October 21, 2018

The Industrials Sector

Posted in Keith Knutsson at 10:50 pm by Keith Knutsson

Concern about global trade tensions has hurt industrial stocks. But that risk may now be priced in and valuations might start to look attractive again. The industrials sector is made of large multinational manufacturers, defense companies, equipment makers and aerospace firms. Investors have seen this industry has been buffeted by trade conflicts this year, but the risks aren’t going away. However, it is important to note that portfolio managers have a better handle on the situation and believe trade risks have already been factored in stock valuations. Not only that, but they also have characteristics that could enable them to grow in the coming years.

The industrials market has been lagging in the stock market for the past ten years. We saw the sector suffer as oil prices fell in 2015, China allowed the yuan to devalue against other major currencies and industrial activity slowed before turning around in late 2016. It is critical to picture the growing industrial cycle, which could last until 2020. Recently, we have seen industrials outperform the defensive sector even as they remain among the worst cyclical sectors. Industrials are now trading somewhere along the lines of a 15.4 price-to-earnings ratio based on the 2019 estimates. This ratio is below the S&P 500 price-to-earnings of 15.9 as well as below a price-to-earnings of 19.5 and 17.4 for consumer discretionary and technology respectively. The sector’s price-to-earnings has contracted about 20% from 2017’s peak levels. Among cyclical sectors, industrials currently trade at the largest discount to their 2017 peak, excluding energy. They also have the lowest price-to-earnings excluding financials.

The underperformance and attractive valuation of industrials recently is in part due to investor concerns over current trade disputes. New tariffs have already started to raise material costs and trade disputes have already started to disrupt supply chains globally. Investors should keep in mind that the management team has already provided guidance on how trade policy will impact them and how they might respond to the additional tariffs through options like price increases or supply-chain shifts. Industrial companies seem well prepared and have given their significant contracted price-to-earnings multiples and may see the strongest rebound when macro-trade fears eventually dissipate.

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October 14, 2018

Emerging Economies: Progress Until Now

Posted in Uncategorized tagged at 8:16 am by Keith Knutsson

Emerging economies made up two-thirds of the world’s GDP growth over 50% of new consumption in an analysis that includes the past 15 years, yet Economic growth among those economies vary widely. Seven economies managed real average  annual GDP growth of 3.5 percent for over 50 years. Those seven economies are China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan, and Vietnam managed to have real average annual GDP growth of over 5 percent for over 20 years.

The impacts of such growth is documented well through the diminishing of extreme poverty, a number that has now decreased by more than one billion. From the period of 1990 to 2013, the number of people living in extreme poverty in emerging economies decreased from 1.84 billion to 766 million; this means that less than 11 percent of the world’s population is experiencing extreme poverty, a number that used to be 35 percent in 1990. Additionally, the countries see a new emergence of middle and affluent socioeconomic classes. This emergence have joined the worldwide “consuming class”, which is classified as people with high enough incomes to become significant consumers of goods and services. In India this class has increased tenfold in only two decades, from 3.4 million in 1995 to more than 35 million in 2016.

Keith Knutsson of Integrale Advisors commented, “Even though financial news have been hammered with the recent struggles in the emerging market space, it is important to take a neutral, long-term look as an investor. There has been tremendous growth in many of the emerging market economies.”

September 30, 2018

Investing in the New Leisure & Entertainment Sector

Posted in Uncategorized at 1:38 am by Keith Knutsson

Technology is changing the nature of entertainment and leisure activities, creating new opportunities for investors. The leisure and entertainment sector represents a large chunk of the economy and has continued to grow. The Dow Jones Travel and Leisure Index has grown at twice the pace of the S&P 500 index in the past two decades. Total leisure spending is at more than $1 trillion globally if you keep in mind film, gaming, restaurants, fitness and social media. This space is set to grow even further for these reasons below:

