Category Archives: New Middle Class

Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

 

The evolution of mobile payments in emerging economies sits right at the intersection of our Digital Lifestyle and New Global Middle Class investing themes. Just as we saw emerging economies able to leapfrog with communication infrastructure thanks to the advent of the mobile phone, so are we now seeing them leapfrog with retail banking options. A recent article on Reuters describes what is happening just south of the border where “Mexico’s new leftist government is betting on financial technology to help lift people out of poverty.”

“In the future, it will no longer be necessary to have a bank in the sense of a traditional, established bank,” said Arturo Herrera, Mexico’s deputy finance minister. “Mobile phones will become banks.”Phone-based banking has proven a hit among the poor in other emerging markets such as China, India and Kenya. Those efforts have been driven by private sector companies that offer user-friendly, affordable apps.

This is similar to what we are seeing in India as that nation also looks to take advantage of mobile technology to provide banking services to the hundreds of millions of its citizens that are currently unbanked, giving them an ability to work their way out of poverty that would have otherwise been impossible.

Our investing themes look towards those companies providing the technology that allows for such implementations and those companies that will benefit as these implementations are rolled out.

Source: Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

Hilton capitalizing on China’s growing middle-class

Hilton capitalizing on China’s growing middle-class

Quarterly earnings season tends to be a frenetic time as hundreds if not a few thousand companies report their results and update their outlooks. It tends to be a plethora of good, not so good and sometimes bad news as these are mashed up against investor expectations. Along the way, however, one can find a number of confirming data points, especially thematic ones as companies look to ride those demonstrative tailwinds to grow their business. Case in point below is Hilton Worldwide Holdings (HLT), which is benefitting from not only our Living the Life investment theme with its high-end Conrad and Waldorf businesses, but also our New Middle-Class theme, particularly in China, as well.

Here’s an excerpt of what Hilton President and CEO Chris Nassetta shared on the company’s recent quarterly earnings call:

We remain focused on building a presence everywhere in the world our guests want to travel. With more than half of our pipeline located outside the United States and 35 new countries represented, we have tremendous opportunities to grow our global footprint for the foreseeable future. Roughly 30% of our pipeline is located in Asia Pacific, a region that continues to benefit from powerful long-term secular trends supported by a growing middle class in China.

In the fourth quarter we celebrated the opening of our 50th Hampton by Hilton in China with an additional 200 in the pipeline. We also debuted our accessible lifestyle brand in the region with the opening of the Canopy by Hilton Chengdu City Center. With more than 75% of our pipeline in Asia Pacific under construction, we expect to open approximately 20,000 rooms in the region in 2019 and achieve roughly 20% net unit growth.

But more of the bulk is shifting to mid-market, and China for us right now that really is Hampton by Hilton and Hilton Garden Inn. That stands the reason because what’s going on is growth in the middle class, they want to travel and that’s what they can afford.

Source: Hilton Worldwide Holdings (HLT) CEO Chris Nassetta on Q4 2018 Results – Earnings Call Transcript | Seeking Alpha

Weekly Issue: Del Frisco’s Sends Strong Signals of Potential Take Over Bid

Weekly Issue: Del Frisco’s Sends Strong Signals of Potential Take Over Bid

Key points inside this issue

  • The stock market continues to move higher even as global growth slows and S&P 500 earnings prospects for the current quarter slump further.
  • Our long-term price target on Thematic King Amazon (AMZN) shares remains $2,250, which offers more than 35% upside following its December quarter earnings report.
  • As Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) gets serious with its strategic alternatives, our price target remains $14.
  • We are issuing a Buy on and adding the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG 190920C00010000) that closed last night at 0.60 with a stop loss at 0.30.
  • On the housekeeping front, we were stopped out of the Nokia (NOK) July 2019 7.00 (NOK190719C00007000) calls last Friday (Feb. 1).

 

Stocks rebounded in a pronounced manner as we started off 2019, making it the best January showing since 1989. The data continues to point to a slowing global slowing economy, especially in China and in the eurozone with Italy in a recession and France not too far behind. The December-quarter concerns, however, have rolled back and propelled the market higher, especially during the last week of the month when the Fed signaled patience with its speed of further interest rate hikes. For the month in full, the S&P 500 finished up just shy of 8.0%, ahead of the Dow Jones Industrial Average’s 7.2% rise, but trailing the tech-heavy Nasdaq’s 9.7% surge.

On top of Friday’s blockbuster January Employment Report, a stronger-than-expected ISM Manufacturing Index reading for January came in, which showcased a rebound in new order activity. On the back of those two reports, the domestic stock market started February off in the green, as that data suggest the U.S. remains the brightest spot in the global economy. That view was supported by the January PMI data released Friday morning by IHS Markit, which showed the U.S. manufacturing economy picking up steam while that activity in the eurozone and Japan slowed, and China marked the second month in contraction territory.

 

Another positive inside the ISM Manufacturing Report was the month-over-month drop in the Prices component. Pairing that with falling prices in the eurozone data, it’s another reason the Federal Reserve can take its finger off the interest rate hike button for the time being. That patient stance, shared by the Fed this week after its latest FOMC meeting, has walked the dollar back some, but as we see in the chart below the greenback’s year-over-year strength will likely continue to be a headwind for companies during the first half of 2019.

