Report
Dave Nicoski ...
  • Ross LaDuke
EUR 46.63 For Business Accounts Only

Vermilion Int'l Compass: Global Equity Strategy

Breakouts Proliferate; Japan, Cyclicals In Focus

Last week we pointed out that the MSCI ACWI and several major country indexes were breaking above key resistance levels and that investors were rotating into economically sensitive Sectors (e.g., Discretionary, Materials, Manufacturing/Industrials). This led us to believe the case for a confirmed breakout was building. Upside follow-through this week across a number of countries tells us the bulls are in control.

· Major Global Indexes. The MSCI ACWI, ACWI ex-US, and EAFE indexes have all broken above key resistance levels which have now become support. As long as these indexes are above the new support levels we believe a bullish outlook is warranted. MSCI EM has not been as fortunate and remains below key resistance thanks to underperformance in China/Hong Kong (more on this below)... see charts below and page 2.

· Country Overviews. The vast majority of countries have joined the breakout party that we began highlighting last week -- a bullish sign for global equities. The list that last week included Japan (a big focus in today's report), Australia, Korea, Russia, and Thailand now includes the UK, Germany, Finland, New Zealand, Norway, Sweden, Belgium, Ireland, Brazil, Poland, Turkey, Greece, and Czech Republic. At this point it is easier to talk about the areas that are not breaking out, namely Hong Kong and Chinese equities. Concerns over China seeking to impose sweeping national security laws on Hong Kong has led to underperformance for both of these markets... see page 3.

· High Yield Spreads. High yield spreads in the US and Europe have narrowed substantially to levels not seen since early March. This is just one more development suggesting the equity bulls are in control... see page 4.

· Sector Comments. Technology continues to be a favorite Sector overweight globally. Health Care in Europe and the US has been one of the main victims of investors rotating into economically sensitive Sectors, and we are no longer labeling the Sector with a broad overweight -- be selective. With that said, Health Care and Consumer Staples remain leadership in the Asia/Pacific region (e.g., Japan, China, Hong Kong, Korea, etc.).

· Actionable Themes: Economically Sensitive Sectors & Additional Opportunities. With the continued shift into cyclical Sectors we are picking up where we left off last week in focusing on economically sensitive areas (Consumer Discretionary, Financials, Manufacturing, Transportation, and Materials). Additionally, there are several other new opportunities that are too good to ignore within Technology, Communications, Energy, Consumer Staples, and Health Care.
Underlyings
FAST RETAILING CO. LTD.

Fast Retailing is engaged in the control and management of overall group activities as a holding company. Co., through its subsidiaries, is mainly involved in the operation of chain stores, selling casual clothing and accessories at reasonable prices, called "UNIQLO" throughout Japan as well as in overseas. Co., through its subsidiaries, is also engaged in the planning, manufacture and sale of clothing under the brand names of "GU," "Theory," "COMPTOIR DES COTONNIERS," "PRINCESSE tam.tam" and "J Brand." In addition, Co. is engaged in the leasing of real estate.

JB Hi-Fi Limited

JB Hi Fi is engaged in the retailing of home consumer products. Co. provides a range of brands with particular focus on consumer electronics, software including music, games and movies, whitegoods and appliances.

KOMERI CO. LTD.

Komeri is mainly engaged in the operation of Do It Yourself ("DIY") stores. Co. operates specialty stores under the names of "Power" and "Home Center" carrying household goods, office and leisure goods; and "Hard & Green" carrying hardware, general materials, building materials, and gardening and agricultural goods. As of Mar 31 2017, Co. maintains total 1,182 stores. In addition, Co., through its subsidiaries, is engaged in the provision of delivery, information processing and credit card services; the sale of gasoline, liquefied petroleum ("LP") gas, kerosene, and related equipment; the operation of video rental and book stores; as well as the real estate leasing business in China.

Mcdonalds Holdings Company Japan Ltd.

McDonald's Holdings (Japan) is engaged in the planning and execution of consolidated group management strategies as a holding company. Co., through its subsidiary and associated companies, is engaged in the operation of hamburger restaurants under the name of "McDonald's." Co. is also involved in the franchise business and the provision of management know-how and sub-licenses to franchisees. In addition, Co., through its subsidiary provides support services to its restaurants and customers. The menu offered includes Big Mac, double cheese burger, chicken fillet, teriyaki McBurger, fillet-o-fish, cheese burger, french fries, hot apple pie, McShake, drinks and desserts.

Nitori Holdings Co. Ltd.

Nitori Holdings is a holding company engaged in the retail sale of household furniture and home furnishings. Co. operates its chain stores under the name of "Nitori" "Nitori Express" and "Deco Home Nitori" offering household furniture, floor coverings, curtains, bedding, kitchenware, housewares, other home furnishings, small household appliances, garden supplies, outdoor goods, exercise equipment and miscellaneous daily goods. Co. also operates shopping malls "Nitori Mall." In addition, Co. provides kitchen and bathroom remodeling services, as well as office and commercial facility design services. As of Feb 20 2017, Co. operates 428 stores throughout Japan and 43 stores in overseas.

