In our recent report Sustainable Protein: Investing for Impact at the Nexus of Environment, Human Health and Animal Welfare, we pointed out that in developed countries, diet-related health concerns and less- or no-meat lifestyles have sharply reduced consumption of red meat. Flexitarian, vegetarian and vegan preferences have been driven, in part, by animal welfare and climate change concerns.
Today, a flexitarian diet – one that doesn’t adhere to a specific eating style and may combine plant-based and meat-based dishes – is now practiced by 31% of Americans, with another 13% subscribing to a specific eating lifestyle such as veganism or vegetarianism. In the U.K., almost 13% of the population is now vegetarian or vegan, with a further 21% identifying as flexitarian, according to a 2018 survey of British consumers. Our report also highlighted a preference by consumers for fresh and organic products.
On February 21, Kraft Heinz announced that it was writing down the value of some of its best-known brands by $15.4 billion which, according to a Bloomberg article[1] was “an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.” Subsequently, the stock price of Kraft Heinz plunged 21%.
Another Bloomberg article[2] observed that “all the old guards of the supermarket aisles are struggling as consumers opt for fresher, less-processed and more on-the-go food items from upstart businesses.” In our report, we pointed to rapid growth in the organic yogurt, almond milk and protein bar categories in recent years, with many of the leading companies being relatively young start-ups. While Kraft Heinz attempted to respond to these trends, its efforts haven’t been enough. As Bloomberg observed, the company “has tried to spruce up a tired suite of brands — from organic Capri Sun to natural Oscar Mayer hot dogs.”
Our report concluded that, reflecting the shift to sustainable protein, opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.
[1] Kraft Heinz Falls Near Record Low on $15.4 Billion Writedown, 2019-02-22
[2] Kraft Heinz’s Financial Recipe Turns Sour, 2019-02-22
Advances in agricultural technology, changes in human diet, and rising awareness of the environmental destruction caused by factory farming are accelerating the rise of sustainable protein.
Investors can target a number of outcomes — access to a sustainable food supply, lower greenhouse gas emissions, more plentiful and cleaner water, and a reduction in animal cruelty — through sustainable protein related investments. Opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.
In this report we outline how a confluence of behavioral, technological, and regulatory changes have fueled the trend toward sustainable protein; identify emerging developments in the “alternative protein” space; and highlight ways to consider sustainable protein investment across asset classes.
Executive Summary
Climbing Out of the Trough. In the US, the Europe/Australasia/Far East (EAFE) region and in Emerging Markets, earnings seem on track to keep climbing out of the 2016 trough.
Regional Preferences. Developed Markets look more attractive than Emerging Markets. Within Developed Markets, the EAFE region — and Europe in particular —looks more attractive than the US.
Sector Outlook. In the US, the Information Technology and Financials sectors are expected to remain the largest contributors to S&P 500 earnings in 2017. The Energy sector is currently forecast to materially increase its contribution to S&P 500 EPS. Key risks for the Financials and Energy sectors: interest rates (10 year Treasury) and oil prices (WTI), which have been trending lower since the start of the year.
A Single-Digit Gain in US Equity Markets Seems Plausible. Since 2010, the start-of-the-year expectation for US EPS has, on average, been too high by 11%. If the current estimate of 2017 earnings declined by the average 11%, that would imply a 9% gain in 2017 earnings. If P/E multiples remain stable, US stock prices could also rise by a single digit amount in 2017.
Figure 1: Index of Earnings for Three Regions (2010 = 100)
Source: S&P, MSCI, Cornerstone Capital Group
Our full length report is available to clients of Cornerstone Capital Group. Please click here for important disclosures.
Michael Geraghty is the Global Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry.
Executive Summary
2017 Estimates Still Seem Overly Optimistic. While the initial estimate of 2015 earnings was below the initial estimate of 2014 earnings, and the initial 2016 estimate was below the initial 2015 estimate, the initial consensus estimate for 2017 EPS is materially above the initial estimate for 2016. Consensus estimates currently imply a 34% gain in global earnings in 2017. Annual earnings growth has not exceeded 13% in any of the past six years.
