A week that was: Big Pharma, a coffee deal and global markets.
Matein Khalid Global Investing
The real sizzler last week was Coca-Cola's $5.1 billion takeover bid for Britain's Costa Coffee chain. (AP)
It was entirely predictable for the Dow Jones index to give back 200-plus points for Thursday and Friday after a fabulous August that saw Apple soar 20 per cent and Amazon rose 13 per cent but Facebook and Google did squat. Financial markets are nervous about the meltdown on emerging market currencies, Trump's latest threats of tariffs on $200 billion of Chinese imports and angst over a Nafta deal with Canada. Wall Street has now recalibrated its earlier optimism on trade, the reason Big Pharma and biotechs have begun to outperform. September's seasonals suggest this trend will continue.
The biotech index was up 5 per cent while Alnylam Pharma up 27 per cent. Celgene is now a momentum buy as it normally rallies into the election. Lilly, Merck and Pfizer are all Big Pharma megacaps and all rose 5 per cent Roche and Glaxo are victims of Trump's Europe bashing but I would avoid Gilead on drug pricing politics.
The real sizzler last week was Coca-Cola's $5.1 billion takeover bid for Britain's Costa Coffee chain, a beloved friend second only to Starbucks (O frappocino mio!). The real growth catalysts for Costa (2,500 cafes in Britain but only 450 in China and none in the US) is in its global business. Coca-Cola paid a rich 16 times earnings price for Costa. Starbucks, after all, has 3,000 outlets in China. Coca-Cola is reinventing its franchise beyond its core Coke soda business (unit declines), as Pepsi did with its Soda Stream deal. Costa Coffee gives Coca-Cola a foothold in the $100 billion global coffee markets whose epicentre is a Swiss colossus. Nestle and whose provinces go from Brazil to Coorg. The stock exchange was unimpressed by Coca-Cola's Costa deal, possibly due to the high price it paid. I disagree. This acquisition gives Coca-Cola a global retail brand in a non-canned soda segment that can well quadruple its current 3,400 outlets. After all, Starbucks boasts 27,000 cafes. On any market hit, I will sell high-delta Coke put options for premium until it reaches target prices.
The US stock market trades at 16 times forward earnings. Financials are up a mere 1 per cent in 2018 but the big US money centre banks have passed the Fed stress tests for six successive years begun to boost Basel Tier One capital ratios and boost return on equity and raise share buybacks/dividend yields. Loan growth in the US has been robust and the US consumer's balance sheet has never looked so good. This is the reason I adore the US centric, Bank of America, the big bank most leveraged to higher US interest rates that has paid $70 billion in litigation fines.
It is ironic that emerging markets tanked last week despite a lower US dollar, lower US Treasury bond yields and continuous optimism on trade. Yet Argentina's request to the IMF to speed up funding led to a speculative attack on the peso that fell 7 per cent in a single session, despite 60 per cent repo rates by the Buenos Aires central bank. Turkish President Erdogan and his son-in-law Finance Minister Albayrak have lost the confidence of global investors, the reason behind the lira's bungee jump. Unlike Alan Greenspan in 1998 or Ben Bernanke in 2008, I doubt if Fed chairman Jay Powell, appointed to office by an America-first president, will slash US interest rates to bailout the developing world at a time when emerging markets owe $11 trillion in dollar-denominated debt. This means the risk of cross-border contagion and a potential catastrophic endgame for the global economy.
So I track Brent crude oil like a hawk. In 2008, Brent fell from $148 in July to below $40 in December. I watch sovereign credit default swaps of vulnerable Third World states - the Kangladesh Brigade. The moment they spike in unison, I know it is time to short risk assets even in Wall Street. I watch Dr Copper, the Japanese yen, gold, Libor and the Volatility Index. It is no longer about just risk but also ruin.
Deutsche Bank now trades at miserable 0.3 times book value. Something ugly is brewing out there. What is it? Dr Copper and other industrial metals have plunged 20 per cent since April. The Russian rouble and South African rand are both down 9 per cent in August. Global mining shares have been in free-fall. The Euro Bank Stoxx index was down 9 per cent in August even while S&P 500 index soared to all-time highs.
The writer is a global equities strategist and fund manager. He can be contacted at firstname.lastname@example.org.
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|Publication:||Khaleej Times (Dubai, United Arab Emirates)|
|Date:||Sep 2, 2018|
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