Old Club New Ideas
Friday 21st August 2015
Presented by Jim Mellon
Edinburgh Red Bus
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• Macro Outlook
• Medium to Long Term Themes
• Portfolio Ideas
• Summary
Today’s Talk
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Macro Outlook
• World – deflationary but uncertain
• US – still greatest innovator but priced to perfection
• Japan – still best upside
• Eurozone – mixed bag
Macro Outlook
• Australia – rentier economy & commodity dependent
• Emerging Markets – in for hard landing but…
• China – tricky period of transition
half
U.S.A.
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2.30%
2.80%
1.40%
2.60%
0.70%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Pro
du
ctiv
ity
Gro
wth
Rat
e
Nonfarm Labour Productivity Growth Rates
Source: Irrational Exuberance, Bureau of Labour Statistics
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.0 x
5.0 x
10.0 x
15.0 x
20.0 x
25.0 x
30.0 x
35.0 x
40.0 x
45.0 x
50.0 x
Lon
g Term In
terest Rate
CA
PE
Rat
io
Irrational Exuberance
CAPE Ratio (LHS) Long Term Interest Rates (RHS)
Japan
• Abenomics -> rising inflation
• Weakening yen will stimulate exports
• Nuclear restart will provide further stimulus
• Local investors allocating out of bonds into equities due to zero interest rates
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Europe
• Euro has weakened sufficiently
• Banking system still not fixed - capital adequacy ratios assume sovereign bonds sacrosanct
• Greek problem deferred others will follow
• UK – equities fairly valued
• Switzerland – CHF massively overvalued
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U.K.
• UK running twin deficits = vulnerable
• A consumer driven economy
• GBP remains overvalued
• Smaller domestic companies favoured
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0%
50%
100%
150%
200%
250%
300%
2000 2007 2014
Deb
t to
GD
P R
atio
Epic Credit Boom
Government Financial Institutions
Non-financial Corporates Households
China
12 Source: McKinsey Global Institute, Bloomberg
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
Ind
ex
Leve
l
Shanghai Composite Index
40%
50%
60%
70%
80%
90%
100%
110%
Iron Ore WTI Crude Copper
Commodity Slump
13 Source: Bloomberg
Emerging Markets • China - stock market speculative & confidence shaken -
more Yuan devaluation to come.
• Many exposed to excessive USD debt
• Reforms still needed
• Emerging Iran and Vietnam are top picks
• India - Good market but expensive
• Africa – overhyped 14
Switzerland
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Dangerous Game of Pass the Parcel
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Bonds and Negative Yields • ECB QE program buy > €1
trillion in bonds
• 23% of EU bonds have negative yields - literally a RETURN FREE RISK
• World first - Switzerland ISSUED USD 242m in 10 YEAR bonds with a negative yield
17 Source: Bloomberg
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Yie
ld t
o M
atu
rity
Sovereign Bond Yields
18
19
20
Technological Advance is Accelerating
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20 years later and all of these gadgets now fit in your pocket
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1956 - IBM 5 megabyte hard drive weighing nearly one tonne
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Five Great Changes
IoT
Social Communication • The sharing
economy and peer to peer
• Unlocking previously idle assets
• Uber, Lyft, Airbnb, Just Park
• Facebook, Twitter, LinkedIn, SnapChat, Whatsapp, Tinder
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Transport Revolution
• One billion vehicles on the road today – majority with just a single passenger
• Driverless cars will: – Use roads efficiently - Reduce congestion – Increase car sharing - Reduce energy requirements – Improve safety - Disrupt insurance industry – Free up time – NO PARKING!
• 2.5m driving jobs in the U.S. alone
• Drones – Amazon & DHL starting trials
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Communications
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Energy Efficiency
• Energy conversion of fossil fuels is ~13%
• Significant production efficiency gain possible
• Solar power cost is at grid parity in southern US and southern Europe and many parts of Asia
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• Not talking about fridges talking to supermarkets
• Logistics and industrial applications
• Virtual reality
• Artificial Intelligence
• Robots coming ‘out of the cage’
Internet of Things
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Current Robot Capabilities
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32
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But the biggest
change of all!