Bottom-Up Estimates Also Seem Too Optimistic. Driven by interest rate and oil price movements, the Financials and Energy sectors had the biggest declines in earnings in 2016. (The yield on the 10-year U.S. Treasury declined in H1 2016; oil prices spent most of 2016 below $50.) The consensus estimate is for those two sectors to have the biggest earnings gains in 2017, which seems dependent on a further steepening of yield curves and materially higher oil prices.
A Single-Digit Gain in 2017 Seems Plausible. Since 2010 the start-of-the-year expectation for MSCI ACWI EPS has, on average, been too high by 15%. If the current estimate of 2017 earnings declined by the average 15%, that would imply a 14% gain in 2017 earnings. However, with estimates likely to continue falling, actual earnings growth in 2017 could well be in the single digits. If P/E multiples remain stable, global stock prices could also rise by a single digit amount in 2017.
Figure 1: MSCI ACWI EPS ̶ Start-of-Year Consensus Estimate and Actual Year-End EPS
Source: MSCI, Cornerstone Capital Group
Please see important disclosures here. The full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Sector Strategy: Upgrade Information Technology (strong relative earnings momentum outweighs rich valuation); Downgrade Utilities (weak relative earnings momentum). Financials remains the most favored sector; Health Care still Unattractive. On top of fundamental factors, interest rate increases would benefit Financials, hurt Utilities.
Regional Strategy: Upgrade Australia (robust economy drives very strong relative earnings momentum); Downgrade UK (cooling economy after post-Brexit growth spurt), Russia (deteriorating earnings momentum likely associated with stagnant oil prices).
ESG Matters More to Regions than Sectors. In our regional model, ESG factors have a combined 18% weight. Australia ranks highly in terms of both governance and environmental metrics.
Figure 1: Sector Rankings Figure 2: Regional Rankings
Source: Cornerstone Capital Group
For important disclosures click here. Our full length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Equity Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
A Governance Update — We update the analysis in our 2014 and 2015 reports with data for 2016.
A Modest Improvement in Governance — The percentile ranking of three-quarters of the countries in a governance composite increased, albeit modestly, in 2016 versus 2015.
Improved Governance in Some EMs — Key Emerging Markets saw an improvement in various governance metrics, including national governance (corruption in China, India and Russia) and corporate governance (China, India).
Valuation Implications —The quality of country-level governance affects corporate governance and, thus, firm value. However, just modest improvements in governance seem unlikely to impact country valuations.
Strategy Implications — We continue to rank China and India as Unattractive in our regional strategy model, in large part reflecting unappealing valuations and relatively weak earnings momentum.
Figure 1: The Cornerstone Capital Governance Composite: Ranking 2016 vs. 2015 
Source: Cornerstone Capital Group
Click here for important disclosures. Our full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Regional Strategy: Upgrade UK; Remain Positive on Russia. This month the UK is being upgraded, largely reflecting a continued improvement in earnings momentum. In contrast to Russia — our other top-ranked country — corporate governance in the UK is among the best in the world.
Sector Strategy Unchanged. Financials remain the most favored sector; Health Care the least favored. Information Technology is looking increasingly attractive, although valuation remains an issue.
Real Estate GIC Added as a New Sector. MSCI added Real Estate as a new sector, increasing the number of GICS sectors to 11. While the sector looks cheap, its earnings outlook is unfavorable. Then, too, the sector’s ESG risk profile is likely among the highest of the GICS sectors.
Figure 1: Regional Rankings Figure 2: Sector Rankings
Source: Cornerstone Capital Group
Please click here for important disclosures. Our full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Equity Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Sector Strategy: Reflationary Revisions… Given the outlook for reflation and reduced regulatory oversight that has taken hold in the US following the recent elections, we are fine-tuning our sector strategy. We are upgrading Financials to Overweight from Neutral as it is a near-term beneficiary of a steepened yield curve. Longer term, the sector could also benefit from a reduction in regulatory headwinds. That said, our previous research has shown the sector is very sensitive to governance issues. (See Evolving Lifecycles in an ESG Materiality Matrix, September 29, 2016). In addition, we are looking increasingly favorably at Information Technology and Energy given their relatively strong earnings fundamentals, although valuations in those sectors still look lofty.
