Developed Equities

What is Japanification?

By |2019-07-17T13:55:49+00:00July 17th, 2019|Asset Allocation, Asset Class Returns, Asset Classes, Cerno Capital Posts, Developed Equities|

An ugly word - even if it is a word - but what is Japanification? The central idea behind the word is that an economy loses altitude in its growth trajectory for an extended period. It is associated with low interest rates, low inflation and high government indebtedness. The extent to which these factors are causal agents, or just the side effects of, is hotly debated by economists. The notion that the economic of the future of the world might resemble that of Japan in the past 25 years took flight following a speech by Larry Summers at the IMF in 2013. Larry Summers is an economist who was Treasury Secretary in the US Government during the tenure of President Clinton. His speech featured the following section: “Yet, in the four years since financial normalization, the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009.  And the American experience of dismal economic performance in the wake of financial crisis is not unique, as Ken Rogoff and Carmen Reinhart’s work has documented.  Japan provides a particularly clear example.   I [...]

ASML – pre-eminent in photolithography

By |2019-05-14T08:47:54+00:00May 14th, 2019|Cerno Capital, Cerno Capital Posts, Developed Equities, General Investment, Global Leaders|

ASML is the dominant supplier of photolithography tools for semiconductor manufacturers. Photolithography is the process of printing with light. In semiconductors it is the process whereby a light source is used to expose circuit patterns onto a wafer via a photomask. Photolithography has played a pivotal role in the evolution of semiconductors. It was Robert Noyce (future co-founder of Intel) at Fairchild Semiconductors in 1960 who saw the potential of the process to enable the printing of electronic circuits on flat, silicon wafers. This vision gave birth to the first integrated circuit and catalysed the race to ever smaller geometries in chip design. As transistor scale approaches the atomic level, the next limiting factor for the continuation of Moore’s Law1 is the wavelength of light. The shorter the wavelength, the smaller the scale in which a circuit can be printed. A radical reengineering of the lithography process is required. For the last 20 years ASML has been working on just such a radical solution. EUV or Extreme Ultraviolet lithography drops the wavelength of light from 193nm to 13.5nm enabling the extension of Moore’s Law through 2025. The payoff for this commitment of capital, and shouldering of risk, is 100% market [...]

The Next Global Downturn: Corporate Debt & the Concept of Fragility

By |2018-07-24T10:14:59+00:00July 16th, 2018|Cerno Capital Posts, Cerno Global Leaders, Developed Equities, General Investment, Global Leaders, Other Posts, Strategy|

Our aim, within the context of the Global Leaders Fund, is to own great companies over multiple market cycles. In this way we operate over a timeframe where competition is scarcer, allowing us the best opportunity to outperform global markets. This overarching objective is underpinned by three concepts: growth, long term relevance (sustainability of returns) and financial soundness. All three are crucial in delineating the leading businesses we want to own. Companies that we can employ in a concentrated, low turnover portfolio and sleep comfortably at night. Growth is perhaps the easier to define: does the company have the tools at its disposal to compound earnings at an attractive rate over time. Relevance and sustainability has sharply diverging meanings depending on who one asks. Our preference is to cast the net as broadly as possible: simply, a company whose current earnings to do not borrow from its future earnings. This concept is wide ranging and influences the fund exclusions. Tobacco for example, where new customers must be found to offset the natural elimination of the existing base by the product itself. Old energy with the extensive disruption from renewables already in full swing. Banks, where inherent leverage hangs like a [...]

Health Care Stocks – Accessing the Demographic Dividend

By |2016-02-26T14:19:50+00:00February 26th, 2016|Bottom Up, Cerno Capital Posts, Developed Equities, General Investment, Other Posts, Sectors & Corporate Performance|

In an endemically low growth world, prone to accelerating forces of disruption, it has become progressively harder to identify stocks to hold for the very long run. There is, though, a group of superficially boring healthcare stocks which are locked into long term palliative, chronic or geriatric pathologies where the demand profile is observably robust and their respective market positions pretty much unassailable. We hold six such companies within the Cerno Global Leaders Strategy, an equity investment program designed to identify and invest in companies for the very long term. The six are made up of three medical equipment suppliers, two chronic conditions specialists and one generalist. The healthcare companies we like have very simple, understandable products and services and are accessing large and growing patient pools. These companies typically operate in oligopolies where the competitive environment is relatively benign, where they are able to maintain stable market shares through high barriers to entry, switching costs and superior intellectual property, thereby sustain high margins for an extended period. We avoid complex and intangible businesses with high valuations and no proven cash generative abilities, for instance many new names in the biotech segment. A basic understanding of the key demographics is [...]

The Problem With America

By |2016-01-18T13:19:24+00:00January 18th, 2016|Asset Classes, Cerno Capital Posts, Developed Equities, General Investment, Other Posts, Regions|

Whilst the headline indices held up in 2015, the drivers behind the US equity market have been weakening for sometime. Index levels have been pendant on flows into a concentrated number large cap technology growth shares and, outside these, supported by extraordinary levels of share buy-back activity. Meanwhile the model-dependent Fed is hawkish as long as employment numbers hold up. Should they do so, higher rates crimp equities but should they weaken, other aspects of the US economy will presumably be weakening in tandem. These are an unattractive set of payoffs and our core thesis now calls for a bear market in US equities. We have been reducing risk within portfolios and have moved to a more defensive position.