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Life Sciences • Area of greatest change
• Disease categories being knocked down one by one
• NASH & Hepatitis B next to be cured
• Cancer to become a chronic condition – IO key
• Robotic surgery, stem cell therapy and printing of organs
• Gene editing
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37
UN Regional Population Projections
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Africa
Asia
Europe
Latin America and the Caribbean
Northern America
Oceania 0.0
1.0
2.0
3.0
4.0
5.0
6.0
2015 2025 2035 2045 2055 2065 2075 2085 2095
Po
pu
lati
on
(b
illi
on
s
Africa Asia Europe Latin America and the Caribbean Northern America Oceania
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Unicorns 1. Xiaomi
2. Uber
3. Palantir
4. Airbnb
5. Flipkart
6. Dropbox
7. Snapchat
8. SpaceX
9. Theranos
10. Meituan
11. Square
12. Pinterest
13. Snapdeal
14. WeWork
15. Cloudera
16. Spotify
17. Kuaidi Dache
18. Pure Storage
19. Stripe
20. Atlassian
21. Fanatics
22. Bloom Energy
23. Jawbone
24. Legendary Entertainment
25. Moderna Therapeutics
26. Vancl
27. Powa
28. Box
29. Houzz
30. Coupang
31. Dianping
32. InMobi
33. Instacart
34. Magic Leap
35. Nutanix
36. SurveyMonkey
37. Trendy Group
38. DocuSign
39. Intarcia Therapeutics
40. MongoDB
41. Adyen
42. IronSource
43. Living Social
44. Deem
45. Koudai Shopping
46. Sunrun
47. Jasper Technologies
48. Actifio
49. AppNexus
50. Automatic
51. Evernote
52. Good Technology
53. Lazada
54. Proteus Digital Health
55. Sogou
56. App Dynamics
57. Eventbrite
58. JustFab
59. Lashou Group
60. MediaMath
61. Slack
62. Pivotal Software
63. Shazam
64. Olacabs
65. CloudFlare
66. Credit Karma
67. Delivery Hero
68. GrabTaxi
69. Hootsuite
70. Kabam
71. Lookout
72. Lynda
73. Mogujie
74. Plurasight
75. Qualtrics
76. Razer
77. Sapphire Energy
78. Shopify
79. Shopify
80. Tango
81. Tinder
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Stratasys Share Price
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$0
$20
$40
$60
$80
$100
$120
$140
Shar
e P
rice
Conviction Ideas • Long:
– FANUC Corp – Hewlett-Packard Co – Hellenic Petroleum Ag – Kuka AG
• Short: – CHF against EUR and USD – Apple Inc. – Raven Russia – S&P 500 – Developed market NEGATIVE yielding bonds
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Long Recommendations
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Instrument Dividend
Yield USD Market
Cap (m) P/E Ratio EV to
EBITDA
Hitachi Ltd 1.8%
29,542 11.4x 7.2x
First Quantum Minerals Ltd 1.0%
4,447 81.2x 20.9x
KUKA AG 0.7%
2,977 29.9x 11.3x
Sunny Optical Technology Group 1.8%
1,992 22.0x 14.0x
HSBC Holdings PLC 5.9%
168,827 12.9x N/A
Hiscox Ltd 2.6%
4,148 12.5x N/A
Portage Biotech Inc 0.0%
37 N/A N/A
Source: Bloomberg
Long Recommendations
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Instrument Dividend
Yield USD Market
Cap (m) P/E Ratio EV to
EBITDA
Ladbrokes PLC 3.1%
1,670 25.1x 24.1x
Canon Inc 3.8%
43,500 19.5x 6.4x
Summit Therapeutics PLC 0.0%
155 N/A N/A
Condor Gold PLC 0.0%
39 N/A N/A
Nikkei Index 1.6% N/A 21.5x 10.8x
Silver/US DOLLAR N/A N/A N/A N/A
Magna Biopharma Income Fund N/A N/A N/A N/A
Source: Bloomberg
Short Recommendations
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Summary • Unconventional monetary policy has created
dangerous imbalances and misallocations
• The world today looks primitive
• Disruption will happen quickly but should not be feared
• Most significant change AND opportunity in life sciences
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Technological transformation will touch everyone
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49 Enquiries to [email protected]