But Avoiding Most Defensive Sectors. We remain Underweight Health Care. While some industries — e.g., biotechnology — have performed strongly (Appendix 1) in anticipation of reduced regulatory oversight, the sector as whole has a mediocre near- term earnings outlook. We also remain Neutral Utilities, Consumer Staples, Telecom.
Regional Strategy: Remain Overweight Russia. Even after its strong performance in November (Appendix 2), we remain Overweight Russia as it continues to offer the favorable combination of relatively strong earnings momentum and reasonable valuations. We remain Underweight the Emerging Markets of China, South Africa and India.
Figure 1: Sector Rankings
Source: Cornerstone Capital Group.
Please click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Equity Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
2017 Estimates Seem Overly Optimistic. Consensus estimates currently imply a 31% gain in global earnings in 2017. Annual earnings growth has not exceeded 13% in any of the past five years. Financials and Energy have seen the biggest downward estimate revisions in 2016, but the consensus estimate is for those sectors to have some of the biggest gains in earnings in 2017.
A Single-Digit Gain in 2017 EPS Seems Plausible. Since 2010 the start-of-year expectation for MSCI ACWI EPS has, on average, been too high by 14%. If the current estimate of 2017 earnings declined by the average 14%, that would imply a 13% gain in 2017 earnings. However, with estimates likely to continue falling, actual earnings growth in 2017 could well be in the low single digits.
Equity Markets in 2017: Driven by Earnings Growth? The potential combination of stable P/E multiples and modest earnings growth raises the possibility that global stock prices will rise by just a single digit amount in 2017.
Figure 1: MSCI ACWI EPS ̶ Start-of-Year Consensus Estimate and Actual Year-End EPS
Source: MSCI, Cornerstone Capital Group
Please see here for important disclosures. The full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Sector Strategy: Neutral. We are Neutral on every sector but one. By our methodology, the majority of sectors are closely grouped in ranking. In some instances, a sector — e.g., Financials — is attractive from a valuation perspective, but has poor earnings momentum. Other sectors — e.g., Materials — have a better earnings outlook, but their valuation is unattractive.
Three More Sectors Moved to Neutral. We have downgraded Telecom to Neutral from Overweight based on a deteriorating earnings outlook. We have upgraded two sectors to Neutral from Underweight — Industrials (improved relative valuation) and Consumer Staples (improved relative earnings momentum).
Regional Strategy: Neutral to Negative. Russia is our sole Overweight based on the favorable combination of strong earnings momentum and attractive valuation. We have downgraded Australia to Neutral from Overweight based on a deteriorating earnings outlook, although the country’s valuation remains attractive.
A Cautious Equity Outlook. Both our sector and regional strategies are consistent with our broader concern about the equity outlook. In general, valuations seem elevated in an environment where expectations for earnings growth are being revised downward.
Figure 1: Sector Rankings
Source: Cornerstone Capital Group
Please see here for important disclosures. The full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Maintain a Cautious Sector Strategy. The majority of sectors continued to experience downard revisions to estimates, so that expectations are for just lackluster earnings growth. Most valuations remain unattractive. Telecom is still our sole Overweight sector. We upgraded Utilities to Neutral from Underweight reflecting the lagging stock price performance of the sector, but we stick with our Underweight of two other defensive sectors — Consumer Staples, Health —as they underperformed the MSCI ACWI by a lesser margin last month.
Regional Strategy Still Selective. Russia and Australia, our only two Overweights, continue to enjoy the favorable combination of rising earnings estimates and attractive valuations.
Figure 1: Sector and Industry Rankings Figure 2: Regional Rankings
Source: Cornerstone Capital Group
Please see here for important disclosures. The full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
An Even More Cautious Sector Strategy. Downgrade Consumer Staples, Health Care and Utilities to Underweight from Neutral. These defensive sectors face the unfavorable combination of unattractive valuations and lackluster earnings growth. We are now Underweight four of the ten GICS (the other Underweight being Industrials), and only Overweight one (Telecom), which is consistent with our broader concern about the equity outlook.
