weekly equity review - ucap-am.hk · 6/14/2016 · accenture (acn) –overview accenture, which...

Weekly Equity Review

Ucap Hong Kong Asset Management Limited

14th Jun 2016

Equity Strategy Highlights

� Global Markets Highlights

� Markets are coming off on renewed Brexit fears and as major indices have failed to clear up some

important resistance levels.

� This week will see 4 major central bank meetings in the US, Japan, UK and Switzerland.

� We present an overview of the current situation around the Brexit vote and we continue to introduce our

favorite Tech stocks with Accenture.

� Important Events This Week

� Tuesday: US Retail Sales

� Wednesday: FOMC meeting, UK Unemployment rate, US PPI, US Industrial Production

� Thursday: BNS, BOJ and BOE meetings, US Jobless Claims, US CPI

� Friday: US Housing starts

14 June, 2016

Equity Strategy Highlights

� Global Leaders – 2016

� The US portfolio is still lagging. Most US active fund are underperforming this year as most popular long

position (as estimated by Goldman Sachs) are down 6% YTD. Our US Global Leaders portfolio suffers from

exactly the same issue as the market is driven by 2015 laggards and purely interest rate related stocks

such as utilities. We continue to believe that companies with robust growth profile and strong cash flow

generation will ultimately perform better over the long-term.

� The European Portfolio remains very resilient compared to indices.

� Europe: -3.1% YTD vs Euro Stoxx at -8.2% YTD (5.1% alpha).

� US: 0.0% YTD vs S&P at 3.6% YTD (-3.6% alpha).

� Stock-Picking List – 2016

� The average performance of our Stock-Picking YTD is +1.33%. The average alpha is +301 bps.

14 June, 2016

Brexit

� The UK votes on June 23rd on whether the country should “Remain” a member of the EU, or

“Leave”.

� Bookmakers price a Bremain at 70%-75%, while pollsters are closer to a 50/50 situation, with a large part

of the population still undecided.

� The latest poll released on Friday showed a gain of momentum in favor of Brexit. Investors are now

waiting for today’s release of the latest Ipsos poll results.

� Part of the support for a Brexit seems to be driven by side issues such as immigration. So basically, we

risk a Brexit vote driven by fear and not reasoning.

� What is priced in?

� The pound and the UK Domestic Stocks have already weakened in anticipation of the vote and there are

clues that flows of US investors into European equities have weakened.

� Our guess is that a Brexit is not priced in. A “Remain” vote may not drive the market much higher, while a

“Leave” vote would kill the market.

14 June, 2016

Brexit

� What will happen on June 23rd?

� Count will go underway when polls close at 22:00 GMT (23:00 London time) at 382 local centers around

the UK.

� These local results will be declared as the counts are completed before being collated at 12 regional centers, which

will also declare the totals for each side. A chief counting officer will then announce the overall result at Manchester

Town Hall.

� Some hedge funds and banks are said to have commissioned private exit polls so the markets will

probably be fed with rumors during the whole day.

� What will happen if Britons vote to leave the EU?

� At first not much will change. The UK will remain in the EU for probably two more years and take that

time to negotiate deals to reduce the economic impact of a Brexit, that relies significantly on FDI (Foreign

Direct Investments).

� The BOE would also probably have to lower rates to support the economy. The pound would weaken and

the FTSE 100 would likely fall. The weaker pound would ultimately benefit large caps with heavy

exposure to international markets.

� Systemic risk does not come so much from the potential negative impact of the UK economy. Political

uncertainty will arise from populist parties pushing for an exit of the EU, even though the direct impact

on some exporting indices such as the DAX is real.

� Even if the impact on the US economy is limited, a Brexit might prevent the Fed from implementing the

two rate hikes that are currently expected in 2016.

14 June, 2016

Brexit – GBPUSD

14 June, 2016

The Sterling is trading back to the low end of its recent range on Brexit fears. The $1.40 level has not been

broken yet…

Brexit – Volatility

14 June, 2016

1.3

1.35

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

5

7

9

11

13

15

17

19

3 Month At-The-Money Implied Volatility

GBP-USD OPT VOL 3M GBP-USD X-RATE

But volatility has already exploded indicating that investors are hedging their Sterling positions.

FTSE/Stoxx 600

14 June, 2016

The FTSE is actually outperforming the broader European market, supported by UK exporters. Showing that the

fear factor is far from limited to the UK market.

