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Thu Dec 31, 2015, 12:15 PM

Great read: Themes for 2016 and beyond according to London based equity sales coverage (BoA ML)

The normal pattern for forecasters in this industry is to be rather optimistic about growth and asset prices at this time of year…
Then it snows .......and American GDP gets cut.
...But stock markets keep rising because bad news is good news in the Quantitative Easing , investing is easy when rates are zero 'handbook.'
However.....This year is slightly different as there is not an investor or commentator anywhere who is not worried about a broad selection of the following (delete as appropriate )...

Credit markets , liquidity , El Nino ,Migrants , Marine le Pen , Frexit , Brexit , Donald Trump ,Jeremy Corbyn, Chinese devaluation , Saudi devaluation ,Yellens’ rate hikes, Draghi’s done all that he can , Syria, Putin , Peak profits, More war , less peace ,Trade barriers ,Fintech disruptions , corporate fraud ,ISIS and cyber crime.....let alone peak profits , narrow stock markets and too much debt.

...Have I missed anything out ?
....I have no idea whether all or any of these dark coloured swans are, or are not, in the price of anything and everything.
My instinct , which may be behaviourally flawed owing to my age and declining testosterone levels, is that ‘volatility’ beckons...... a term now used as a euphemism for price declines .
My other instinct is that zero interest rates and low growth have a very elevating effect on the price of anything with sustainable growth and sustainable income streams.
Moreover , I am very conscious that there are always some things in a Bull market......
So what I have written below is my attempt to pull together my own conclusions as to what they will be in 2016 and , more importantly ,beyond....

...Most of my sources come from the work of BAML’s own analysts , but are not limited to just them... Movies , books , documentaries , blogs and especially observably changing habits of those around me all contribute to shaping my prejudices.
Above all , I write this because I believe that investing success is about identifying one of two things. Companies that have a solution to a problem.....or better still , companies that have or make something that other people desire, especially if there is a shortage of it. Place all your bets on those. And right size them......
...and don’t sell them until either the problem is solved , or the desire has gone. Valuation is seldom useful in identifying entrance and exit opportunities in long term thematic trends of the type that really drive asset prices.

Even if you were a year late in recognising the Chinese commodity binge was over.... you were still early.

..Now I know it is easy to be wise after the event , but my point is that you never have to be wise before the event...when that event is going to last for a decade or more.......I didn’t invent E-commerce, or the i-phone. But what I did suspect soon after being exposed to them was that they were so much better than the alternative they would one day everyone would switch.....and they still are....15 years into the process...

So here are the Eight multi-year, ubiquitous and material themes that frame all my conviction ideas:

1. The world will barely use any fossil fuels in 30 years time

2. If an App is on your smartphone home screen...Own its stock.

3. Humans will be liberated from the chore of owning or driving their own cars within 20 years

4. Mankind is addicted to data and wifi.....it has to be available, everywhere. .

5. The world is getting older , more indebted and will deflate....( ex Africa)

6. Income bearing assets and jobs are worth more than you think.

7. Nearly half of all American jobs , and a third of Europes’ , will not exist in 20 years time....

8. ...So there will be exponential growth in Virtual reality experiences .

9. There are more losers than winners......so it is easier to beat the index than ever before.



1.The world will barely use any fossil fuels in 30 years time.

Three hundred and twenty million Chinamen watched ‘under the dome ‘ in the summer of 2014, it didn’t rain in California for the third year on the trot , and China and the US signed a climate accord. That co-incided with Saudi Arabia starting to use solar power to desalinate the water they use to pump out their oil ......

Within 4 months the oil price had halved. ....and the Saudi oil minister had observed that the stone age did not end due to an absence of stones.....

We are one year in to the end of the Oil age. Energy conservation , Solar power and wind power work , and work better each year. Steady improvements in the technology to store renewable power means that the price and productivity curves of batteries are heading towards mass adoption at an astonishing pace. The 2016 GM Bolt Electric car batteries cost $145 per kilowatt hour...down from $900 5 years ago....”Petrol parity “, I am told , is $ 100. We are virtually there. The Gobi desert is now a solar farm...Morocco is doing the same with one of theirs. My wife has helped build 17 schools in Kenya , that are all perfectly and efficiently solar powered......