Shanghai Zhangjiang Hi-Tech Park Development Co. Ltd. Class A

Shanghai Zhangjiang Hi-Tech Park Development is engaged in the development and management of real estate; the investment and operating of commercialized high-tech projects; the investments in municipal infrastructure facilities; the property investment and management; the supply and installation of equipment; the sale of building materials; the provision of warehousing and consultation services; the sale and lease of property; merchandise trade; and provision of data communication services. Through its subsidiaries, Co. is also engaged in the production of pressure vessels and related parts; and the development of computer hardware and software and production of related electrical products.

Shimano Inc.

SHIMANO is engaged in the manufacture and sale of bicycle components, fishing tackle and rowing equipment. Co.'s operations are organized in three business segments. Bicycle Components segment offers driving parts, braking parts and other related products including shift transmissions, brakes, running gears, road racing wheels, shift levers, cranks, chains, pedals, road bikes, bicycles and shoes for mountain bikes. Fishing segment handles reels, rods, quills, fishing gears and other related accessories. Others segment is involved in the manufacture and sale of cold-forging parts for automobile-related companies and rowing-related products.

Suofeiya Home Collection Co. Ltd Class A

Suofeiya Home Collection Co. Ltd is a China-based Company, principally engaged in the design, manufacture and sales of custom furniture and matching household products, as well as the provision of all-room custom space solutions for customers. The Company's products include closets, cupboards, tatami, bookcases, beds, dressers, television cabinets, desks, wine cabinets, dining cabinets, shoe cabinets, lockers and other whole house custom furniture, as well as mattresses, jewelry, curtains, sofa, tea table, textile supplies and other ancillary household products. The Company distributes its products within domestic market and to overseas markets.

TS Tech Co. Ltd.

TS TECH is mainly engaged in the manufacture and sale of automobile seats and interior components. Co.'s principal products include front seats, middle seats, rear seats and door trim panels for automobiles; seats for motorcycles, off-road vehicles and snowmobiles; and medical chairs. Co.'s main customer is Honda Motor Co., Ltd. Co. operates its operations in Japan, Canada, the U.S., Mexico, Brazil, China, Bangladesh, the Philippines, Indonesia, Thailand, India, the U.K., Hungary and Germany. Co. operates in four business segments: Japan, the Americas, China, and Asia and Europe.

Uematsu Shokai Co. Ltd.

Uematsu Shokai is mainly engaged in the purchase and sale of machines, tools, industrial equipment and fixtures. Machines include metalwork machines, forge rolling machines, automatic programming and others. Tools include cutting tools, measuring tools and equipment, tooling construction equipment and others. Industrial equipment includes motors, hydraulic and pneumatic equipment, compressors, power saving and rationalization equipment, environmental improvement equipment and others. Power transmission equipment includes axle bearings, transmission equipment and others. Other products include steel products, office automation equipment, food-related equipment and others.

United States Steel Corporation

United States Steel is a steel producer of flat-rolled and tubular products with production operations in the United States and Europe. The company is also engaged in railroad services and real estate operations. The company's segments are: North American Flat-Rolled, which produces slabs, strip mill plates, sheets and tin mill products; U. S. Steel Europe, which produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials; and Tubular Products, which produces and sells electric resistance welded steel casing and tubing (known as oil country tubular goods), and standard and line pipe and mechanical tubing.

USS Co. Ltd.

USS is mainly engaged in the management of used vehicle auction. Along with its subsidiaries and associated companies, Co. operates in three business segments: automobile auction, used car purchasing and selling, and others. Co. is engaged in the sale of used vehicles by running used vehicle auctions, the purchase and sale of accident cars and used cars, the operation of used car purchasing chain stores under the name "Rabbit" throughout Japan, and the recycling business for end-of-life vehicles and scrap rubber.

Wing Chi Holdings

Wing Chi Holdings Ltd. Wing Chi Holdings Limited is a subcontractor engaged in foundation and site formation work. The Company's foundation works include ELS works and pile caps construction works. The Company's site formation works are mainly carried out to set up a suitable construction work site for subsequent foundation and superstructure works to be carried out on the site. The Company's customers include main contractors and subcontractors in both public and private construction projects in Hong Kong. The Company also provides machinery and equipment rental services.

Workman Co. Ltd.

Workman is mainly engaged in the operation of specialty chain stores called "Workman" and the sale of clothing, work uniforms and work-related products. Co. mainly operates its business through franchised stores. Co. maintains total of 797 stores throughout Japan as of Mar 31 2017. Co.'s principal lines of products are inner ware, socks, hats, towel, apron, polo shirt, T-shirt, high neck shirt, work jumper, work pants, boiler suit, protective shoes, boot, safety shoes, thick cotton gloves, leather gloves, rain gear, and helmet, white coat for medical field and food industry, office uniform, and nursing clothes.

Provider
Vermilion Research
Vermilion Research

Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.

Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.

Analysts
Dave Nicoski

Ross LaDuke

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