TECH COMPANIES

14 June, 2016

Accenture (ACN) – Overview

� Accenture, which spun-off of Arthur Andersen in 1989, is the largest independent technology

services company in the world, providing a broad range of services and solutions in strategy,

consulting, digital, technology and operations in more than 120 countries and across 40+

industries.

� Revenue is generated through four platforms:

� Strategy: Business strategy – understanding how tech will impact industry and business models.

� Digital: Digital marketing, big data analytics (forecasts, statistical analysis).

� Technology: System integration, technology consulting.

� Operations: Business Process Outsourcing (BPO), infrastructure, security cloud services.

� Its top reputation and long history of success has allowed the company to gain a strong base of loyal and

renowned customers.

� 97 of its top 100 clients have worked with the company for over 10 years, including Oracle, Wal-Mart, AT&T.

� Accenture is also well-known for its superior cost cutting measures that has allowed it to report a stable

set of margins in an era of high sales and marketing costs for tech companies.

� 73% of its workforce is located in low-cost regions from 28% in 2005.

14 June, 2016

Accenture’s Top of the Line Business

� The Accenture Cloud Platform enables an entirely new agile operating model for cloud

consumption, which helps achieve a new level of control, scalability and security. It was designed

to:� 1) Speed up cloud implementation: Accelerate the speed to value and increase agility by reducing the time needed

to develop and deploy new business solutions.

� 2) Cost efficiency and optimization of IT: Optimize resource usage to help reduce operational costs and improve ROI.

Provide better consumption and cost-management with improved analytics, forecasting and reporting capabilities.

� 3) Governance and cloud management controls: Simplify oversight with centralized cloud governance using

analytics, cost controls and policy management. Provide enhanced visibility, accountability and compliance without

additional overhead costs.

� In the last quarter, its digital business experienced a 25% growth YoY and now makes up roughly 40% of

its total revenue powered by strength in digitalization, cloud services and security.

� On top of its growing digital business, the company has been active in the M&A market as a form

to expand its offerings an industry leader.

� Accenture acquired five companies in Q2 of 2016 bringing up the total to nine YTD.

� Ex. Acquisition of OPS Rules, an analytics company in late May, expanded its machine learning capabilities.

14 June, 2016

Accenture – How Does The Business Work?

� Mondelez International found in Accenture’s consulting business an answer to increase its

operating margin following similar trends in the food industry.

� Mondelez looked for a strategy similar to that of private equity firm 3G with AB InBev and Heinz, which

focused on cutting costs measures to increase margins.

� Accenture set up a cost-control plan that focused on improving margins by establishing a zero-based budgeting

system, a new global operating model and supporting global business services.

� In 2014, the first year of implementation, the company saved $350M, with a three year projection to save $1bn.

14 June, 2016

0%

2%

4%

6%

8%

10%

12%

14%

16%

25,000

28,000

31,000

34,000

37,000

2012 2013 2014 2015

Mondelez EBIT Margin Growth

Revenue EBIT Margin

What is Driving Growth?

� The move into As-a-service (SaaS, IaaS and PaaS) is in high demand across the world, as these

products provide scalable solutions, pay-as-you-go consumption and cost-effective solutions,

which are essential to digitalize businesses in order to keep up with changing technology.

� These include business services, applications and platforms, cloud, security and infrastructure.

� International Data Corporation (IDC) projects Digital services to grow at a 17% CAGR to $189bn by 2019.

� Companies with tools for social, mobile, cloud and analytical products are experiencing above average growth rates

relative to peers.

� An estimated 30-50bn devices will be connected to the Internet by 2020 with spending for the Industrial

Internet of Things (IIoT) projected to reach $500bn by 2020.

� This provides a unique opportunity for companies in the sector to design, deploy and manage digitally connected

solutions such as industrial analytics.

14 June, 2016

Growth in Recent Quarters

14 June, 2016

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Q1 Q2 Q3 Q4

Revenue Growth

2011 2012 2013 2014 2015 2016

Accenture has now reported six consecutive quarters of revenue growth avg. 11%. Outsourcing keeps

growing as a % of total revenue, but consulting is driving growth in recent quarters, as more companies

opt to switch from traditional IT services to cloud-based.

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue Breakdown

Consulting Outsourcing

INVESTMENT IDEAS

14 June, 2016

Global Leaders

14 June, 2016

The Global Leaders are quality companies that we believe are fit for a long-term investment.

We launched this strategy in August 2011. Please read our special report for a full explanation of this strategy.