 

The current mismatch between U.S. economic data and that for China has raised hopes for U.S.-China trade talks. Also lending a helping hand on that front were several positive tweets from President Trump exiting this week’s round of trade talks. I remain cautiously optimistic but will once again remind subscribers it’s the details that we’ll be focused on when they are released. 

As we move deeper into February, just over half of the S&P 500 companies have yet to report their quarterly results and given the slowing global economy and dollar headwinds we are likely to see further downward revisions to earnings expectations for the S&P 500 in the coming weeks. Along with the market’s push higher in January that has extended into February, should those revisions come to pass it means the market gets incrementally more expensive. This means we should continue to tread carefully in the near-term.

 

As we do this, known catalysts to watch in the coming weeks will be incremental developments on U.S.-China trade and potential moves by the European Central Bank. Following the weakening economic data in the eurozone, ECB President Mario Draghi said, “The European Central Bank is ready to use all its policy tools to support Europe’s softening economy, including by restarting a recently shelved bond-buying program.” There is also the possibility of another government shutdown should Congress fail to reach an agreement on immigration. Who said 2019 was likely to be boring?

 

Tematica Investing

As I have said numerous times, we do not buy the market, but rather invest in companies that are well positioned to capitalize on the tailwinds from our 10 investment themes. From time to time, we are given opportunities to scale into existing positions and in my view, we are seeing that now with Thematic King Amazon (AMZN). The reason for this latest bout of weakness in Amazon’s share price is management’s comments that it will once again investment more than Wall Street expected and the news over e-commerce regulations in India.

From time to time we’ve seen Amazon step up its investment spending and historically its been a great time to load up on the shares because those investments have paved the way for future growth. From opportunities in grocery, mobile payments, streaming video and gaming services, healthcare following its PillPack acquisition as well as expanding the scale and scope of its Amazon Prime service further in the US and abroad, there are ample thematic opportunities for the Amazon business. I also suspect that with FedEx (FDX) looking to collapse order times to under 24 hours for its retail partners, that Amazon too is working on growing its Prime Now offering at the same time.

Let’s turn to the new e-commerce regulations in India and their potential impact on Amazon. The issue is that while these new regulations permit full foreign ownership of ‘single brand’ retailers such as IKEA, restrictions are in place with ‘multibrand’ stores such as supermarkets from outside India. Odds are we will see a rebranding of sorts by the likes of Amazon, Walmart (WMT) and others that are looking to tap into this New Global Middle-Class market. Candidly, given Amazon’s growing private label business that spans apparel, furniture, food, electronics, and other categories, I’m not all that bothered by this. And let’s face it, not only are the folks at Amazon pretty smart, but we have yet to see a market that shuns two-day delivery. I doubt India and its growing middle-class will be the first.

The bottom line with this Thematic King is it is a stock to own as the company is poised to further disrupt other markets, sectors and other business models in the coming quarters.

  • Our long-term price target on Thematic King Amazon (AMZN) shares remains $2,250, which offers more than 35% upside following its December quarter earnings report.

 

 

Del Frisco’s gets serious about entertaining take out bids

After a few weeks of no big news from Living the Life company Del Frisco’s Restaurant Group Inc. (DFRG) after it pre-announced its fourth-quarter revenue in early January, we have a new development that in my view reinforces our belief that the company is putting itself up for sale. More specifically, Del Frisco’s announced on Monday that it has executed a cooperation agreement with its third-largest shareholder, Engaged Capital — the same shareholder that criticized the management team in late 2018 and suggested the company examine its strategic alternatives.

Included in the agreement is the appointment of Joe Reece not only to the Del Frisco’s board but also as the Chairman of the Transaction Committee that is overseeing the company’s previously announced review of strategic alternatives. There are other conditions with the cooperation agreement, but it is the naming of Reece and the comments contained inside the accompanying press release that gives us some insight into his background. The comments read in part:

Glenn W. Welling, the founder and Chief Investment Officer of Engaged Capital, said, “I am pleased to have reached this agreement as part of a constructive dialogue with Del Frisco’s. In addition to his decades of experience working inside boardrooms, Joe Reece brings exceptional experience in investment banking and the capital markets to Del Frisco’s which will be instrumental as the Board evaluates the various opportunities available to maximize value for all shareholders.”

 Joe Reece has over 30 years of experience as a business leader. His experience working with executives at corporations, financial sponsors, and institutional investors, as well as serving on several public company boards, will bring an added dimension to the Board.

Mr. Reece is the Founder and Chief Executive Officer of Helena Capital. Mr. Reece previously served as Executive Vice Chairman and Head of the Investment Bank for the Americas at UBS Group AG from 2017-2018 as well as serving on the board of UBS Securities, LLC.

 

More on Reece’s background is contained in the press release, but as the above excerpt notes, he has ample investment banking experience. In our view, the naming of Reece as chairman of the Del Frisco’s Transaction Committee means two things. First, the company is serious about examining alternatives to remaining a stand-alone company. Second, it is also serious about extracting the greatest value for its business and brands.

As shareholders, this news has increased my degree of confidence that a transaction, be it with private equity or a strategic partner, is likely to happen. As such, we will continue to keep DFRG shares as a Thematic Leader for the time being to capture these potential gains.

  • As Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) gets serious with its strategic alternatives, our price target remains $14.

 

Is Everyone Looking the Wrong Way?

Is Everyone Looking the Wrong Way?