My children , your children , and our polititians now collectively believe that in 40 years time Manhattan and South London will resemble Venice or Bruges unless we all act responsibly now..... Coal , Oil , and eventually even Natural gas will all be inexorably replaced by Solar , wind , and battery storage .The will exists , and there is a way.

For your Christmas reading list I would recommend Tony Seba’s “ Clean Disruption “ as the most interesting book to read on this issue.

I would own Vestas , Gamesa and LG Chemicals (Batteries )

I would not own Statoil , OMV , Repsol , Tullow , Neste Oil , PKN , Tecnicas Reunidas , Vallourec or Premier Oil and Gas.

Needless to say I forsee some interregnum problems for Oil producing countries .....and would assume that petrodollar recycling will not be quite such a supportive prop for asset prices it has been in the recent past.

The worst bit is that one day we will have to stop eating meat....as the protein chain is now 15% of our C02 emissions. Starting an insect farm and experimenting with tasty ways to eat them would be a smart path for some of your children to take.

2. If a companies’ App is on your Smartphone home screen...Own its stock , and avoid the shares of companies which it is usurping.

My home screen displays the following apps......

App 1... Uber.....As a result of this , the Donalds next year will be a one ( electric )car family ,as opposed to 3 car family. My 20 year old daughters have shown no interest in learning how to drive.... likewise many their friends...and this is not just a London thing. Sarb Nahals’ Millenials report this year confirmed there was a material decline in the number of young people wishing to learn how to drive. Uber is growing 6 times faster in China than it did in the Us....London has nearly completed an East /West bicycle route for me to safely commute in on.... I will not be alone.

So avoid automobile manufacturers and their mechanical component suppliers.....sharing is better.

App 2,3,4 and 5 ....Amazon Prime / ASOS / Net-a- Porter/ Ocado.....Does your hallway resemble a regional distribution centre? We (Justin Post ) reckon 50% of Americans may now be on Amazon prime. Prime customers spend on average $1440 a year with Amazon. Amazon is garnering 60% of all the growth in E-commerce. I use it twice a week. I haven’t been to a shopping centre for 3 years. Neither has my wife. Ditto my daughters. The apps above explain a lot of that....Buy ASOS and Yoox , sell Tesco , Sainsburys and INTU. (shopping centres)...Amazon Prime send you stuff in boxes made by DS Smith (buy) , but will increasingly deliver it without using outside contractors ( Sell Deutsche Post)
Sit and deliver.

App 6...Easyjet....A category killer ....no Thomas Cook, and nice low oil prices

App 7 Google.....and

App 8 ...YouTube.. ( owned by Google)

App 9 ..And Netflix....

And App 10 ..BBC I-player. I am no longer a sky customer. The cord has been cut. So Google will outperform Sky.

App11...Spotify...and because I am now paying for Music.....buy Vivendi

I don’t use Facebook.

App 13 and 14....Just eat/ Dominos/ Ocado ....So sell supermarkets...Foods’ route from farmers land to stomach is just commencing a multi-year bypass of the supermarkets as we know them.

App 15....Mind body connect...or some other vanity feeding, narcissistic health and wellness app...Buy Nike and Under-armour...Glanbia and Danone

App 16.....Opentable....This is so good I don’t use an assistant to make a restaurant reservation now... Apple (Siri) , Google and Amazon have all created desk top boxes that will arrange meetings and perform other administrative tasks for you.........will this one day hollow out the core of the business at Manpower, Adecco and Hays.? Will LinkdIn one day replace large swathes of what Human resources do ?Our Robotics and Artifical intelligence primer got me thinking that one day it would. Our floor already has a third less assistants than 5 years ago.

App 17...Betfair...whose app has turned betting into an everyday on-line middle class pursuit....And Betfair is almost becoming a verb.