ESG Rankings a Differentiator. One factor that makes the Telecom sector an Overweight in our model is its ESG ranking. The relatively strong earnings momentum of the Energy and Materials sectors is partly offset by their poor showing in terms of the ESG metrics we track.
Regional Strategy Still Selective. Russia and Australia, our only two Overweights, continue to enjoy the favorable combination of rising earnings estimates and attractive valuations.
Figure 1: Sector and Industry Rankings Figure 2: Regional Rankings
Arrows Indicate Change vs. Last Month
Please see here for important disclosures. The full-length report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Consider these facts:
- 90% of world trade is transported by sea,
- The world will ship by sea 2.5 times more iron ore per year in 2018 than in 1998,
- Transporting a pair of jeans from Asia to the US costs less than the taxi ride to go and buy them.
So, what would happen if the traditional investors in maritime financing downsized their commitment to funding the construction or secondary sale and purchase of the ships that the global economy relies on for international trade? It could be reality, if the current apathy towards the industry continues and alternatives are not sought. In this article we explore the possibilities, including the role alternative finance may play.
Unprecedented Forces of Change Are Afoot
We all acknowledge that the business cycle faces periods of growth, followed by adjustment phases correcting misallocations, usually caused by credit-fueled expansion. The 2002-08 maritime asset investment boom was no exception, but was also driven by China’s 2001 ascendancy to the WTO. The reality is that eight years on, we are still faced with a large dislocation between supply, demand and asset prices that are outside of traditional trend levels. In a broad sense this is actual (in dry bulk ships particularly), but in some other sub-sectors it is perceived (container feeder).
These perceived dislocations are building more immediate upside risk into the asset class, which is a positive that has been missed by many. In areas of actual overcapacity, with asset life averaging 20-25 years, the industry is fast approaching the halfway period of much of tonnage deployed around the time of the credit crisis. With ongoing low levels of profitability, there is a strong likelihood of accelerated scrapping of older or less well maintained vessels.
Adding to the pressures on financing for the maritime industry is the debate around the global trade fundamentals that drove much of demand, specifically whether the reliance on export-oriented strategies and the associated trade imbalances are correct. This is not helped by the collapse of asset inflation, the decline in debt-based consumer consumption, and new banking rules surrounding the financing of risk-weighted assets. This controversy will not be solved overnight. Therefore, no matter who the maritime tonnage owners are, they are going to have to change their approach towards finance in order to survive.
Chart 1: New Build Prices Index
Source: IPSA, Clarksons
Change, but with Wider Consequences
In 2014, Deutsche Bank estimated the value of the maritime tonnage responsible for cargo transportation to be US$820 billion.[1] Traditionally, maritime assets have seen equity funding provided by high net worth individuals, family offices and privately held corporates who operate outside of the main institutional investment forums. This has been matched by a small number of banks who are comfortable with shipping providing junior and senior debt facilities. Of this last group, circa 80% of the senior funding was historically supplied by banks in Europe, some of which were severely hit by the credit crisis and have formally announced lower exposure going forward. Many of the capital providers to the industry have fewer financial resources at their disposal.
Heightening the pressure on maritime industry financing are Basel Banking Accords surrounding risk-weighted assets. Maritime asset funding is in one of the higher-cost categories. Some of largest traditional senior and junior debt providers are, as a result of these rules, forced to downsize their commitments. Moreover, Asian and Middle Eastern banks face the same rules, and also tend not to have the expertise and therefore the risk appetite to fill the gap. But even excluding these constrained balance sheets, it is estimated that the industry is still facing a US$100 billion shortfall in funding[2].
Yes, press headlines highlight oversupply and that’s fine when global economic growth is anemic; but what happens when it isn’t? After all, there is on average a two-and-a-half-year lead time for delivery of new ships, and supply dynamics are beginning to adjust back towards equilibrium. As referred to above, industry assets have a finite life.
With current low returns in certain sub-sectors and a broader perceived uncertainty, there is an increasing risk of under-investment in the sector in the next decade. A prolonged disruption to finance, be it origination or refinancing of the maritime sector, could create systemic risk and cost of capital implications for industries reliant on global trade.