 

Over the past few months, the investing markets have considered Federal Reserve Chairman Powell enemy number one. Earlier this week the markets once again showed that America’s central bank drives sentiment more than any other factor, forget trade wars, forget earnings, forget political drama, it is the Fed and only the Fed that matters. That may sound somewhat simplistic to all the fundamental analysts and market technicians out there, but let’s face facts – it’s true.

Even the end of the 35-day long government shutdown barely generated a response from the markets.

What did generate interest was the rumor that the Fed may be considering ending its $50 billion-a-month drawdown of its balance sheet.

The afternoon of Wednesday, January 30th, after a much more dovish tone out of Powell, the stock market closed up for the first time after the past eight FOMC meetings – the longest post-FOMC losing streak on record. The prior meeting on December 19th was followed by a gut-wrenching 1,800-point crash in the Dow over the following four sessions. As we were nearing the end of 2018, it looked and smelled like the Fed went too far yet again, as it had done in 10 of the past 13 post-WWII hikes – so much for the narrative of the omniscient central banker. As Mark Twain wrote, “History doesn’t repeat itself, but it does rhyme.”

Investing is all about finding an inflection point, where the market is wrong – pricing an asset too high or too low, believing a policy to be beneficial when it isn’t or vice versa. Given the ubiquitous nature of the belief that the Fed is the central bank that really matters to the market, what if that supposition is wrong?

What if everyone is looking in the wrong direction with the wrong set of expectations? What if everyone ought to be looking in the direction of our New Global Middle Class investing theme? We will start to explore that idea in this week’s piece along with an assessment of the domestic and global economy.

As Chris Versace and I wrote in our book Cocktail Investing, there are three major participants in an economy: consumers, business and government. To understand what is happening in an economy one needs to understand the vector and the velocity associated with each one of these participants.

 

Households’ Outlook Dims

Our Middle-Class Squeeze investing theme was again front and center this week in the domestic economy. This week we got a rather dour report on how the Household sector of the economy is feeling about the future with the University of Michigan’s monthly index of Consumer Sentiment, which gauges American’s view on their own financial condition as well as the economy in general. In January U.S. Consumer Confidence dropped to 90.7 versus expectations for 96.8, hitting an 18-month low despite initial jobless claims dropping to a 49-year low, likely thanks to the double-whammy of the partial government shutdown and the recent volatility in the financial markets.

The decline was driven primarily by deteriorating expectations about the future, with that portion of the index declining 11% in January after falling 13% in December. On the other end of the spectrum, consumer’s assessment of current conditions is a mere 2% below the August peak which puts the spread between consumer’s outlook for the future and their present situation at nearly the largest since 1967. The only period in which the spread was greater was January through March of 2001 – the recession began in March 2001. Hat tip to David Rosenberg of Gluskin Sheff for the chart below.

We will be watching this metric particularly closely in February as well as the February Manufacturing Index given the recent drop in the 6-month view.

The rather glum outlook continues to be a headwind to the housing sector. House sales, excluding newly built homes, fell by 10% in December compared with the same month in 2017, according to the National Association of Realtors. Interestingly, this sharp fall off occurred despite the late 2018 rollover in mortgage rates, which as any a home buyer knows makes for a lower cost of total home ownership.

 

Slowing Corporate Sector

We are knee deep in the December 2018 quarter earnings season with around one-third of the S&P 500 companies having reported so far with an aggregate increase of 14.2% in earnings per share on an increase of 5.6% in revenue. While that sounds pretty good at first glance, what concerns us is that the beat ratio so far is the lowest since 2014, despite having the second most aggressive estimate cuts in the months going into this season since the depths of the financial crisis. On top of that, expectations for 2019 are being materially scaled back with expected EPS growth having fallen to just 1.6% year-over-year in the March quarter, driven in large part by weakening revenues for those companies with a lot of international sales exposure. As we’ve heard from a growing number of companies over the last few weeks, they are feeling the pinch of the trade war as well as the strong dollar.

One theme that keeps rearing its head is the impact of weakness in China, which is no small matter given that according to the US Census Bureau, America’s exports to China have doubled over the 10 years through 2017 to reach $130 billion a year. Companies ranging from Caterpillar (CAT) to Apple (AAPL), NVIDIA (NVDA) to Stanley Black & Decker (SWK) and 3M (MMM) have commented on the impact of a Chinese slowdown.

Caterpillar expects its Chinese markets to be flat in 2019. NVIDIA reported weaker Chinese demand for its computer chips and gaming consoles. H.B. Fuller Co (FUL) reported that weaker demand from China will reduce its profits by $20 million this year. PPG Industries (PPG) reported sales of its coatings for cars made in China fell 15% in the December quarter.

Despite these declines, however, luxury goods associated with our Living the Life investing theme continue to boom in China according to LVMH-Moet Hennessy Louis Vuitton (LVMHF). During its earnings conference call, the company shared that “growth in China has accelerated in Q4 compared to the previous quarters and the beginning of this year is the same.” That strength was corroborated by Ferrari (RACE) that reported its sales in China, Hong Kong and Taiwan rose nearly 13% year over year in the December quarter, and forecasted a pickup in its China business during the first half of 2019. Some of this may reflect the non-US nature of those companies, but the more pronounced driver is more than likely demographic in nature as captured by the rising middle class in China and the allure of aspirational goods, but also the rapid rise in wealthy and ultra-wealthy Chinese, a key cohort when it comes to the Living the Life tailwind.