App 18...Rightmove....A business that has basically become a verb (like Google or Amazon Prime)

App 19...My Apple watch app...No need , or desire , for one of those anachronistic mechanical watches. Sell Swatch

App 20.....The simply awesome Philips Hue.... Mine is set so that when Chelsea score all my lights flash blue...All the lights in your house can be controlled from your i-phone. ( and apple watch ) Adios Osram.

And finally....The Bank of America research app .

If only your Smartphone Home screen had been your Portfolio......Think about it.


3.Humans will be liberated from the chore of owning or driving their own cars within 20 years.

I read a lot about Autonomous cars being right at the very pinnacle of the Hype cycle......Most people hate change , and physically recoil at the idea of letting a computer drive them....That will change so quickly.....At some point in the next two years investors will start pricing in the probability that the terminal growth rate in automobile stocks DCF is negative. Every Autonomous vehicle in a city will remove 8 cars...

I believe that London , Paris , Frankfurt etc will all follow the lead of Helsinki ( which will probably move first ) and one day it will be illegal to drive your own car in a city centre....That would have the effect of doubling the width of every road ( no parking spaces required ) , and freeing up some of the 31% of all urban space that is asphalt....Traffic would move 3x faster , and cities that do not embrace this will be left behind.

It costs $ 21,000 a year to own a car in a city....doing the same mileage , whilst either sleeping , watching Netfix or cuddling in an autonomous uber will cost you about $ 2000 a year...There is no contest...

...QED.

A urban world of Renewably powered , all electric , self driving cars that never crash that we all share will be a consensus view in 7 years time..... Will we need petrol stations , will we need car insurers , will we only need half the number of cars on the planet that we have today , will we need diesel?.. I think it is early enough to start addressing the monumental portfolio implications of that today. ....The luddites will not like it. Too soon?....No

4. Mankind is addicted to Data and wifi.....it has to be secure and available at all times .

More than 1 zettabyte of data will be transmitted over the worldwide interweb in 2016 ( a trillion gigabytes )...Hold onto Nokia and to JC Decaux....the capex required to keep up with the demand and the desire ensures both these companies are boats on a rising tide.....aside from their many other qualities.

But above all Buy Inmarsat... Can you imagine a world that does not provide full speed internet access on every plane journey you take in 5 years time. Airlines make about $ 1 profit per passenger per flight...Given I believe we would all pay $ 2 for good wifi , can you imagine any airline that will not provide this. ? .....Inmarsat is the best in class provider , and has a crucial 3 year head start versus its competitors. And then there is revenue growth from Inmarsats’ role in helping drones wage war and the Lightsquared part 2 bandwidth monetization.......I believe there is another 60% on the table here.

5. The world is getting older , more indebted and will deflate....(ex Africa)

Aviva told us that their average personal pension fund customer goes online 12 times a year to view the pittance their pension pot will pay them when they hit retirement age.....No wonder consumer spending is so muted... Aging people need to save more money with asset managers , because at these interest rates their pensions are so inadequate.... St James Place, Azimut, Legal and General and the Prudential should all rise on that tide....and technological advances should ensure their costs fall at the same time.

Ajay Kapur ,in his articulate year ahead note on the Emerging markets , wrote “ We remain steadfast in our view that nominal growth is scarce in the world, and is likely to stay that way, despite consistent (erroneous) consensus views of an impending upturn. Old, indebted and unequal societies are condemned to weak growth. Most emerging markets have joined the developed markets in suffering from these three afflictions. The three key drivers of global growth in the past 15 years – the plutonomists (rich people), energy capex, and China’s housing/infrastructure boom – are moribund. That’s what their proxies – the three doctors are telling us – Dr. Sotheby’s (down 48% from its two-year peak), Dr. Halliburton (down 48%) and Dr. Copper (down 55% from its five-year peak)....