When Passive Participation Moves Toward Active
Finance has been a key driver for the maritime industry for centuries, be it the building of vessels sent to explore new worlds and find trade opportunities, or risk mitigation through Lloyds of London, which was established in 1871.
Whilst historically finance has played a passive role, it has been an active tool in developing global trade. Despite the current macro debates, the themes of outsourcing, an emerging middle class and urbanization are driving more active participation for a number of reasons:
The equipment and its infrastructure are more capital intensive than two decades ago. Not only have ports needed to be constructed to handle oil and petrochemicals, iron ore, coal and containers, but the assets in their own right are now larger in size, as trade volumes have increased and lower unit costs are demanded by end customers. The sheer size and cost of these assets is requiring financiers to consider the amortization of investments over longer periods of time. In some cases, the traditional seven-year tenors are now as long as 12-17 years. Traditional commercial banks have struggled to accommodate these demands. Alternative finance can meet this demand, if matched to the right counterparty, but in these circumstances investment management needs to be more active and industry specialized.
Direct ownership through default: Traditional and alternative financial firms are becoming increasingly involved in the ownership and operation of intermodal assets. Initially, this arose from the evolution of international trade, but more recently it has been a result of the credit crisis and the untimely demise of some traditional owners who over-indulged in cheap credit.
With real-world assets, diversification is required: Aircraft leasing, water treatment plants, PPP/PPE assets, ports and airports in the late 1990s fell into the illiquid bucket of many pension, insurance, private equity and sovereign wealth funds, and therefore were considered non-mainstream. However, over the 2000’s, assets were acquired at multiples not to be imagined a decade earlier as funds looked for new asset classes. As a result, these assets were increasingly perceived as liquid and mainstream, a perception encouraged by the active involvement of a variety of financial firms and ratings agencies. International commercial vessel fleets have not yet shifted to this profile, mainly because they didn’t need funding prior to the credit crisis. However, due to the above-mentioned changes to the financing of these assets, maritime asset owners and operators are beginning to review the structuring of asset cash flows and residual values. This move, coupled with returns in other real world assets being bid away by the competition for a smaller number of deals, is beginning to build a more active and direct focus by traditional investors.
Maritime asset exposure offers portfolio diversification and lower volatility for multi-asset and alternative investment managers: This profile is starting to drive investment in commercial maritime assets, particularly those that offer steady income, as they provide institutional investors, such as pension and insurance firms, with a tool for asset-liability matching, portfolio diversification and competitive yield. Moreover, the asset class offers lower volatility over time to investors, if specialist management is deployed. Furthermore, it is in most cases compliant with the principles of Islamic financing.
Chart 2: Industry unlevered returns IRR% versus New Build Prices
Source: IPSA Capital, Clarksons.
The Average IRR is a weighted average of 3-, 5-, 7- and 10-year holding period return across the three key sub-sectors — Dry Bulk, Container, Tanker — weighted on fleet capacity measured in dead weight tonnes. Purchase price is the new build price.
Exit price is taken as secondhand price corresponding to the holding period. Revenues are 12-month time charter rates. Operating expenses include dry docking expenses amortized over the appropriate period. S&P commission: 1% charged on purchase price and exit price, allowing for deal expenses. Charter commission: 2.5% of 12-month charter rates is deducted from cash flows. Past returns are not a predictor of the future. Furthermore, typically new build vessels can be delayed, meaning returns are estimates and allow for a framework for discussion. Rates are assumed at 12-month/1-year charter rates; in practice contracts can be for shorter or longer periods, which could smooth volatility and boost returns.
Chart 3: Portfolio diversification provision
Source: IPSA Capital, Clarksons, Reuters.
Average risk and return of various asset classes starting from 1990 until December 2015. Global Bond Index is comprised of JP Morgan GABI index from 1990-2013 and Barclays aggregate bond index for 2014 and 2015. Commodities Index is CRB index up to 2005 and Thomson Reuters Index to Dec.2015.
Risk management is no longer just through insurance, but via synthetic financial instruments and provision of regulatory capital as well: Shipping derivatives, while relatively young compared to mainstream assets, evolved out of the high volatility seen in the maritime markets and are designed to help manage risk.