 

Government

While the partial government shutdown has finally come to an end, at least temporarily, inside the beltway is increasingly looking like a kindergarten class that has missed its afternoon nap. The US federal deficit continues to be quite large compared to post WWII norms.

The sheer size of the federal deficit combined with the Federal Reserve program to reduce its balance sheet means that roughly $1.3 trillion is being pulled away from the private sector. The more money the government needs, which means increased Treasury bond supply, the less money is available to be spent in the private sector – this is referred to as the crowding out effect of large government deficits. The Fed’s actions along with the increase deficit spending are one of the factors behind the recent drop is equity prices as the money has to come from somewhere. Less money in the private sector means demand for private sector assets declines which impacts prices. What about China? Well, it is no longer a buyer of US debt and may well have become a net seller.

 

Global Economy

In 2017 the world’s leading economies accelerated in sync, boosting equity prices. In 2018 the U.S. economy surged on thanks in part to fiscal stimulus in the form of tax cuts and increased government spending while the rest of the world slowed. In 2019 the world looks to be once again syncing up to slow down. The IMF warned that “the global expansion is weakening and at a rate that is somewhat faster than expected”. The fund revised down its forecasts, particularly for advanced economies with the world’s economy forecast to grow by 3.6% in 2020. Although that is stronger than in some previous years, the IMF thinks “the risks to more significant downward corrections are rising”, in part because of tensions over trade and uncertainty about Brexit.

The Global Zentrum fur Europaische Wirtschaftsforschung (ZEW) Economic Sentiment Index echoes what we’ve seen from the Michigan Consumer Sentiment Index.

Italy has now had two consecutive quarters of contracting GDP, which means that technically Italians are breaking out the Barolo and sadly toasting to their latest recession. Germany, which has been the strongest economy in the Eurozone, saw its economy contract 0.2% in the third quarter of last year, its industrial production decline 1.9% in November, and retail sales crash 4.3% in December, sparking fears that the country is on the brink of a recession as well. Recent federal statistics have Germany’s economy growing by just 1.5% in 2018 versus 2.2% in 2017 with the IMF forecasting just 1.3% in 2019. According to data published by IHS Markit, France’s Composite Output Index that reflects its manufacturing and services economy remained in contraction mode at 47.9 in January, down from 48.7 in December. As a reminder, a reading below 50 indicates a contraction, while one above 50 indicates growth. Against that backdrop, it’s not shocking to read that European Central Bank President Mario Draghi say “The European Central Bank is ready to use all its policy tools to support Europe’s softening economy, including by restarting a recently shelved bond-buying program.” As for the U.K., consumer confidence with respect to the economic outlook fell to a 7-year low in January.

 

China Slows

China has the second largest economy in the world and will soon replace the US as the world’s largest retail market as it benefits from the tailwinds in our New Global Middle Class investing theme. What happens in China matters to the rest of the world. For example, China has become the largest importer of wood in the world and the largest exporter of things made from wood, ranging from furniture to flooring. While China’s economy will eclipse that of the US, growth doesn’t come in a straight line and we are seeing warning signs:

  • China’s economy has slowed 6.4% in the fourth quarter of 2018, the third consecutive deceleration. Growth slowed to 6.6% in 2018, the slowest growth since 1990 when sanctions were imposed following the Tiananmen Square massacre.
  • Manufacturing PMI in January stood at 49.5 and was 49.4 in December, showing 2 consecutive months of contraction.
  • Property sales, which had been a reliable source of growth which took advantage of borrowing opportunities have been slowing.
  • The growth in retail sales has fallen to its lowest level in more than 15 years.
  • Sales of cars fell last year for the first time in more than two decades.
  • Companies have started cutting back hiring and incomes are growing more slowly, weighing on consumer sentiment. The middle three quintiles of China’s population by income distribution saw earnings increase by only about 2% last year in real terms.
  • Defaults are on the rise. Corporate bond defaults reached 19 billion yuan in the first half of 2018 versus 14 billion in the same period of 2017. Smaller banks in rural areas, which would be the first to feel the pain, are seeing rising levels of bad loans.

As a result, China is letting up on its drive to deleverage its economy and Chinese investment into Europe and America fell by 73% in 2018. China has already pivoted towards more supportive economic policies. It has sped up spending on infrastructure, trimmed income taxes and relaxed some restraints on bank lending. China has a massive population that it needs to keep employed and was the world’s engine during the last financial crisis, providing a floor under demand as much of the rest of the world was crashing.

 

What If They Are Wrong?

The US today has the highest non-financial private sector debt to GDP ratio in history. Overall the global debt to GDP ratio is the highest we’ve ever seen. Most likely the Fed tightening cycle has come to an end and the next thing we are most likely to see is easing, but this time perhaps that cure is already used up?

We’ve already seen materially diminishing returns from Fed stimulus efforts in the past.

What if this time around the only central bank that truly matters is China’s?

What if China decides to alter its monetary policy, its peg to the dollar, to help its slowing economy thereby creating a cascade across the east as its neighbors scramble to respond?

What if the only bank in the world that can affect asset prices this time, that can actually create inflation is the one for the biggest consumer of raw materials in the world, the one in the East at the People’s Bank of China while everyone is looking the other way?

What if indeed…

How many investors are factoring that into their thinking? Is President Trump contemplating that as US-China trade talks continue? We’ll be watching so stay tuned.