China ‘s state-owned firms are mired in debt and over-capacity. I don’t assume that China’s slowdown will in itself cause an apocalypse in 2016, but it will probably lead to a wave of defaults and takeovers among a small group of firms that printed money from selling China what it didn’t have, couldn’t make or should’ve resisted. For miners of iron-ore, Las Vegas casino barons, American and European digger-makers and purveyors of expensive Brandy and flashy timepieces life will never be as good. Many of these firms have accumulated huge debts. Global commodity firms owe $1 trillion.

I suspect there will be less change for the vast number of companies that are connected to China through supply chains that provide them with widgets, clothes and assembled machines. Although wages have risen and the yuan is more expensive relative to most currencies bar the dollar, We expect China to devalue and expect Robots to eventually replace humans in factories, ......China will be at the cutting edge of the deflationary automation and devaluation curves.... not their victim.

So I suspect we are stuck with Zero interest rates , competitive devaluations , overcapacity and deflation for several more years....

...The companies whose share prices are most at risk from the confluence of these forces are Heidelberger Cement , Sandvik , The car industry ,Norsk hydro , The Steel industry ,Mondi , Stora ,Luxury Goods , and Oil Services....

......and it is hard to share the popular enthusiasm for a banking sector where rates stay so low , yield curves so flat , economists so optimistic on defaults and regulators so diligent.

The flip side of this is that there is a chronic need for any yield that is perceived as sustainable....Money will continue to be squeezed out of the banking sector and into anything with 5 stars calling itself an income fund.

...I suspect it is quite possible that a well chosen group of safe and reliable dividend stocks , with a starting yield of 4.3% , could finish next year with a yield of 3.6% , and hence a commendable double digit return.....The chosen protagonists on my compression trade team would be Munich Re Swiss Re , Relx , Imperial Tobacco , Swedish Match , Legal and General , Nordea , Proseiben , ITV , TF1 , Unilever , Roche , Glaxo and SNAM Rete Gas....All of which our analysts have stand alone reasons to be optimistic on , aside from their yields....

...We have a ‘little red riding hood’ basket full of these ‘ safe dividend stocks ‘stocks which you can find under the ticker MLEILRDV .

As the world gets older and richer , we live longer and need more healthcare.......That has been an abiding constant in my entire 30 year career , and the demographics have another 30 years to run in Healthcares favour.

More cancers will be cured.....great medical breakthroughs will accelerate. Computing has done wonders for understanding disease and finding treatments for it. Immuno-oncology is unquestionably turning the tide on the “war on cancer “......We have an outstanding team of analysts who remain resolutely optimistic that so long as their companies find breakthrough drugs that meet un-met needs they will be able to charge $ 130,000 a year per patient for them....they are , after all ,saving lives. But the US Presidential candidates generally view these prices as a horrible headache that won’t go away....and all are trying to find a cure....Their rhetoric will be hostile , but drugs are only 3% of the cost of Healthcare, and by and large they keep people out of expensive hospitals... So it may be a rocky ride next year , but I believe the best drugs will continue to achieve high prices....So I would hold Roche , Astra Zeneca, Sanofi and , again , last years’ best recommendation Genmab ...

....For anyone who is neither a widow or an orphan Cellectis and GW Pharma are two quoted European biotechs that we expect to double.

And I believe what Philips is doing in Healthcare , especially the remote side , is the stuff from which re-ratings spring.

6.Nearly half of all American jobs , and a third of Europes’ , will not exist in 20 years time....

Amazon and its acolytes will replace shop workers....Drones will deliver.....Siri and Amazon and AI from Google will replace so many clerical assistants.....Robots will replace fast food workers...I am not sure what everyone will do....but I know that short of a revolution , this will all be seen as progress and will be embraced. ..( and rightly so )

Adorable robots, namely Echo, Jibo, NAO and Pepper , are already marching into homes to help kids with homework and bedtime stories....and the children ,many of whom now do not have siblings and whose parents are constantly busy , adore them.

....In Japan, robotic caregivers tend to the elderly and play concierge at deluxe hotels....Many customers believe that the service levels are much better as a result.