  • Automation is allowing people to work less and spend more time to “play more”. Americans may feel busier than ever, but the time spent working has actually declined in aggregate. Automation, which makes work more efficient is the big reason why people have more spare time than they did in the 1970’s.
  • There is new technology leading to innovation in the leisure and entertainment space that fascinates consumers. Segments like virtual reality and e-sports have become increasingly popular as with gaming, streaming videos and social networking. These segments have further supported the fast-growing sector.
  • Multitasking has been increasing over the past years and has also expanded the number of hours per day spent on leisure activities and entertainment. People have evolved into a new trend of doing two kinds of leisure activities at once. For example – watching TV and posting on social media about their day-to-day life or exercising while steaming music. One study from Harvard shows how only 5% of active TV viewers watch television without performing any other activities. Existing statistical models on leisure have ignored multitasking which supports the claim that the leisure and entertainment space might be undervalued.

Multitasking, innovative changes and automation are three primary drivers for our interest in the sector. A downside of this growth in leisure activities is that competition for our leisure time and dollar is increasing. However, the fastest growing industries might not have much pricing power. Fully immersive experiences like virtual reality could have more pricing power than activities that require less attention, like posting on social media. Speculators argue that activities that can be multitasked may grow much faster. Some activities like social media are hybrids can be active or passive depending on person-to-person and the context. Investors should look into investing across active and passive leisure, also known as “multiline leisure companies”.

August 31, 2018

Predictive Analysis: An Overview

Posted in Keith Knutsson tagged at 1:19 am by Keith Knutsson

The value of predictive analytics increasingly takes hold in international organization. Delays are not just costly but also frequent; an analysis of more than 1,800 software projects revealed a 30% on-time completion time. On average, a project was behind around 25%of the original deadline. And while time in itself carries strategic value, the deployment of extra resources needed to deal with overrun costs can be direct. Research on average budget overrun experienced by factory-automation-software projects studied exceeded 10%. One in five projects had overruns exceeding 50%. Then there are the indirect costs.

One of the main reasons for overruns appears to be a misunderstanding by managers and engineers by the complexity of a project. Teams remain unaware of the large impact of features and performance targets and the costs of implementing features into the final product. Psychologically, project progress is thought of as linear, a concept not applicable to reality. Additional to that, the overestimation of productivity of the development team causes additional delays. Project planners appear quick to ignore previous problems and ignore the potential for new issues.

To combat the issue of overruns, analytical models provide a powerful new way to deal with such constraints. Through the use of predictive analytics software, a company is able to model multiple projects running concurrently, and test for factors such as staff demand and possible resource bottlenecks. Planners can use the data to make adequate adjustments, whether it be through contracting, hiring or outsourcing.

Keith Knutsson of Integrale Advisors commented, “we increasingly see predictive analytics enhance human decision-making. The technology in itself carries much room for improvement, but even at it’s current state we are looking at very promising results.” 

July 25, 2018

China and Cloud Infrastructure

Posted in Keith Knutsson tagged at 3:11 am by Keith Knutsson

China, a country associated with taking technological leaps, is lagging in the cloud infrastructure.  While some analysts might view recent reports of China’s recent cloud growth as impressive, the issue is more complex than that. It’s true that China spent around 14 percent of its total IT budget to cloud services in 2017, double the amount spent four years earlier. China nonetheless falls behind its global peers in overall cloud expenditures. The United States accounted roughly. 29% of the total IT budget in 2017 into cloud infrastructure,  more than twice the investment in 2013.

In China, a large portion of companies continue to rely on local computing and their own infrastructure. The problem is the hesitation of investment in IT initiatives, which includes automation or advanced analytics.1 Some investors see this as a major factor behind the low digitization rates in China.

Change might appear soon, Corporations and the government has taken note of the cloud’s importance and have committed to increase growth in infrastructure through an action plan issued by the Chinese Ministry of Industry and Information Technology. The goal is to increase the national industry 2.5 fold from 2015 levels by 2019.2 Chinese companies currently show a preference for the private cloud, and a few analysts estimate more than a 20 percent CAGR for the next three years in that part of cloud infrastructure. 

Keith Knutsson of Integrale Advisors commented, “Change is afoot in the cloud infrastructure market; industry leaders need to be careful not to be leapfrogged and continue developing strong initiatives to grow in emerging markets.”