This risk emanates from fluctuations in freight rates, bunker prices, vessel prices, scrap prices and the more traditional areas of interest rates and foreign exchange rates. Maritime principals cannot provide this liquidity or expertise.
Often, direct exposure by financial institutions is not preferred or needs to be investment grade. However, the benefits of industry financing can also be enjoyed through regulatory capital relief trades. This arises from the evolution of the Basel banking rules. It is widely expected that alternative investment managers, with expertise in the shipping arena, could shortly deploy equity relief capital to well-managed shipping banks. This has been recently seen in the SME funding, infrastructure and auto finance sectors to name a few. The benefit to the banks is a lower cost of equity and a multiplier effect on existing equity allocated to their shipping portfolios. The benefit for the investor is a return competitive to alternative sectors and assets and greater protection from any asset price pressure. This is similar to Collateralized Loan Obligation trades, but allows for the underlying bank to remain the front-facing name. Although the success of this trade is going to highlight the need for specialist investment managers should the loan fall into default. This way, investors have a manager with the knowledge of how to protect capital in a work-out scenario through their knowledge of the asset and network to redeploy it.
What Is Required to Achieve Best Practice?
Acceptance by the maritime trade that its relationship with the financial community is set to change will take time. Once seen as an industry that repelled mainstream institutional investors providing direct or alternative finance, it is likely that inclusion is to be driven by necessity. This, we believe, will take another three to five years. Meanwhile, challenges will need to be overcome, namely:
- Transparency: With the allure of high returns in 2002-07, uninitiated alternative asset investors made a headlong rush into maritime sub-sectors with low barriers to entry, particularly dry bulk. This saw the fleet more than double in tonnage terms. With charter rates now at or below breakeven, cost management and governance is ever increasingly being examined by the finance industry.
- Governance: From 2001 to 2008, the maritime industry benefited from the large sums of capital available. This came through a number of high-profile alternative debt and equity offerings, the avenues of which are likely to remain a component of the new investment landscape. Due to the mainstream profiles that this capital deployment has brought, there is now an increasing amount of pressure to deliver better governance.
- Acceptance by ratings agencies: Investors and industry participants are slowly demanding an improved hearing and profile by ratings agencies. However, this is likely to be difficult, not only because of ownership fragmentation in various subsectors, but also because the wave of cheap credit and asset inflation in the 2002-08 period and subsequent collapse has left the maritime industry struggling to deliver investment grade characteristics. If the ratings agencies are willing to adapt to accepting the industry’s importance to world trade and operators are able to provide stable cash flows via longer-term contracts and credit enhancement, then relative to other industries there is no reason parts of the industry cannot be investment grade.
Is the Current Approach Best Practice?
To date, regrettably for some limited partners, alternative investment has come from mainstream alternative investment houses, some of whom have limited industry knowledge or networks, and have in some cases ignored fees and costs or available strategic knowledge investments. This high-cost approach comes at the detriment to limited partners’ returns, which has therefore curtailed investor appetite for the asset class. Moreover, it has for now slowed maritime owners’ and operators’ acceptance of alternative funding.
The simple fact is that investors in this space are best served by using specialist real world asset managers in navigating the maritime industry to achieve optimal risk/reward parameters. The industry, while critical to global trade, remains small and is at its simplest based on relationships. Use of specialist managers who have these networks and relationships helps considerably to bridge the current gaps in knowledge and expectations that exist in both the finance and maritime industry.
One way or another we expect change to occur. The reality is demand for finance by operators is at a cyclical low. As such, we are yet to see the true demand for finance in the brave new world that is coming over the horizon. It is hard, though, to imagine that the cost of capital for operators and owners is set to be lower in the medium term than it is today. Therefore, the true rewards are going to be reaped by those prepared to act now to be positioned for the coming up-cycle and do so with specialist advice and industry partnerships.
David Lepper is Founding Partner and CIO of IPSA Capital, a global asset management and advisory group specializing in alternative assets and special situations. He is formerly Head of MENA Research for HSBC and Pan Regional Head of Asian Small-Mid Cap Research and Global Coordinator for Shipping Research for UBS.