Humans are being enhanced by technology.....and robots are being infused with humanity.

Which is why you must watch Ex Machina...a film that cleaned up at the independent film awards ceremony this week........disproving the thesis that prophets are never accepted in their own time.

I would argue that Data compression ,Mobile technology and the Chinese Industrial revolution have been the dominant investment currents of the last 20 years......

...Robots and AI will cause seismic alterations to our way of life for the next 20 years .

Will there still be 5 security guards in our office foyer....will every office need a night-watchman? Surely technology will allow Securitas and Group 4 S to take labour as a percentage of sales down from 70% to a fraction of that...Security is a massive growth industry , but I suspect that sleepy humans are a poor substitute for facial recognition, motion sensitive , web enabled gizmos that are starting to be rolled out.

And what will this all mean for Employment agencies?....I suspect that they will need to be very focussed on skilled workers....compliance officers ,cyber security experts , Drone engineers , Blockchain developers and coders in particular.

Deloitte and Accenture announced that they were getting rid of their staff performance reviews this year.. Deloitte let slip that it spent an unconscionable 2 million hours a year to produce yearly reports for its 65,000 people. The journalist Lucy Kelloway has eloquently argued in the Economist magazine that the demise of the performance review is part of a bigger aversion to the old style of managerial bureaucracy. Companies will stop fussing about inputs (how people do things) and focus only on outputs (what they produce). They will be obsessed with data, losing all interest in anything that can’t be measured. Every employee will be monitored every second; every keystroke and click will be tracked and analysed. Some companies will go further and get white-collar workers to wear sensors that track all movements and measure their tone of voice and the number of steps they take. Whatever they get up to, they will be watched by Big Brother.

Sound familiar ?

Not only will there be little room left for the line manager, human resources (HR) will have less to do. In the new world there will be a few HR gurus who understand how to gather and manipulate data; the rest will no longer be needed.

Companies will stop sending their middle management teams to country-house hotels to ask themselves if they were an animal, which one would it be? The soft side of management—the emotional intelligence that all managers have spent the past decade telling everyone they possess—is going to be out of fashion. Empathy can’t be easily measured, so we are going to hear less about it.

Mentors will lose out to machines....

Theme 8 ....So , more machines , less jobs....? What is everyone going to do ?

Vincent Bollore , I believe , has a hunch what we will all be doing....and he has always been a visionary investor...He is putting his arms round as many electronic games companies as he can...Combining their skills with Oculus rift and Augmented reality technology means that by the end of this decade we might all be travelling to the Pyramids or down the Zambezi , in a 3D virtual reality world , with our chosen companions. Video game technology , 3D mapping ,combined with Nvidia graphics and Oculus Rift like display will make television feel like a punch and Judy show from the Victorian era....This is how we will entertain ourselves ( and it is a lot cheaper than actually travelling there....and there are no other tourists )

The ROBO ETF and every Robotics fund started by an asset manager have been terrifically popular.......

Doubtless Wisdom Tree ...or perhaps your firm , will create an ETF to ride the ' future of entertainment wave' ......Nvidia , Microsoft , Google , Electronic arts and Vivendi will get another new fan base.

Theme 9...beating the index.

Fund management and broking will change enormously too......Nowcasting will ultimately displace quarterly forecasting.... As each year passes the availability of data from sources like MIT’s billion prices project, Zillow or Rightmoves property data ,IBM commerce which tracks retail trends daily, and all of Google’s search data , in the hands of the right supercomputers and their algorithums, suggests to me that if your job primarily involves predicting what has happened in the recent past ,or indeed what is happening right now and trying to profit from it over a quarterly earnings release or a piece of government trade data , join Linkdin.

Whereas Predicting the future will remain an Artform for a decent period of time.....It will take AI another 20 years to develop an imagination as refined as a good fund manager

I do not intend these thoughts that I have just committed to a data storage centre in which they are now perpetually stored to be considered in any way a comprehensive guide to how anyone should run money in 2016......

