Market Matters Morning Report Tuesday 28th June 2016

Morning Report 28/06/2016

Market Matters Morning Report Tuesday 28th June 2016

The 5 ugly sisters!

England is out in the cold like never before with Scotland and Ireland wanting to leave Britain and this morning Iceland have knocked England out of the European Cup. Arguably the largest surprise in the football competition's history. Iceland, with a country boasting a population of only 323,000, no professional domestic clubs and a manager who is a part-time dentist - the goalkeeper even directed the video for the country’s 2012 Eurovision song contest. England and their 53 million fans were sent packing. We are sure a lot of onlookers are smiling about this result due to the economic damage England has done after their vote to leave the EU.

Yesterday the ASX200 managed to gain 24 points BUT stocks with exposure to Britain / Europe were hammered with five notable standouts:

Henderson (HGG) -15.9%, BT Investment Management (BTT) - 15.9%, CYBG Plc (CYB) -9.4%, QBE Insurance (QBE) -6.8% and Macquarie Bank (MQG) -5.9%. We commenced yesterday looking to sell our HGG around $4.50 but it plunged over 10% on the open and we actually averaged our position into the panic and will review that decision today. We believe these stocks will have strong bounces in weeks to come but have we caught the falling knife a little early?

Today we are going to look at these 5 stocks in the cross hairs of sellers, especially as we own two of them in our portfolio.

Henderson Group (HGG) $3.75

HGG has fallen 32% since the high of last month due to +60% of its revenue being generated in the UK. HGG will be materially impacted by the BREXIT vote with a lower index level in the UK, net outflows, reduced performance fees and of course, a fairly static cost base. The Financial Services Group will survive but it will obviously be a tough 12-18 months for the company. The question is at what level is all the angst priced into the stock?

Looking at forecast earnings post major BREXIT downgrades, we see forecasted EPS of around 14.5cps in FY 16 dropping to 12.5cps in FY 17. Back in 2015 when the stock was trading at $6.40 HGG were earning 17.2cps. Stocks tend to get priced on FY17 numbers now, and it looks like EPS will be around 30% lower than it was then, HOWEVER, the stock closed at $3.75 yesterday and will likely be down today from the $6.40 at that time – a drop of 41%.

We have a 7.5% exposure to HGG and will consider taking the position up to 10% under $3.50, with current volatility this may easily occur in June / July. HGG reports 1H16 results on 28th July

Henderson Group (HGG) Monthly Chart

Macquarie Group (MQG) $67

MQG has an over 20% earnings exposure to Europe / Britain and European banks are being hit hard. The most telling theme here is the Credit Default Swap market, which tracks the cost of insuring one's debt against future default. The chart here looks at 30 European Banks and measures this costs. Clearly, there is rising concerns being pricing into this market, at a similar level as we saw in February this year – but that’s it. Nothing more at this stage and nothing of the magnitude we saw during the GFC.

Macquarie is clearly getting caught up in the exitus – somewhat unfairly, and the stock has dropped, however, we like the companies overall direction moving from a highly transaction based business to a larger proportion of annuity style income. It seems to us, that lower rates for longer will be more supportive of MQG earnings going forward. We remain a buyer of panic selling but would want a test of $62 prior to adding to our 7.5% holding. Technically MQG is in a trading range between $55 and $87.

Macquarie Group (MQG) Monthly Chart

BT Investment Management (BTT) $7.82

Another fund manager with over 60% exposure to Britain and a very similar story to HGG, however, BTT is coming from a higher multiple then HGG – so arguably, has more to fall in the event of a higher ‘risk premium’ being applied to valuations. Technically we could not consider buying until a test of the $6 area, around 20% lower. Importantly, BTT is coming from a higher

BT Investment Management (BTT) Monthly Chart

CYBG Plc $4.14

CYB has 100% earnings exposure to a weakening British Pound, however importantly, the Pound is weakening due to the deteriorating economic outlook for the UK. CYB has a big exposure to both interconnected themes. At this stage, it's hard to predict exactly how weak the UK's currency will be and hence the dilution on $A earnings. However if we reduce our earnings by 20%, we still get a valuation closer to $5.

Technically CYB has huge support at $4 and we could buy any weakness today - panic lows are often on the third day of a major decline.

CYBG Plc (CYB) Daily Chart

QBE Insurance (QBE) $10.23

QBE has almost 20% earnings exposure to Britain and Europe plus it’s under pressure as interest rates continue to fall on concerns around the world economy; is it strong enough to avoid a recession after BREXIT? Long term we believe buying QBE around $10 will prove very profitable but an uptick in economic confidence is required before we would consider buying.

QBE Insurance (QBE) Monthly Chart

Summary

BREXIT is going to continue to create volatility for weeks / months to come but it will bring with it great opportunities. At Market Matters, we love buying panic as we demonstrated with the gold, oil and iron ore sectors. Unfortunately, we have some existing exposure to Europe so have to be prudent in any purchases going forward. Our favourite BREXIT panic buys from here is CYB under $4.

**As always, watch for alerts**

Overnight Market Matters Wrap

Global share markets continued to fall, as uncertainty remains post-Brexit vote.
The Dow closed down 261 points (-1.5%) at 17,140, while the broader S&P 500 ended the day down 37 points (-1.8%) to 2,000.
In Europe, the FTSE 100 closed 2.6% lower at 5,982 after Standard & Poors downgraded Britain from the top credit rating, AAA to AA, while Fitch reduced its rating to AA from AA+.
Safe haven assets remain to be the path at present, with gold futures up a further 0.4% to US$1,324.70/oz.
The ASX 200 is expected to open over 75 points lower to the 5,060 area as indicated by the September SPI Futures this morning.

Regards,

The Market Matters Team
Level 12 28-34 O'Connell St
Sydney, NSW 2000.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 28/06/2016. 9:00AM.

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