On this page, we will share our main market views.
This page will be updated, as markets dictate.
Do not hesitate to get in touch to share with us your views/comments.
Views on Global Equity Markets
Jun 10, 2015
This summer, our view on global equity markets has turned negative, and as a result the equity portion of our portfolio is now in cash. We are patiently waiting for valuations to become more reasonable before coming back in.
The 6 year long bull market has pushed valuations to overvalued territory. High quality stocks that we look at have reached unsustainable valuations in terms of price to tangible net asset values, and the price / earnings ratio are also high. This leads us to conclude that even though stock prices may still run higher, the risk reward ratio in the stock market is no longer attractive.
Deteriorating Supply / Demand dynamics in global equity markets
Our proprietary indicators and research now show that this bull market is coming to an end. We see supply trending up, and demand trending down. This is typical of the “distribution” period of an old bull market, and as a result we see any rebound as a chance to build defensive positions.
In addition, major markets have broken important trend lines, and volatility has significantly increased. We will not know the cause of this turmoil before some time, but these are enough signs to push us to quietly take our profits and wait for better times.
We will not come back to the market unless we see tangible signs of improvement in the structure of the market.
Plummeting Commodity Prices
Most analysts, who still believe that we are now in a market correction, argue that plummeting commodity prices (crude oil being the most striking example, but we can also look at coal, steel, copper, aluminum, zinc or shipping rates) happened not because of demand, but because of excess supply.
Maybe; but it is interesting to see that “excess supply” is correlated into so many commodity markets. Based on our analysis of equity markets, we believe that even though excess supply may be one factor, the main factor for plummeting commodity prices is falling demand. Producers manufacture less, most likely because inventories are building up. If they manufacture less, it means that profits of companies from commodity producers to part makers to companies selling to end consumers, will fall. This means that valuations of equity markets are even higher than currently estimated by forward P/E ratios.
The probabilities that a shock is coming are high, and we need to prepare ourselves for such an eventuality.
Opportunities in the Oil Sector
Aug 28, 2015
As contrarian investors, it is our view that bear markets are great opportunities to buy selected high value names. In the past year, oil has fallen by more than 50%, with bond and stock prices of oil related companies plummeting.
Our view is that this drop in oil prices is cyclical, and not structural. We do not believe that in the next few years, oil will be replaced by another, cleaner or cheaper, source of energy (for instance, shale gas or electricity). Even though cars are getting more fuel efficient, even though more and more car makers plan to produce electric cars by 2020, even though leading economies try to decrease CO2 emissions, we believe that oil will continue to be one of the major sources of energy.
Most commentators focus on the supply factor in order to explain such a sharp price drop. We partially agree with them, but we believe it is only the tip of the iceberg and just looking at this factor prevents us from understanding the actual dynamics in play.
We believe that there is also a demand factor. Indeed, equity markets tell us that we are at the end of an up cycle..
In addition, it is our view that OPEP countries, and in particular cost leaders among them, are taking advantage of this price drop to force less competitive producers out. It is rational, from their point of view, not to support prices by decreasing their production. Indeed, this would mean bearing the costs for “subsidizing” high cost producers, including one of their main competitors, American shale gas, and at the same time losing market share. It is logical, from their point of view, to maintain production long enough for higher cost producers to exit the business. This will take some time, but it will automatically adjust supply, while at the same time increasing the market share of cost leaders.
Finally, it is not in the interest of cost leaders to let prices too low for a long time, as it also affects their revenues, and eventually the political stability in these countries. As a result, we believe that at some point, they will decrease production if needed, in order to keep oil prices at an “acceptable level”.
In this environment, it makes sense to focus on cost leaders / low cost producers. We have selected Tullow Oil. Their cash cost per barrel is much lower than current market prices, even including their “exploration and development costs”, i.e. what they invest every year to look for new oil fields. Their 2020 bonds now yield about 12% in USD, while their equity has fallen to levels unseen even in 2009. Because of our view on the equity market, we have not and will not buy their equity, but we have invested in their bonds. They currently have a higher net debt / EBITDA ratio than what we usually like to see for our investments, but this is because of large capex needs for their “TEN project”, with first oil planned for mid-2016; and it is still well below their covenants. We believe that, despite the current challenging environment, the company will manage to bring back this ratio to below 2x in the next three years. In addition, they have hedged a large part of their 2015 and 2016 production around the $70 / barrel level, giving them enough headroom to wait for markets to settle. Finally, they have recently negotiated a $1bn debt facility, while the size of their bond issue is $650mns. Their management team is of great quality, and has proven in the past their ability to navigate the business through challenging environments, so we are confident in their future.