 

 

India’s Mobile Monsoon

India’s Mobile Monsoon

 

An article in this week’s Economist points out some phenomenal data that speaks to our Global Rise of the Middle Class investing theme. While the Middle Class in many developed nations is under pressure, part of our Middle-Class Squeeze investing theme, we are seeing technology help leapfrog infrastructure needs in many emerging markets. In India, mobile data is giving people access to the global economy in ways that was utterly impossible just a few years ago.

Just three years ago there were only about 125m broadband internet connections in India; by last November the number had reached 512m. New connections are growing at a rate of 16m per month, almost all on mobile phones. The average Indian phone user now consumes more mobile data than most Europeans.

Incredible economies of scale possible in the most populous nation on earth make for business models that are not feasible elsewhere.

So as not to limit the market to people who can afford smartphones, Jio also launched its own 4g feature-phone, the JioPhone, which it says is “effectively free”. Customers pay only a refundable deposit of 1,500 rupees ($21) for the device, with which they can use WhatsApp, watch YouTube and take pictures. As Mr Ambani said last year, for most users their Jio connection “is not only their pehla [first] phone but also their pehla radio and music player, pehla tv, pehla camera and pehla Internet”.

Which has lead to incredible adoption rates.

Data in India now cost less than in any other country. On average Jio’s users each download 11 gigabytes each month.

The opportunities here are staggering, but as we’ve seen pushback on globalization in much of the developed world, so too is India looking to protect is domestic companies from foreign competition. Draft rules revealed last July would require internet firms to store data exclusively in India. Another set of rules that went live last October require financial firms to store data locally, too. On December 26th India passed rules that hit hard at Amazon (AMZN) and Walmart (WMT), which dominate e-commerce there, preventing them from owning inventory in an attempt to protect local digital and traditional retailers.

Investors are well served to look beyond just the U.S. economy which is facing growth headwinds from slowing population growth, aging demographics and enormous debt loads with a mountain of unfunded liabilities across pensions and Social Security. In India, a country with a massive population that is relatively young and with productivity levels well below those of developed economies, small improvements can generate enormous returns for both its citizens and investors.

Source: Mukesh Ambani wants to be India’s first internet tycoon – India’s new Jiography

The U.S. is on track to fall to the world’s second-biggest retail market

The U.S. is on track to fall to the world’s second-biggest retail market

While China’s economy may be slowing now, the long-term implications associated with our Living the Life, Rise of the New Middle-class and Digital Lifestyle investing themes in that market will continue to be felt. Even if China’s economy slows to something between 5%-6%, the economic reality is it will continue to grow far faster than the US. Per the Fed’s most recent FOMC economic forecast, it sees US GDP between 1.8%-2.5% over the next few years.

That faster rate of growth mixed with our three investment themes cited above will continue to drive retail sales growth in China. Will that eclipse the US in 2022, a year later or a year sooner? It’s hard to predict but it’s the longer term tailwind that we’re focused on here at Tematica. Sneaking up right behind China is India, which boasts wonderful demographics that will continue to power our Rise of the New Middle-class theme for years to come.

With regard to our Digital Lifestyle theme, given the far superior rate of adoption of mobile payments not to mention Alibaba’s seemingly replicating Amazon’s strategies, it comes as little surprise to us that digital shopping will be a key driver in China. This is backed to some extent by the growing usage of digital commerce and social media by the luxury brands that are associated with our Living the Life theme.

 

China’s economy may be slowing, but it is on track to overtake the United States and become the world’s top retail market this year.

The latest forecast by eMarketer predicts that retail sales in China will increase 7.5% to $5.636 trillion in 2019. That’s approximately $100 billion more than the United States, where retail sales are expected to grow 3.3% to $5.529 trillion.

And while growth rates are slowing for both countries, China’s growth rate will exceed that of the United States through 2022. By 2022, total retail sales in China are expected to hit $6.757 trillion, while U.S. total retail sales will reach $6.030 trillion.

A major driver of China’s retail economy is e-commerce. Online retail sales in China will increase 30.3% to $1.989 trillion in 2019, accounting for 35.3% of the country’s total retail sales, which is the highest percentage in the world, according to Marketer. The United States lags far behind, with e-commerce on track to represent 10.9% of total retail sales this year.

By the end of 2019, China will account for a whopping 55.8% of all online retail sales globally, with the metric expected to exceed 63% by 2022. The United States is expected to account for 17% of all global online sales, followed by the U.K. at 3.8%, Japan at 3.2% and South Korea at 2.4%.

Emarketer noted that Alibaba will lead e-commerce sales in China with a 53.3% share. But its share has been steadily declining for the past several years as smaller players chip away at the e-commerce giant’s dominance. In particular, social commerce platform Pinduoduo has seen triple-digit growth since 2016, although its share remains small, according to eMarketer.

Source: U.S. set to lose its position as world’s biggest retail market

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

Market Reversal

So far in 2019, we are seeing a reversal of the heavily oversold conditions from the end of 2018. Those stocks that were hit the hardest in 2018 are materially outperforming the broader market in 2019. For example, through the close on January 16, 62% of stocks in the Financial sector were above their 50-day moving average, the highest of any sector, versus 44% for the S&P 500 overall. To put that into perspective, Financials have not been the top performer for this metric in 273 trading days, the second-longest such streak since 2001 and only the fourth streak ever of more than 200 trading days. It isn’t just financials as the Energy sector, which was the worst performing sector in 2018, has the third highest percent of stocks above their 50-day in 2019.