Doubtless much of it seems far too theoretical , fanciful and long term to be the foundation of any professional investment portfolio with a 3 year investment perspective.

I think all of this is relevent now......But then I am a fan of Ray Kurzweil... In his book “ the singularity is near “ he very convincingly argues how a whole 20th century’s worth of progress happened between 2000 and 2014 and that another 20th century’s worth of progress will happen by 2021, in only seven years. A couple decades later, he believes a 20th century’s worth of progress will happen multiple times in the same year..

(Arm and ASML were the only two European technology stocks that have just never stopped benefiting from this trend....and I do not expect that to change.)

....Kurzweil calls it the Law of Accelerating Returns.

....2016 will be my 30th year as a European stockbroker.....In 1986 no one had even imagined a mobile phone , the internet or CDs..... Hochtief and Bouygues were Europes biggest companies... I read a book by Bill Gates in the early 1990’s called ‘The road ahead’. In it he predicted something called the internet that would enable the existence of things like ipads , digital music , and social networking....I believed him, and spent a year trying to persuade fund managers to buy Cap Gemini, which was the only company I could find that I could shoehorn into all Bill Gates’ themes....with no success whatsoever. Everyone thought it all too theoretical and fanciful.

Today I feel the same way about Tony Seba’s vision of the future ( Clean disruption ) , and Ray Kurzweils’ , Jeff Bezos’ and possibly even Elon Musk’s as I did about Bill Gates in the early 1990s.

The only thing difference is that the future arrives faster now than it did back then.

I wish you a happy and prosperous 2016......

In 2016 the share of wealth of the richest 1% of the population will exceed that of the remaining 99%. ( Oxfam )

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Xxxxxx Xxxxxx
December 14th 2016.
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Appendix...Of sorts !

Summary of what I think will be the winning and losing European stocks in 2016. With very few exceptions these are in line with the recommendations of BAML analysts

Winners

Vestas Inmarsat
Gamesa Nokia
DS Smith JC Decaux
Vivendi St James Place
Just Eat Azimut
Betfair Legal and General
Philips Cellectis
Asos GW Pharma
Genmab Swedish Match
Yoox Arm
ASML Securitas ( BAML u/p )
Glanbia Danone

And a safe high yield dividend basket........Mine would comprise..
Swiss Re , Munich Re , RELX , L&G , Proseiben , TF1 , ITV , Sanofi , Roche , Unilever , SNAM ,AZN , Nordea and Imperial Tobacco..

Losers

Statoil Repsol
Neste Oil PKN
Tecnicas Reunidas BP
Vallourec Tullow (Baml Neutral )
Sky Swatch
Volkswagon The SXAP
Autoliv Tesco
Sainsburys INTU (BAML neutral )
Heidelberger Cement Stora
Norsk Hydro Anglo American
RIO Billiton ( Baml neutral )
Mondi LVMH
Deutsche Post.

These are my own or other peoples shamelessly plagiarized ideas. Dont rely on them for veracity , wisdom or accuracy...Moreover, they are not necessarily the views of my employer.

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Reply Great read: Themes for 2016 and beyond according to London based equity sales coverage (BoA ML) (Original post)
Lucky Luciano Dec 2015 OP
pscot Jan 2016 #1
A HERETIC I AM Jan 2016 #2
Lucky Luciano Jan 2016 #3
golfguru Jan 2016 #4

Response to Lucky Luciano (Original post)

Fri Jan 1, 2016, 12:14 AM

1. Well, at least climate change won't be a problem

That's a relief.

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Response to Lucky Luciano (Original post)

Sat Jan 2, 2016, 12:31 AM

2. Interesting.

Figures that Amazon is a $675 stock!

Hope you're well, Lucky. Happy New Year.

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Response to A HERETIC I AM (Reply #2)

Sat Jan 2, 2016, 10:28 PM

3. Same to you Mr Apostasy!

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Response to Lucky Luciano (Original post)

Sun Jan 3, 2016, 01:11 AM

4. Loans Loans Loans Everywhere!

 

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