Phoney wars



Markets in the US were higher on Tuesday as investors started turning their attention to the earnings season which has started off in a very positive fashion. As I have been writing in these notes, I believe that this will be the catalyst that sees markets rebound from the correction which began in early February.

This is also as the US, and indeed global, economy continues to strengthen, with the best synchronised conditions in decades. This was also re-iterated by the IMF which has left its forecasts for global growth this year and next at the 3.9% it estimated in January.

The body was encouraged by Donald Trump’s tax cuts, with the US economy set to grow 2.9% this year, and 2.7% next, both figures up 0.2 points from three months ago. The IMF also raised its forecast for the euro area to 2.4% growth in 2018. China is expected to grow 6.6% this year and 6.4% in 2019. This is in line with our positive view on the economy, and positive for resource centric markets in particular.

The IMF did warn that the expansion could be derailed if a trade war ensued. Chief Economist Maurice Obstfeld said, “Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses.”

Also in a press conference on Tuesday he called the current trade frictions “more of a phoney war,” referring to the period of limited conflict at the start of the WWII. He went on that “There’s still room for countries to engage in a more multilateral set of discussions to take advantage of the set of dispute resolution mechanisms that are in place to avoid an intensification” He added that countries would lose in a trade war.

I go along with the IMF’s comments and as I have been saying the chances of a full scale trade war are very limited. It has always been about negotiation from our point of view. The phoney war (including rhetoric over currencies and action against Syria) may have a bit to play out yet, but it is all about jostling for position, and I believe markets are beginning to appreciate this.

Stocks closed higher on Wall Street Tuesday, with technology stocks rebounding sharply and other earnings reports generally topping expectations. The Nasdaq was the strongest performer among the major US indices, gaining 1.74%, followed the S&P 500, which advanced 1.07% and finally the Dow rose 0.87%.

 Disney shares gained 1.9%, buoyed by Netflix’s rise as Disney has just entered the streaming space with its ESPN+ offering and will next year roll out a Disney-branded service that we believe will be well received. More on Disney later.

Google-parent Alphabet surged 3.2%, Apple advanced 1.4% and Chinese online search giant Baidu gained 2.5%. Video game developer and publisher Activision Blizzard closed 2.6% higher, while networking giant Cisco rallied 3.0%. Homebuilders Lennar and DR Horton added 0.7% and 1.4% respectively. Casino operator Wynn Resorts ticked up 1.0%.

European movers

Our banking exposures on the continent made modest gains, with Bankia up 0.4%, BNP Paribas advancing 0.6%, Caixabank adding 0.3% and Credit Suisse gaining 1.6%. Food group Credit Suisse closed 1.2% higher, while Euronext was up 1.1% and Heidelberg Cement tacked on 0.9%.

Several big banking stocks also gained, with Lloyds up 3% on cost cutting measures and Royal Bank of Scotland advancing 2.1%. Soft drink maker Britvic added 0.7%, packaging firm DS Smith gained 1.0% and food catering business SSP Group was up 1.3%. Business software provider Sage Group closed 1.9% higher, recovering from recent weakness after revising down its revenue growth outlook for the financial year. Miners BHP and Randgold Resources edged up 0.9% each. Nutrition player Glanbia ticked up 0.7%.

Asian movers

Food sector companies gained, with Ajinomoto advancing 0.9% and Kikkoman up 0.6%. Financial stocks lagged, with Mizuho, Mitsubishi UFJ and Sumitomo down between 0.7% to 1.3%.

Robotics leaders Robotics leaders Fanuc and Yaskawa Electric both eked out gains, up 0.5% and 0.2% respectively. Sony closed 0.5% higher even as the yen strengthened, and Inpex added 1.0%, while names considered more defensive such as Nippon Telegraph and Telephone (NTT) lost 0.5%.

In Hong Kong, China Mobile dipped 0.6%, while internet titan Tencent Holdings fell 1.4%. Oil & gas major CNOOC performed well, rising 1.6% better. The Macau casino stocks were mixed, with Sands China advancing 1.5%, while Wynn Macau slipped 2.2%. MGM China starred, surging 4.9%. Parent MGM International Resorts opened a hotel on the island of Hainan in 2012 and reportedly has plans to develop at least two more with a joint venture partner. Hainan-linked companies received a boost this week to open Hainan to horse racing and sports lotteries to boost its popularity as a resort island, or “China’s Hawaii.”

International companies in the news

Macau casino operator, MGM China have been awarded the Three-Star certification for their MGM COTAI building. This makes their property the largest project to achieve the certification from the China Green Building and Energy Saving Association of Macau, acknowledging the company’s commitment to design an environmentally sustainable building.

CEO of MGM China Holdings, said: “MGM COTAI is the latest integrated resort to open in Macau. While we have dedicated every effort to making it not only spectacular but also leading in environmental sustainable design, we also recognize the importance of ensuring the long-term sustainable development in the Macau community.”

MGM COTAI combined environmentally sustainable features in the design and construction process including, highly advanced heating and cooling systems, water efficiency procedures, standards for noise pollution and the largest indoor garden in the world featuring over 100,000 plants and 2,000 species. MGM China finished the day 4.9% higher and is a core holding in the Global Contrarian Fund.

Walt Disney shares made solid gains Tuesday, following Netflix’s lead. The House of Mouse is entering the streaming space by going direct-to-consumers itself, marking a big change in its strategy and CEO Bob Iger has said this is one of his biggest priorities. The new ESPN+ streaming service launched on 12 April at $4.99 per month and while to date it has underwhelmed investors somewhat due to its limited nature, Disney should quickly move up the learning curve. And we are more excited about its Disney-branded offering due to launch next year.

They say content is king and Disney certainly has some of the best entertainment content on the planet. If the acquisition of 21st Century Fox assets is successful, this will be bolstered further.

Meanwhile, the Parks and Resorts business is a strong and steady performer and the new Shanghai property has got away to an impressive start. The ‘halo’ effect from the resort is likely to significantly boost Disney’s business in China over the next few years. We believe we are already seeing this with recent Disney animated movies showing strong performances at the Chinese box office.

Disney’s Studio Entertainment division is in better shape than it has ever been. In fiscal 2017, it was up against a tough comparative period from the prior year but should return to growth in fiscal 2018. Disney is held in the Global Contrarian Fund.

Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in: Disney, Baidu, Heidelberg Cement, Bankia, Caixabank, BHP, Mizuho, Mitsubishi UFJ, Sumitomo, Fanuc, Nippon Telegraph and Telephone, Sony, MGM China, Sands China, Wynn Macau and CNOOC.


Carpe Diem!

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