Benchmark: S&P 500Benchmark: Euro Stoxx 50

� European Portfolio � US Portfolio

*Since

August 2011

Portfolio Benchmark Delta Annualized Portfolio Benchmark Delta Annualized

Performance 89% 55% 34.0% 14% Performance 108% 91% 17.7% 17%

Performance 5D -2.6% -2.7% 0.1% Performance 5D 0.4% -0.1% 0.5%

Performance YTD -3.1% -8.2% 5.1% Performance YTD 0.0% 3.6% -3.6%

Volatility 16% 22% -6% Volatility 14% 14% -1%

Max DrawDown -19% -28% 9% Max DrawDown -13% -13% 0%

-15

5

25

45

65

85

105

EU Global Leaders Benchmark

-11

9

29

49

69

89

109

US Global Leaders Benchmark

Global Leaders – Current List

� European Portfolio � US Portfolio

14 June, 2016

Name Weight Mkt Cap ($bn) Sector

Apple 7.81% 529 Information Technology

Alphabet 7.68% 489 Information Technology

Microsoft 7.36% 395 Information Technology

Exxon 7.26% 370 Energy

Facebook 7.12% 333 Information Technology

Johnson & Johnson 7.00% 308 Health Care

JP Morgan 6.62% 232 Financials

Merck & Co 6.08% 152 Health Care

Pepsico 6.02% 145 Consumer Staples

Bristol Myers 5.77% 116 Health Care

Nike 5.54% 95 Consumer Discretionary

Honeywell 5.43% 86 Industrials

Starbucks 5.34% 80 Consumer Discretionary

Accenture 5.29% 76 Information Technology

Costco 5.09% 63 Consumer Staples

Amazon 3.55% 330 Consumer Discretionary

Wells Fargo 3.35% 247 Financials

AT&T 3.32% 236 Telecommunication Services

Verizon 3.22% 201 Telecommunication Services

Visa 3.16% 184 Information Technology

Walt Disney 3.08% 162 Consumer Discretionary

Philip Morris 3.04% 152 Consumer Staples

Altria 2.91% 124 Consumer Staples

CVS 2.83% 106 Consumer Staples

Mastercard 2.82% 105 Information Technology

Walgreen 2.69% 83 Consumer Staples

Reynolds 2.61% 71 Consumer Staples

Goldman Sachs 2.58% 67 Financials

Time Warner 2.50% 57 Consumer Discretionary

Name Weight Mkt Cap ($bn) Sector

Novo Nordisk 7.08% 141 Health Care

Sanofi 6.68% 103 Health Care

Inditex 6.61% 100 Consumer Discretionary

Nestlé 5.91% 239 Consumer Staples

Vinci 5.60% 44 Industrials

Fresenius 5.52% 40 Health Care

Unilever 5.29% 137 Consumer Staples

Essilor 5.13% 28 Health Care

BATS 5.10% 115 Consumer Staples

Philips 5.00% 24 Industrials

L'Oréal 4.99% 102 Consumer Staples

Dassault Systemes 4.80% 20 Information Technology

Reckitt Benckiser 4.62% 70 Consumer Staples

Roche 3.87% 217 Health Care

Ab InBev 3.82% 202 Consumer Staples

Novartis 3.79% 199 Health Care

LVMH 3.20% 84 Consumer Discretionary

Allianz 3.10% 72 Financials

AXA 2.97% 58 Financials

Heineken 2.93% 54 Consumer Staples

Daimler 2.05% 72 Consumer Discretionary

BMW 1.95% 55 Consumer Discretionary

Stock Picking

� Within those Global Leaders, we identify a number of stocks that benefit from an attractive

technical pattern or from a near term catalyst.

� Tactical Stock Picking

� Apart from those long term investment stocks, we also have a number of stocks we like as a tactical

investment:

14 June, 2016

Way Name Ticker Exch Code Date Last Price Next Target Stop Level

Long Syngenta SYNN VX 18-Feb -2.1% 394.70 480.00 390.00

Long IBM IBM US 18-Feb 15.4% 152.81 160.00 145.00

Long Accenture ACN US 18-Feb 22.3% 119.35 120.00 113.00

Long PayPal PYPL US 18-Feb 5.4% 38.28 42.00 37.50

Long Ctrip.com CTRP US 5-Apr 2.8% 44.93 53.50 42.20

Ref. Perf.