While impressive looking, this shift doesn’t necessarily bode well for the Financial sector, nor for the broader market according to data compiled by Bespoke Investment Group.

 

Stock Performance After Streaks Ended

 

 

This recent outperformance by Financials in 2019 is particularly fascinating when I talk to my colleagues at various major financial institutions. Here are a few of the comments I’ve been hearing, paraphrased and without attribution for obvious reasons:

“This deal is way too small for you guys, but I wanted to let you know that our team is working on it.” –  (M&A consultant)

Send it over.We are so late in the cycle that we are looking at damn near anything.” –  (Partner at one of the largest global private equity firms)

“What can we do to better serve your company? We are making a major push this year into better serving companies of this size.” –  (Partner at one of biggest investment banks to a very surprised member of the Board of Directors of a recently IPO’d company whose market cap would have normally left it well below the bank’s radar. After some investigation, many other board members for companies of a similar size in the sector have been getting the same phone calls from this bank.)

The big financial institutions are having to work their way downstream to find things to work on – that’s a major peak cycle indicator and does not bode well for margins. It also doesn’t bode well for the small and medium-sized institutions that will likely need to become more price competitive to win deals in this new more competitive playing field.

We have also seen some wild moves in a few of our favorites such as Thematic Leader Netflix (NFLX), which reported its earnings after the close on January 17th. Netflix sits at the intersection of our Digital Lifestyle and Disruptive Innovators investing themes and has seen its share price fall over 40% from the July 2018 all-time highs to bottom out on December 24th. Since then, as of market’s close on January 17, shares gained nearly 50% – in around all of 100 trading hours! While about 10% of that can be attributed to the recent price increase that will amount to about $2 or so per month for subscribers, there are greater forces at work for a move of such magnitude. No one can argue that either direction was based on fundamentals, but rather a market that is experiencing major changes.

One of the most important leading indicators as we start the Q4 earnings seasons was the miss by FedEx (FDX) and the negative guidance the company provided for the upcoming quarters. FedEx’s competitor United Parcel Service (UPS) is part of our Digital Lifestyle investing theme – how are all those online and mobile purchases going to get to you? Both FedEx and UPS are critical leading indicator because they touch all aspects of the economy and transportation services, in general, have been posting some weak numbers lately in terms of both jobs and latest price data.

In what could be reflective of both our Middle Class Squeeze investing theme, Vail Resorts (MTN) also gave a negative pre-announcement, stating that its pre-holiday period saw much lower volumes than anticipated despite good weather conditions and more open trains. The sour end of the year in the investment markets and the weakness we’ve seen in markets around the world may have led many decided to forgo some fun in the snow. We’ll be keeping a close eye on consumer spending patterns, particularly by income level in the months to come.

Investor Sentiment Slips

According to the American Association of Individual Investors, bearish investor sentiment peaked at 50.3% on December 26, right after the market bottomed. Bullish sentiment over the past month rose from 20.9% to 38.5% but then stalled this week, falling back to 33.5% as the markets reached resistance levels. Bullish sentiment is now back below the historic average but still well above the December lows. Bearish sentiment, on the other hand, is on the rise, up to 36.3% from last week’s 29.4%. This is just further indication that much of what we’ve seen so far in 2019 is a recovery from the earlier oversold conditions.

As we look at the unusual pace at which the major indices lost ground in the latter part of 2018 and the sharp reversal in recent weeks, I can’t help but think of one of the many aspects of our Aging of the Population investment theme. A large portion of the most powerful demographic of asset owners is either in or shortly moving into retirement. Many already had their retirement materially postponed by the losses incurred during the financial crisis. They are now 10+ years older, which means they have less time to recover from any losses and have not forgotten the damage done in the last market correction. I suspect that we are likely to see more unusual market movements in the years to come than we have since the Boomer generation entered into the asset gathering phase of life back in the 60s and 70s. Today this group has a shorter investment horizon and cannot afford the kinds of losses they could 20+ years ago.

The Shutdown and the Fed

Aside from a rebound against the oversold conditions, another dynamic that has the market in a more optimistic mood, at least for the near term, is the narrative that the government shutdown is good news for interest rates as it will likely keep the Federal Reserve on hold. Given that estimates are this shutdown will cost the economy roughly 0.5% of GDP per month, it would be reasonable for the Fed to stay its hand.

Inflation certainly isn’t putting pressure on the Fed. US Producer Prices fell -0.2% last month versus expectations for a -0.1% decline. The bigger surprise came from core ex-food and ex-energy index which fell -0.1% versus expectations for an increase of +0.2%. Keep in mind that core PPI declines less than 15% of the time, so this is meaningful and gives Powell and the rest of the FOMC ample cover to hold off on any hikes at the next meeting.

US import prices fell -1% month-over-month in December after a -1.9% decline in November, putting the year-over-year trend at -0.6%. That’s the first negative year-over-year print since August 2014. Yet another sign that inflation is rolling over.

 

Economy Flashing Warning Signs

Despite all the hoopla earlier this month over the December’s job’s report, this month’s Job Openings and Labor Turnover Survey (JOLTS) report showed that for the first time since the end of 2017 and just the 6thtime in this business cycle, hirings, job openings and voluntary quits fell while layoffs increased in November.

