ongoing share buybacks.