Japan – ROE is the Key

By |2015-05-14T09:09:52+00:00May 14th, 2015|Bottom Up, Cerno Capital Posts, Developed Equities, Other Posts, Regions|

Those who have seen our opinions on Japan will know that our arguments on expanding equity returns in the country are predicated on the condition that Japanese corporates implement reforms, aimed at increasing shareholder value. We like to think of long term investment as being evidential, and are therefore seekers of proof for our beliefs. We have already seen a string of positive developments. Most recently, Fanuc, a large cap Japanese robotics manufacturing business, has announced the hiring of an investor relations team. The company was previously known for purposefully avoiding shareholder contact. This is a significant development, with a 1.2% weight in the TOPIX index, Fanuc is leading by example. Other noteworthy changes include the reduction in cross shareholdings between companies, announcement of dividend increases and share buybacks. With the prominent launch of the JPX Nikkei 400 Index, one particular measure of shareholder value creation has been pushed into Japanese CEO’s spotlight – return on equity (‘ROE’). The index gives it a 40% weight in its selection criteria, besides operating profits (40%) and market capitalisation (20%), in arriving at its 400 constituents. ROE can be decomposed into three measures, according to an analysis first introduced by the DuPont Corporation [...]

Demand Shift – Japan Has a New Marginal Buyer

By |2015-04-13T13:17:01+00:00April 13th, 2015|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Developed Equities, Other Posts, Regions|

Last year, the Japanese Government Pension Investment Fund (GPIF) announced its intention to cut allocations to low yielding government bonds and to double its exposure to domestic equities. The logical pretext for this decision is the need to achieve higher returns to cover increasing pension payments to the country’s aging population. After decades of overweighting bonds - which benefitted from Japan’s deflationary environment - policy changes by Prime Minister Abe, set out to boost risk assets and to introduce inflation, gave this move further urgency. The new asset allocation came into effect on 31st October 2014. The table below outlines the extent of this change and alludes to the impact it had so far in monetary terms. Source: BCA Research, GPIF Data from BCA Research shows that the world’s largest pension fund, with total investable assets of Y138 trillion (US$1.14tr), has shifted close to US$90bn into domestic equities in the fourth quarter of 2014; still 5% (US$59bn) below its new target allocation of 25%. A further three Japanese public pension funds, managing assets in the region of US$250bn, are expected to follow suit this year. An estimated 13% increase to their allocation would add a further US$33bn in net new [...]

JPX Nikkei 400 Index – a new way to do Japan

By |2014-10-08T13:30:36+00:00October 8th, 2014|Asian/emerging Equities, Cerno Capital Posts, Developed Equities, Other Posts, Regions|

After decades of subdued growth, Japanese equity markets rallied in 2013 following Abe’s election and announcement of his triumvirate of measures. The three arrows, as his policy approach is called, consist of monetary measures, fiscal measures as well as growth oriented structural measures. The first two of these have been implemented early on and were well received by investors. Japan outperformed other developed markets returning +55% in 2013 compared to +34% for the US and +21% for Europe. However, Japanese equity returns this year have been held back by scepticism over the potential success of Abe’s third arrow. The TOPIX index is flat on the year at the time of writing, compared to +8.6% and +5.5% for the US and Europe indices respectively. Structural measures envisioned as part of the third arrow aim to improve companies’ capital efficiency to promote economic growth. The main provisions of this program are to encourage companies to allocate their cash more efficiently and to promote corporate governance. Japanese companies have been notorious for hoarding their cash over the last few decades, a habit which gained new life following the Global Financial Crisis. In the reflationary environment that the government wishes to create, cash becomes [...]

Lifting the kimono on a misunderstood Japan

By |2014-09-23T11:48:40+00:00September 23rd, 2014|Asian/emerging Equities, Asset Allocation, Cerno Capital Posts, Developed Equities, General Investment, Other Posts|

“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan. After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage. Figure 1. Share buyback Programs Source: Goldman Sachs. As at 8th September 2014. One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in [...]

The morphing Apple

By |2014-09-17T09:35:00+00:00September 17th, 2014|Bottom Up, Cerno Capital Posts, Developed Equities, Other Posts|

As ever, Apple’s product launches are greatly anticipated and 9th September was no exception. At that launch the iPhone 6, iPhone 6 Plus, Apple Watch, and an intriguing new payment platform, Apple Pay were revealed to the world. Thanks to its tightly integrated iOS ecosystem, Apple’s hardware tends to feel less commodity-like compared to its peers and, as a consequence of Apple’s integration in users’ lives, the explicit and implicit costs of switching mount. Its iPhones, iPads, iMacs, and the newest addition to the family, the Apple Watch, complement each other well by synchronising everything from apps to media (music, films and TV shows) to personal data (contacts, calendars, photos, etc.) through its iCloud and iTunes platforms. Apple’s ever growing application universe is a clear money-spinner. Given the typically short product replacement cycle of 2-4 years for personal electronics, building a loyal customer base is thereby essential to the success of the business over the long-term in this maturing and highly competitive market. It is generally thought that this loyalty lies on the sleek design, interface, simplification and sheer “wow” of their products. However, whilst the techies will froth on the screen size and resolution, the more meaningful business development [...]