Way Name Ticker Exch Code Date Last Price Next Target Stop Level

Long Bristol-Myers BMY US 31-Dec 8.4% 74.21 75.00 63.50

Long Time Warner TWX US 31-Dec 18.6% 75.88 78.00 71.26

Long Vinci DG FP 31-Dec 13.0% 66.83 67.50 63.70

Long Facebook FB US 18-Feb 14.8% 118.80 120.00 110.00

Long Novo Nordisk NOVOB DC 4-Mar 0.1% 373.60 400.00 358.00

Ref. Perf.

Stock-Picking List – Performance

� Hit Ratio 42%

� Hit Ratio Alpha 58%

� Average Perf. 1.33%

� Average Alpha 3.01%

� Nb. of Trades 31

� Open Trades 10

14 June, 2016

Average alpha of each stock strategy when compared to its

index (S&P or Euro Stoxx) over the same holding period.

Average performance of each stock strategy.

Please ask for more details.

SECTOR VIEWS

14 June, 2016

Our Strategic Views – Sectors

14 June, 2016

GICS

SectorUS EUROPE

Information

Technology

US Technology remains the most attractive investment space in

terms of:

� Growth potential,

� Reasonable valuation,

� Potential cash return,

� Stock picking opportunities.

Stay long but the Tech sector is tiny in

Europe.

Financials

US Banks will ultimately benefit from the US economic recovery and

rising interest rates. However, despite the expected rate hike,

inflation remains low and yield curves continue to flatten.

Stay long insurers for their dividends and as

Solvency 2 should actually benefit a well

prepared industry.

European banks continue to face headwinds

from low rates and structural issues.

Healthcare

Pharma are on multi-years upcycle:

� Earnings, M&A activity and positive drug developments continue to support the sector.

� Prices and valuations have risen, but the sector has lagged on Q4 2015, offering investors an opportunity to

accumulate positions.

Our Strategic Views – Sectors

14 June, 2016

GICS

SectorUS EUROPE

Consumer

Discretionary

Continue to play the exposure to the US growth with Consumer

Discretionary stocks.Those three sectors are heavily tilted

towards exporters. Their relative

performance will be mostly driven by FX

rates.

Staples continue to be supported by low

rates.

Consumer

Staples

Consumer Staples are expensive but continue to be supported by

low US long rates.

IndustrialsOverweight as 2015 headwinds are abating. Stay long defense stocks

as geopolitical factors will keep the pressure on defense spending.

Energy Despite a recent rise in oil prices, stay neutral as crude oil remain under pressure due to excess supply.

MaterialsCommodities remain under pressure due to declining emerging markets demand, overcapacity and a strong dollar.

-> Be careful with miners. Stay neutral chemicals.

UtilitiesStay Neutral as the sector is a play on long rates and other sectors

offer better fundamentals.

Avoid the sector as it is plagued by political

intervention in France and Germany.

Telecom

ServicesStay Long on low interest rates. Stay neutral

Our Strategic Views - Sectors

14 June, 2016

The Following charts are a recap of our sector view as well as the relative size of each sector.

How to Invest

14 June, 2016

GICS Sector US EUROPE

Information

Technology

Best Investment proxy:

• Technology SPDR ETF (XLK).

Favorite Stocks:

• Payment Technologies: Visa, MasterCard, PayPal.

• Software: Microsoft, Adobe.

• Hardware: Apple.

• Media: Facebook, Alphabet.

• IT Services: Accenture, IBM.

Best Investment proxy: No Liquid Tracker.

Favorite Stocks:

• Software: Dassault Systèmes.

• Semis : ASML

Financials


• Financials SPDR ETF (XLF).

• Banks only: Banks SPDR ETF (KBE).

Favorite Stocks:

• Banks: Wells Fargo, Goldman Sachs.


• Eurozone Banks: iShares Estoxx Banks ETF (SX7EEX

GY Index).

• Pan-European Banks: Lyxor Stoxx 600 Banks (BNK

FP).

Favorite Stocks:

• Insurance: Allianz, AXA.

Healthcare


• Healthcare SPDR ETF (XLV).

• Pharmas only: Pharmaceuticals SPDR ETF (XPH).

Favorite Stocks:

• Pharmaceuticals: Bristol-Myers, J&J, Merck.


• Lyxor Stoxx 600 Healthcare (HLT FP).

Favorite Stocks:

• Pharmaceuticals: Novo Nordisk, Roche, Sanofi.

• Equipment and Services: Fresenius, Essilor.

