Macro-Industry Strategy: Global Views Update

Continued weakness in global markets, combined with idiosyncratic dynamics continue to weigh on the performance of our Macro-Industry Strategy views this week, but we highlight that most of the views still remain in positive territory and continue to outperform their respective benchmark indices, despite giving back a portion of their gains. We are also currently looking at a potential new view that would take advantage of the US shale boom, and in particular, the Tuscaloosa Marine Shale play.

Two Infrastructure Views Are At Risk Of Further Weakness

We note that our two infrastructure views in Latin America are at risk, with both of them giving back all their gains in the past two weeks. In Colombia, our Bullish Colombian Materials view, which we are playing via Cementos Argos (Cemargos), is flat and we see some risk of a move lower, despite still-strong medium term fundamentals. Indeed, we believe that a contract dispute over cost overruns which has resulted in a winding down of work on the Panama canal expansion project could be weighing on Cemargos' share price in the short term given that it is the main supplier of cement to the project. It is hard for us to assess how the negotiations between the Panama Canal Authority (ACP) and contractors will pan out, however a lack of resolution will prolong a period of uncertainty over payment for sub-contractors and suppliers and thus, investors may shy away from Cemargos temporarily. Although we remain bullish, we continue to highlight our implied stop loss, which comes in around support at COP8,700, implying approximately 3.5% of potential downside from our original entry point.

Cemargos Looking Weak
Colombia - Cementos Argos Equity, COP

Macro-Industry Strategy: Global Views Update

Continued weakness in global markets, combined with idiosyncratic dynamics continue to weigh on the performance of our Macro-Industry Strategy views this week, but we highlight that most of the views still remain in positive territory and continue to outperform their respective benchmark indices, despite giving back a portion of their gains. We are also currently looking at a potential new view that would take advantage of the US shale boom, and in particular, the Tuscaloosa Marine Shale play.

MACRO-INDUSTRY STRATEGY TABLE
Performance as of 22 January 2014
View Date Initiated % Gain/Loss Benchmark %
Bullish US Homebuilders S&P 500 Homebuilders Open 10-Oct-13 18.3 9.1
Bullish Mexican Infrastructure Empresas ICA Open 05-Dec-13 -0.5 -0.6
Bullish Colombian Materials Cementos Argos Open 11-Dec-13 0.0 -4.5
Source: BMI. Data accurate as of January 22 (-) reflects a loss on our view. Benchmarking is against a long position in the country's benchmark equity index
BMI, Bloomberg

Two Infrastructure Views Are At Risk Of Further Weakness

We note that our two infrastructure views in Latin America are at risk, with both of them giving back all their gains in the past two weeks. In Colombia, our Bullish Colombian Materials view, which we are playing via Cementos Argos (Cemargos), is flat and we see some risk of a move lower, despite still-strong medium term fundamentals. Indeed, we believe that a contract dispute over cost overruns which has resulted in a winding down of work on the Panama canal expansion project could be weighing on Cemargos' share price in the short term given that it is the main supplier of cement to the project. It is hard for us to assess how the negotiations between the Panama Canal Authority (ACP) and contractors will pan out, however a lack of resolution will prolong a period of uncertainty over payment for sub-contractors and suppliers and thus, investors may shy away from Cemargos temporarily. Although we remain bullish, we continue to highlight our implied stop loss, which comes in around support at COP8,700, implying approximately 3.5% of potential downside from our original entry point.

Cemargos Looking Weak
Colombia - Cementos Argos Equity, COP

Similarly our Bullish Mexican Infrastructure view, which we are playing through construction services company Empresas ICA (ICA) continues to be weighed down by generally weak sentiment for Mexican stocks. Our view is currently down 0.5% since we placed it in our Macro-Industry strategy table on December 5, and it is marginally outperforming the benchmark IPC Index, which is down by 0.6% over the same period. The technical picture has deteriorated somewhat as ICA broke below multi-week trendline support at MXN26.6, and while we could see additional downside, we maintain our stop loss around MXN23.8, about 8.5% below our entry point. Despite the weakening technical picture, the fundamentals and valuations are still positive in our view. Indeed, we continue to see very strong growth in demand for oil and gas related infrastructure following the ongoing liberalisation of Mexico's oil sector, as well as a positive outlook for the Mexican construction sector in 2014. Moreover, in terms of valuation, ICA remains attractive as the 12-month trailing price-to-earnings (P/E) ratio is 28.6x compared to its 10-year average of 35.0x, while the price-to-book ratio (P/B) is 0.9x, lower than the 10-year average of 1.3x.

Breaking Below Support
Mexico - Empresas ICA Equity, MXN

US Homebuilders Continue To Do Well

On a brighter note, our Bullish US Homebuilders view continues to outperform. Indeed, the S&P 500 Homebuilding Sub Industry Index, which we are using as a proxy for our view is up 18.3% since October 10 and has outperformed the S&P 500, which is up by 9.1% over the same period. As we have been highlighting for several weeks, there is potential for a short-term correction in the Homebuilders Index back to resistance-turned-support around the 550 level. Although we remain optimistic beyond the short term, we highlight that industry growth will start to slow, and if this slowing trend takes investors by surprise, then homebuilders could suffer more. Similarly a sharp rise in bond yields, which is not our core view, would weigh on affordability. Lastly, as we mentioned last week, valuations have become slightly more expensive over the past few months, which could prompt more investor caution. As such, should we see a larger retracement back to the 450 to 500 level, we may consider heading to the sidelines, which would imply gains of around 4.0%.

Homebuilders Playing Out
US - S&P 500 Homebuilders Equity Index

Potential For A Bullish US Shale Play

For some time we have been looking at ways to play the shale boom in the US. In recent months there has been a surge of interest in the Tuscaloosa Marine Shale (TMS) play, as independents ranging from Canadian firm Encana to Houston-based Sanchez Energy and Goodrich Petroleum Corp. re-evaluate its potential as an economically viable producer in light of new drilling methods. We caution that significant risks remain given the nascent stage of this play's development, but there is potential for 2014 to be a breakout year for the TMS. Indeed, aside from improvements in technological developments, which have yielded more promising drilling results, there are significant below-ground resources (conservative estimates put them at 7bn bbl), a much more benign regulatory environment (with favourable severance taxes on oil in Louisiana and Mississippi), still-low lease rates (compared to other states) and good proximity to takeaway infrastructure and refining capacity. Although it is still too early to crown TMS the next Eagle Ford or Bakken, there is significant potential, and we are looking at Goodrich Petroleum Corp as a potential way to play this view. In terms of the fundamentals, the company has not posted a profit since 2007, but this is somewhat normal for independents in the exploration phase. That said, the technicals and the valuations look much more favourable. From a technical perspective, Goodrich broke out of a five-year downtrend in 2013, and looks poised to push higher following a test of support around the US$15.00 level. Moreover, in terms of valuations, the company has a 12-month trailing price-to-book ratio of 2.9x, which is much lower than its 10-year average of 3.9x. Of course, as previously mentioned, there is substantial uncertainty surrounds thing view, given both the feasibility of the TMS as well as company-related specifics.

Reservoir of Potential?
US - Goodrich Petroleum Equity, US$
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