July 9, 2018

Setbacks for Chip Makers

Posted in Keith Knutsson tagged at 2:35 am by Keith Knutsson

The Chinese court has banned a portion of Micron Technology Inc. sales further adding burden to some of the largest chip makers in the world. Micron has been caught up in dueling intellectual property lawsuits with United Microelectronics Corporation and received a preliminary injunction from the court stopping sales of over twenty products. Some of the products include dynamic random-access memory and Nand flash memory chips.

It has become increasingly fraught to do business in China for various chip making giants regardless of the fact that China is the world’s biggest market for semiconductors. South Korean rivals and Micron have been probed by antitrust authorities while regulators have been silent on their investigation of Qualcomm Inc.’s bid for NXP Semiconductors.

Keith Knutsson of Integrale Advisors said “The growing trade war between China and US will mean a very turbulent market. Companies like Micron are right in the middle of this war.“

Shares of Micron dropped as much as eight percent thus leading a slump in technology stocks. The Micron ban escalates a trade dispute that’s engulfing industries from steel to autos and increasingly also electronics sector. Not only that, but President Donald Trump has railed against Chinese companies for allegedly stealing U.S. companies’ intellectual property. Last year Micron sued UMC claiming they stole memory and the lawsuits have been back and forth since then.

China is the largest market for semiconductors, yet it lacks one of the top producers of the crucial components. The memory chip market has been increasingly concentrated in the hands of Micron and its Korean rivals like Samsung Electronics Co. On another note, the world’s largest mobile phone service provider, China Mobile Ltd. is banned from entering the U.S. market due to national security grounds. As the governments continue fighting, companies face potential disruption of a complex supply chain that produces most of the world’s smartphones, computers and their components.

July 7, 2018

A Blockchain Evaluation Past Frenzy and Currencies:

Posted in Keith Knutsson tagged at 2:45 am by Keith Knutsson

As the cryptocurrency frenzy has settled down, as discussed back in January, investors should reevaluate the strategic objectives of blockchain, separately from those of the currencies that received much attention. Blockchain does carry benefits from reductions in transaction complexity and cost, as well as helps improve the transparency and therefore fraud control for. Yet, instead of utilizing new technologies, the economic incentives are more aligned to capture value for incumbents by harnessing blockchain rather than be overtaken by it. Therefore, recent research puts the highest likelihood on blockchain as a permissioned, not public, commercial model. Under public blockchains belong the currencies like Bitcoin, which structurally have no central authority and are generally viewed in regards to their disruptive disintermediation. Permissioned blockchains on the other hand are privately hosted and allow controlled access and editing rights.

The use of private blockchain allows existing businesses of any size to extract commercial value. Dominant firms are able to maintain their positions as central authorities with or without other industry players. Firms that undertake that route are able to efficiently share data without limiting manually automating what is shared, with whom, and when. Currently value can be created by uses such as that of the ASE (Australian Securities Exchange) where blockchain is used for equities clearing to reduce back-office reconciliation work for its member brokers. IBM and Maersk Line are currently working on marketing  a blockchain trade platform for logistical purposes, where secure, real-time exchange of supply-chain data and paperwork is possible.

Keith Knutsson of Integrale Advisors commented, “There is undoubtedly value in blockchain technology, and as the craziness around currencies decays, companies will be able to see gradual ways to involve blockchain and evolve their operations.”

 

June 26, 2018

New Trends: The transitions of executives and the failures.

Posted in Keith Knutsson tagged at 1:03 am by Keith Knutsson

Recent Studies on leaders who demonstrated success and showed intelligence, initiative, and results in their previous roles reveals that within two years of executive transitions, between one-in-four to one-half of them are classified as failures. Cited as the main challenges are organizational politics. Many transitioning executives lament having not changed the culture at a quicker pace to combat these effects, and internal vs external transitions have little effect on any listed sentiments. Yet, other surveys suggest even with a deliberate goal, these matters are difficult to handle. 79 percent of external and 69 percent of internal hires report that attempts to change the company culture change is taxing.