How to Invest

14 June, 2016


Consumer

Discretionary


• Cons. Disc. SPDR ETF (XLY).

Favorite Stocks:

• Media: Disney, Time Warner.

• E-Commerce: Amazon, Priceline, Ctrip.

• Restaurant: Starbucks.

• Apparel: Nike.


• No Liquid Tracker.

Favorite Stocks:

• Apparel: Inditex, LVMH.

• Carmakers: BMW, Daimler.

Consumer Staples


• Cons. Staples SPDR ETF (XLP).

Favorite Stocks:

• Pharmacies: CVS, Walgreens.

• Food & Beverage: Pepsi.

• Packaged Food: Kraft Heinz, Mondelez, ConAgra,

Tyson.

• Tobacco: Altria, Reynolds.

• Retail: Costco, Wal-Mart, Kroger, Dollar Tree.

• Confectionary: Hershey.



Favorite Stocks:

• Food & Beverage: Nestlé, AB Inbev, Heineken,

Danone.

• HPC: Unilever, Reckitt, L'Oréal.

• Tobacco: BAT.

• Retail: Carrefour.

• Confectionary: Lindt, Barry Callebaut.

Industrials


• Industrials SPDR ETF (XLI).

Favorite Stocks:

• Conglomerates: GE, Honeywell, 3M, United Tech.



Favorite Stocks:

• Infrastructure: Vinci.

• Diversified: Philips.

How to Invest

14 June, 2016


Energy


• Energy: Energy SPDR ETF (XLE).

• Oil services: Market Vectors Oil services ETF (OIH).

Favorite Stocks:

• Exploration & Production: Occidental, Hess, Noble

Energy, Anadarko.

• Oil Refining: Philips 66, Valero.

• Integrated: Exxon, Chevron.

• Equipment & Services: Schlumberger, Halliburton.



Favorite Stocks:

• Integrated: Total, RDSA.

• Refining: Neste OYJ.

Materials


• Materials: Materials SPDR ETF (XLB).

• Gold Miners: Market Vectors Gold Miners ETF

(GDX).

Favorite Stocks:

• Gold Miners: Newmont, Barrick Gold, Newcrest.



Favorite Stocks: na.

• Gold Miners: Randgold.

Utilities


• Utilities SPDR ETF (XLU).





Telecom Services



Favorite Stocks:

• Diversified: Verizon, AT&T.




Disclaimer

14 June, 2016

Ucap Hong Kong Asset Management Ltd has issued this document for information purposes only. This document may not be distributed to the United States, Canada,

Australia or to any other jurisdiction in which its distribution is unlawful. If you require investment advice or wish to discuss the suitability of any investment decision,

you should contact your professional advisers for financial, legal or tax advice when appropriate. This document is not and should not be construed as an offer to sell or

a solicitation of an offer to purchase or subscribe for any investment or service.

Ucap Hong Kong Asset Management Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently

verified. Ucap Hong Kong Asset Management Ltd makes no guarantees, representations or warranties, and accepts no responsibility or liability as to its accuracy or

completeness. Expressions of opinion herein are subject to change without notice.

Members of the Ucap Hong Kong Asset Management Ltd and/or their officers, directors and employees may have positions in any securities mentioned in this

document (or any related investment) and may from time to time add to or dispose of any such securities (or investment).

In the case where this document is distributed in the United Kingdom by a person who is not authorized by the United Kingdom Financial Services Authority; it is only

intended for persons who (i) have professional experience in matters related to investments or (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth

companies, unincorporated associations, etc") of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or to whom it may

otherwise lawfully be communicated by such an unauthorized person (all such persons together being "relevant persons"). This communication must not be acted on

or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and

will be engaged in only with relevant persons.

Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not receive back

the full amount invested. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an

adverse effect on the value, price or income of that investment. In the case of investments for which there is no recognized market, it may be difficult for investors to

sell their investments or to obtain reliable information about their value or the extent of the risk to which they are exposed. Investment in any market may be

extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect, influences. Such characteristics can lead to

considerable losses being incurred by those exposed to such markets.

© Copyright. Ucap Hong Kong Asset Management Ltd 2015 ALL RIGHTS RESERVED

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, whether electronic, mechanical, photocopying,

recording or otherwise, without the prior written permission of Ucap Hong Kong Asset Management Ltd.

weekly equity review - ucap-am.hk · 6/14/2016 · accenture (acn) –overview accenture, which...

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