By digging further into the details of the Household survey as well we see that people holding onto more than one job rose +117k in December, accounting for over 80% of the total employment gain. On top of that, the number of unincorporated self-employed rose +126k. These two are things we normally see when times are tough, not when the economy is firing on all cylinders. Not to be a Negative Nancy or Debbie Downer here, but the prime-working-age (25-54) employment shrunk -11k in December on top of 48k the month before. This was before things started to get really scary for many workers with the government shutdown. Imagine how many more are now looking for a second job to make ends meet while they wait for those inside the beltway to work this mess out.

We also got a materially weak New York Empire Manufacturing survey report this week that saw New Orders decline for the second consecutive month and a sharp drop in the 6-month expectation index. The New York Federal Reserve’s recession risk model is now placing odds of a recession by the end of 2019 at over 21%, having more than doubled since this time last year and having reached the highest level in 10 years. Powell and his team at the Fed have plenty of reasons to hold off on hikes. I wouldn’t be surprised if their next move is actually to cut.

 

NY Fed Recession Probability

 

Risks, what risks, we don’t see no stinking risks

US economy isn’t as strong as the headlines would make you think. The political dialogue going back and forth while on the one hand entertaining in a reality TV I-cannot-believe-he/she-just-said-that kind of way isn’t so funny when we look at the severity of problems that need to be addressed – excessive debt loads, a bankrupt social security program, a mess of a healthcare sector – just to name a few. The market today isn’t pricing much of this in, and based on the year to date move in the major market indices, particularly not the potential economic damage the government shutdown if the situation worsens.

If we look outside the US, the market’s indifference is impressive. UK Prime Minister Theresa May’s Brexit plan suffered a blistering defeat in Parliament, the largest such defeat on record for over 100 years, leaving the entire Brexit question more uncertain than ever and it is scheduled to occur just over two months away. In the two days post the Brexit vote back in 2016 the Dow lost 870 points and the CBOE Volatility Index (VIX) rose 49%. This time around the equity markets were utterly disinterested and the VIX actually fell 3.5% – go figure. A messy Brexit has the potential to have a material impact on global trade and yet we basically just got a yawn from the stock market.

Over in Europe flat is the new up with Germany’s GDP expected to come in every so slightly positive and this is a nation that accounts for around one-third of all output in the euro area – with China a major customer. Overall, Eurozone imports and exports fell -2% in November.

The other major exporter, Japan, just saw its machinery orders fall -18.3% in December after falling -17% in November. Japan already had a negative GDP quarter in Q3 and the latest data we’ve seen on income and spending aren’t giving us much to be positive about for the nation.

The Trade War continues with some lip service on either side occasionally giving the markets brief moments to cheer on some potential (rather than actual) signs of progress. The overall global slowing coupled with the trade wars is having an effect. China’s exports for December were far worse than expected, -4.4% from year-ago levels vs expectations for +2%. Last week Reuters reported that China has lowered its GDP target for 2019 to a range of 6% to 6.5%, which is well below the 6.6% reported output gain widely expected last year which itself is the weakest figure since 1990. Retail sales growth has fallen to a 15-year low as auto sales contracted 4.1% in 2018, the first annual decline in 28 years. With a massive level of leverage in its economy, banking assets of $39.1 trillion as of Sept. 30, and nearly half of the $80.7 trillion 2017 world GDP, (according to the World Bank) waning economic growth could be a very big problem and not just for China. We’ll be watching this as it develops given our Rise of the New Middle-class and Living the Life investing themes.

The bottom line is we’ve been seeing the markets bounce off seriously oversold conditions after a breathtakingly rapid descent. The fundamentals both domestically and internationally are not giving us reason to think that this bounce is the start of another major bull run. With all the uncertainty out there, despite the market’s recent “feel good” attitude, we expect to see rising volatility in the months to come as these problems are not going to be easily sorted out.

 

Domino’s taps four investment themes to double revenue in 6 years

Domino’s taps four investment themes to double revenue in 6 years

Earlier this week, we discussed how Pizza Hut will be digging deeper into our Guilty Pleasure tailwind by expanding its offering to include the delivery of beer. Today, we have Domino’s Pizza sharing that it looks to deliver significant growth as it expands its footprint. The details are below, but with expansion in India and other emerging markets, Domino’s is clearly tapping into our Rise of the New Middle-class investing theme and using our Digital Lifestyle to do so.

While many think of it as a pizza company, with some 65% of its US business digital in nature we have to wonder how long until Domino’s formally removes “Pizza” from its name the way Apple did with “Computer” and Starbucks did with “Coffee.” Those name changes signaled a major shift in those business models, and Domino’s is already feeling some lift from our Clean Living investing theme with its gluten-free crust here in the US. that signals flexibility on the company’s part when it comes to catering to changing food preferences. Odds are that Domino’s will be serving up more than just pizza as it looks to crack the various emerging markets.

Domino’s Pizza, Inc. unveiled ambitious growth goals during its 2019 Investor Relations Day on Thursday. The Ann Arbor, Mich.-based pizza chain — which currently includes 15,300 stores globally — expects to grow by nearly 60 percent over the next six years, with a target goal of 9,700 new stores by 2025. That goal would nearly double the company’s growth rate of 5,260 stores over the past six years. Domino’s is also projecting $25 billion in annual sales globally by 2025 — a number that doubles the pizza chain’s fiscal 2017 sales of $12.25 billion

Fortressing. Domino’s execs spoke a lot about “fortressing” — increasing the number of restaurants in the same market — as a strategy for strengthening dominance. The company cited a fortressing attempt in India where they forced out a competitor. In response to concerns that Domino’s would be competing with itself and therefore same-store sales would suffer, the company said “order count requires capacity,” meaning that they are looking to the long-term effects of fortressing.