Despite these challenges, in today’s corporate world leadership transitions are more frequent, yet new leaders feel limited on the help they receive. With the pace and magnitude of change, investors might be unsurprised by the constantly rising number of transitions in the corporate world. Research suggests that CEO turnover rates have increased to 16.6 percent in 2015, when it was only at  11.6 percent in 2010. Additionally, within the first two years roughly 70 percent of new CEOs restructure the management teams of the company they take charge of. These transitions can often be seen cascading through senior ranks. And roughly the same amount of leaders report that their organizations now experience an increasing amount of transitions than they did in the year prior.

Keith Knutsson of Integrale Advisors commented, “Executive transitions should be comparable to surgery; if not taken care of carefully and in a precise manner, it can cause complications many years into the future.” 

June 21, 2018

Energy Storage in the new economy.

Posted in Keith Knutsson tagged at 1:34 am by Keith Knutsson

Investors should keep an eye on Energy-storage companies. Despite declines in storage-system costs, the future could look different than previously expected by analysts. Yet, it is not all negative and some might view the outlook as encouraging. Currently there are some commercial uses for energy storage with economic benefits. In the future utilities, industrial customers, and households might benefit from energy storage. This is due to lower system costs, and also the decreasing incentives of government on solar power. These factors can lead to increasing financial sensibility to store power over exporting it to the grid.

The economics aren’t new to investors savvy with renewable energy; as costs of an average system decrease, room storage developers will have less room to undercut competitors. This has resulted in the past in squeezing every penny of savings to processes like customer acquisition, engineering, permitting, system integration, and installation. This process occurred already in the solar photovoltaic (PV) business between 2005 and 2015. The result was a 75 percent lower cost of PV modules and forced solar developers to pivot on operational efficiency. Unfortunately for most, this triggered a major restructuring among module manufacturers (including multiple bankruptcies) and eliminated a large portion of profit margins.

Therefore, as investors look forward they should expect only a small set of energy-storage companies to be successful. Their profitability is derived from taking share away from less cost-effective rivals.

Keith Knutsson of Integrale Advisors commented, “As investors look into the past, trends of the future are not always as surprising as they seem. Looking at previous business cycles of developing technologies can help against costly mistakes.”

June 16, 2018

Global Market Effect on US-Korea Summit

Posted in Keith Knutsson tagged at 1:29 am by Keith Knutsson

The markets and economies have been expecting a significant impact from the highly anticipated meeting of the President of the United States, Donald Trump and the leader of North Korea Kim Jong-un.  These are potential results in the global economy and markets from the summit:

North Korea: If both countries continue to successfully take steps towards denuclearization, North Korea could open up for new business ideas and investment opportunities.

Currencies: The currencies pegged by the U.S. dollar could be impacted. For example, the UAE Dirham, Saudi and Qatari Riyal are just a few currencies pegged that would benefit from a strengthening U.S. dollar. High yielding currencies such as the South African Rand, Russian Ruble and the Mexican Peso rely on investor appetite towards taking on more risk. Investors should be wary, but also consider currencies like the African Rand to lead global markets. On the other hand, the Japanese Yen relies heavily on its safe-haven status for buying momentum. The summit played into the favor of a rise in the Yen as the meeting showed positive results.

Overall Stock Market: With uncertainty and trading speculation building up, the trading volume in global markets should see a major uptick. Nations closest to North Korea could benefit from emerging market engagements. Some markets include the Korean Won, Chinese Yuan and the Malaysian Ringgit.

Commodities: Buying sentiment for gold is highly reliant on market uncertainty and lower attraction towards safe haven assets would be seen as negative momentum for Gold.

Even though the summit has turned out to be successful, there can still be problems that emerge later on. If this occurs, there will be extreme market uncertainty which could negatively impact global stocks and in turn effect the emerging market currencies. Risk aversion will be important in times like this as investors are recommended to steer close of high-yielding currencies like the South African Rand. Overall the summit between the United States and Korea ended on a good note and the markets priced the result appropriately.

 

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