[1] Deutsche Bank (DB) Arab Maritime Forum May 21, 2014
[2] Makan, Ajay, and Mark Odell. “Wave of Private Equity Money Flows into Shipping” — FT.com, October 27, 2013
Executive Summary
A Sharp Drop in 2016 Estimates. Consensus estimates for 2016 global earnings have fallen sharply since the start of the year. Nevertheless, many stock markets globally have performed strongly, even as uncertainty has increased given both the Brexit vote and the forthcoming U.S. presidential election.
2017 Estimates Look Too High. Consensus estimates currently imply a 26% gain in global earnings in 2017. Annual earnings growth has not exceeded 13% in any of the past five years.
Some Stock Markets Look to Be at Precarious Levels. The combination of falling earnings estimates and heightened levels of global uncertainty suggests some stock markets that are at, or close to, record levels —such as the U.S. — seem vulnerable to a pullback. The potential combination of a continued decline in earnings estimates and compressed multiples suggests that U.S. stock prices will be flat, at best, in 2016.
Figure 1: Estimated 2016 MSCI ACWI EPS: July 2016 and January 2016
Percentage and Absolute Change in Earnings in $ Millions (Sum of Sectors Equals MSCI ACWI)
Source: MSCI, Cornerstone Capital Group
Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
- Sector implications of Brexit fallout. Uncertainty likely to prevail globally, at least until U.S. presidential election. Major corporate and consumer spending decisions potentially on hold, a negative for Information Technology, Industrials, and Consumer Discretionary (downgraded to Neutral). Low rates continue to pressure Financials.
- Regional strategy. Russia and Australia still rank at top of regional model. Both seem relatively insulated from the uncertainty that’s likely to weigh on the U.K., Europe and the U.S (downgraded to Neutral). While a strong dollar will pressure commodities —Materials just 14% of Australian market — oil prices may prove resilient following production cutbacks, a potential positive for Russia. (Energy upgraded to Neutral.)
- Strategy in sync with Brexit thesis, but not driven by it. Both our sector strategy (neutral or negative on Consumer Discretionary, Industrials, Information Technology, Financials) and regional strategy (overweight Australia, Russia two countries far from the U.K.) are in sync with our Brexit thesis but are not driven by it, with valuation and earnings being the key determinants.
Figure 1: Industry Rankings
Source: Cornerstone Capital Group
Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Upgrade U.S. to Overweight from Neutral. Earnings estimate revisions turned sharply positive, adding to other favorable fundamentals including margins, share buybacks.
Information Technology: Still Neutral; Earnings Outlook Remains Unfavorable. We downgraded Information Technology to Neutral last month reflecting, in part, negative earnings estimate revision trends and a deceleration in expected earnings momentum. Both factors remain unfavorable.
Market Outlook Unchanged: Modest Gains in Global Equities in 2016. While the earnings outlook in the U.S. has improved, other countries are still seeing material earnings downgrades so that we continue to expect just a single-digit increase in global profits in 2016. Single-digit earnings growth combined with stable P/Es would suggest modest gains in global equities in 2016.
Figure 1: Regional Over- and Underweights Figure 2: Sector Over- and Underweights
Arrows Indicate Change vs. Last Month
Source: Cornerstone Capital Group
Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
Executive Summary
Intangible Factors Can be Material Too. Most investors focus on tangible income statement and balance sheet items, but intangible factors can be material too.
Analyzing Intangible Factors at the Industry Level. In our report ““ESG in Sector Strategy: What’s Material?”” we developed an approach to analyze intangible factors that can potentially have a material financial impact on sectors. We now apply our approach at the industry level.
Industry Risks are Constantly Evolving. In a subsequent report,“A Shifting ESG Materiality Matrix: What Has Mattered, What May Matter,” we concluded that the likelihood of an intangible factor having a financial impact, and the potential magnitude of that impact, are constantly evolving. We analyze industry risks associated with intangible factors currently.
Counterintuitive Conclusions. Based on our methodology, Tobacco is currently a less risky industry than Non Alcoholic Beverages. Food Retailers are currently more risky than Investment Banks.
Figure 1: Ten “Most” and “Least” Risky Industries Currently
Based on Ranking of Intangible Factors
Source: Cornerstone Capital Group
Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.
Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.