· Technology. As a technology leader, Domino’s is not planning on slowing down anytime soon.

“[The company] is now more than 65 percent digital in our U.S. business,” Allison said. Domino’s will be creating a “Tech Garage” in Ann Arbor that will serve as a technology innovation laboratory, where team members will work on and roll out customer-facing and back-of-the-house technology, including a next-generation point-of-sales system.

· International growth. Domino’s sees growth potential of 2,000 stores in the U.S. over the next six years. But even more growth will occur abroad, with unit expansion potential of 6,500-plus locations in the company’s largest international markets alone by the end of 2025.

Source: Domino’s plans to grow in size by 60 percent in next six years

China accounted for nearly half of app downloads in 2018

China accounted for nearly half of app downloads in 2018

It’s not only the pace of the smartphone market that is slowing here in the US, so is the rate at which we are downloading apps even though Apple’s App Store and Google Play remain dominant platforms. A new report shows that China, India, Brazil, and Indonesia are the driving force behind app downloads and app-related revenue growth, which likely reflects the deployment of 4G networks and the adoption of smartphones. No wonder Apple is keen on cracking China and India. To us, this is our Rise of the New Middle-class investing theme intermingling with our Digital Lifestyle theme.

Global app downloads topped 194 billion in 2018, up 35 percent from 2016, according to App Annie’s annual “State of Mobile 2019” report released today. Consumer spending across app stores was up 75 percent to reach $101 billion. The report, which analyzes trends across iOS, Android and the third-party Android stores in China combined, follows the company’s earlier report released at year-end, which looked at downloads and spending across just iOS and Google Play.

According to the “State of Mobile” report, China accounted for nearly 50 percent of total downloads in 2018 across iOS and the third-party stores, despite the slowdown related to a nine-month game license freeze in the country. China also accounted for nearly 40 percent of consumer spending in 2018.

Emerging markets played a role in fueling downloads, as well, accounting for three out of the top five markets for downloads (India, Brazil and Indonesia). Download growth in the U.S., meanwhile, has slowed.

Developing markets played little role in consumer spend, however. Instead, the countries contributing the most on that front were (in order): China, the U.S., Japan, South Korea and the U.K.

It found that Chinese mobile gaming giant Tencent was the global leader for overall revenue across iOS and Android, not counting the third-party Android app stores. It was also the leader in game revenue. Tencent topped the non-game app chart for 2018, too, with its Tencent Video app clocking in at No. 3.

Source: China accounted for nearly half of app downloads in 2018, 40% of consumer spend | TechCrunch

India to have over 800 million smartphone users by 2022

India to have over 800 million smartphone users by 2022

Even though new smartphone subscriptions in the U.S. market are slowing dramatically as demand matures, becoming increasingly reliant on replacement demand, tailwinds associated with our New Global Middle-Class investing theme explain why Apple CEO Tim Cook is so keen on breaking into India in a meaningful way. A new report from Cisco Systems forecasts smartphone growth in India to grow by 425 million users over the 2017-2022 period – roughly 180% of the U.S. smartphone subscriber base in the US this year. This growth will not only drive tailwinds for our Digital Lifestyle theme but also place demands on existing infrastructure that should drive a spending tailwind for our Digital Infrastructure one as well.

The number of smartphone users is expected to double to 829 million by 2022 from 404.1 million in 2017, projects a new Cisco report.This proliferation of smart devices will propel India’s per capita data consumption to nearly 14 gigabytes (GB) by 2022 from 2.4 GB in 2017, according to Cisco’s latest “Visual Networking Index (VNI)” report.“By 2022, the smartphone data consumption will increase by five time in India — which proves the dominance of smartphones as the communications hub for social media, video consumption, communications, and business applications, as well as traditional voice,” Sanjay Kaul, President, Asia-Pacific and Japan, Service Provider Business, Cisco, said in a statement on Monday.

Key predictions for 2022 (India)

· In India, there will be 840 million total Internet users (60% of the population) by 2022, up from 357 million (27% of the population) in 2017.

· In India, there will be 2.2 billion networked devices by 2022, up from 1.6 billion in 2017.

· In India, Smartphones will account for 38% (829.0 million) of all networked devices by 2022, compared to 26% (404.1 million) in 2017, (15.5% CAGR).

· In India, Smartphones will average 17.5 GB per month, up from 3.5 GB in 2017.

· India’s IP traffic grew 53% in 2017 and reached 3.3 Exabytes per month in 2017, up from 2.1 Exabytes per month in 2016.

· In India, IP traffic reached 2.4 Gigabytes per capita in 2017, up from 1.6 Gigabytes per capita in 2016. Per capita Consumption will reach 13.9 GB by 2022.

· In India, Internet video traffic grew 73% in 2017 and reach 13.5 Exabytes per month by 2022, up from 1.5 Exabytes per month in 2017. This account for 77% of all Internet traffic by 2022, up from 58% in 2017..

Source: India to have over 800 million smartphone users by 2022: Cisco study | tech | Hindustan Times