RECM on ArcelorMittal SA

Daniel Malan in the latest RE:CM commentary makes the bull case for ArcelorMittal SA.
The investment case relies primarily on a cyclical argument and that ACLJ.J looks good compared to historical multiples. Most interesting for the Bull case is this paragraph:
   
   Two recent corporate actions in the domestic 
   steel industry put much-needed perspective on 
   the valuations afforded by the market at present: 
   A BEE company called Nemascore is buying 
   Russian parent company Evraz's 85% stake in 
   JSE-listed Evraz Highveld Steel for R3bn, valuing 
   it at R30 per share - a substantial premium to the 
   market price of R13 at the time; A consortium 
   including the IDC and Shanduka bought Scaw 
   Metals from Anglo American in April 2012 
   for R4.6bn. Sell-side analyst Brian Morgan of 
   brokerage firm BNP Paribas Cadiz estimates that 
   on a value per installed ton of capacity basis 
   these transactions value Mittal SA in a range 
   from R60 to R74 per share.

That is all very good. However, it should be noted that both Evraz and Scaw are smaller operations, and are therefore more likely to hit full plant capacity, arguably the most important factor in profitability. ArcelorMittal SA's facilities are just too big for the South African market, and it is extremely unlikely that it will ever consistently operate at full capacity. So replacement cost and book-value valuations are relatively meaningless in this instance. Evraz and Scaw have also been making profits in the most recent quarters, the same difficult trading environment as ArcelorMittal SA has produced losses. At R32 a share, ACLJ.J could go to R50, but in the absence of getting back to the preferential iron ore agreement at Sishen, it's unlikely that it will ever be more than that. 

Ned Davis latest on growth, equities

"Ned Davis of Ned Davis Research told clients in a report Monday, "one can clearly see the disconnect between stocks and the economy by comparing all-time record highs on the Dow Jones Industrial Average and the S&P 500 on April 11, with the barely growing revenues on the S & P 500 over the last year." The popular belief among analysts is that profits will start soaring at double-digit rates later this year as uncertainty about U.S. budget cuts and payroll taxes ease along with improvement in the European economy. Davis said the people expecting strong growth "could be right, but I can't see it yet.""

Useful reminder here. Don't focus too much on EPS, it's a below-the-line number. Top-line much less susceptible to distortions. 

Intu Properties FY2012

Intu Properties, previously Capital Shopping, previously Liberty Properties, reported results last week. Key points:

• Valuation up 0.6 per cent (IPD down 5.8 per cent)
• Full year dividend 15p
• NAV per share 392p; total financial return for the year 4.1 per cent 
• Debt to assets ratio 49.5 per cent, 6.1 years average debt maturity 
• New debt funding platform, a secured group structure (“SGS”) 
• Branding across malls (Intu)
• 96% occupancy
• 169 new long term leases £44m (+7% reversion)
• Digital strategy (free wi-fi and intu.co.uk)
• Lease expiry profile - 58% expiring beyond 2017 (weighted average expiry 7.8 years)

So is it attractive? Currently trading at a yield of 4.5%. No visible signs of earnings growing significantly, so this is the income stream one will get for the next few years. It's trading at a 17% discount to NAV (at prevailing price of 329p today) so it seems like there is scope for slight yield compression to narrow the discount to NAV (to about 10%). Assuming this convergence occurs this year, GBP return will be 11.5%.

Intu used to trade at a discount to BBB GBP 10 Year corporate bond index yield (from 1994 - 2008). 

BBB GBP 10 Year corporate bond index yield is currently at 3.79%. If Intu had to valued as it was in the 1994-2008 period (say 3.6% yield), then it would be trading at 417p (which is 26% above current prices.)

The share performance since 2009 clearly shows how poorly UK retail has performed. It has been effectively flat over the period, with no clear signs of income growth imminent. 

Fed Governor Stein posits a measure for exuberance

As mentioned by PIMCO, Stein thinks that volume of credit issuance is a more reliable indicator of exuberance than credit spreads. 

On the oddness of this bull run

Markets near all-time highs, but consumer confidence at recessionary levels.
While corporate profits are at all time highs.
But as this Bernstein research piece notes, the bulk of this high earnings level is a result of (1) low interest payments due to the Fed keeping rates near zero and (2) low depreciation due to low capital investment.

Investec Value Fund 2012

As stated in a prior post about Value Investing, too rigid an approach can sometimes lead to problems in performance. Lets look at Investec Value Fund's performance in 2012 to understand how and why things go wrong. The fund had a negative 24% alpha versus the JSE All Share Index in 2012 (2.0% vs 26.7%). The top 10 holdings at the end of 2012 were:


1) Steinhoff Int'l Hldgs Ltd [+12%]
2) Gold Fields [-15%]
3) Anglo American Platinum Ltd [-20%]
4) Anglogold Ashanti Ltd [-30%]
5) Sappi Ltd [+24%]
6) Sasol Ltd [0%]
7) Kap Industrial Holdings Ltd [+13%]
8) Absa Group Ltd [+17%]
9) Sun International Ltd [+13%]
10) JD Group Ltd/south Africa [-7%]

Note that the entire fund is not fully invested in the South African stock market. Domestic Equities make up 68.2%,  International Equities 25.4% and Domestic Money Market 6.4%. Part of the funds negative alpha may have materialized from the allocation to International Equities. The S&P 500 returned (1277 >1426 = 11.66%) and MSCI World (1186 >1338.50 = 12.85%). Given that the rand only depreciated by 5% against the dollar in 2012 we can see how having exposure to offshore equities affected performance.

Let's look at the year end portfolio against the top 10 shares in the Top 40:

1) BHP Billiton [+17%]
2) SAB Miller [+50%]
3) Anglo American PLC [-17%]
4) Richemont [+69%]
5) MTN [+38%]
6) Sasol [0%]
7) Naspers [+48%]
8) Standard Bank [+16%]
9) Firstrand [+50%]
10) Old Mutual [+55%]

Comparing the Investec fund to the Top40, we notice a few things:
1) Preference for foreign, rand weakness. SA Value investors perennial 'short' bias to SA - get hurt in periods of SA outperformance
2) Preference for rule-based cheapness (low PEs) rather than quality. This could lead to value traps.
3) Crisis exposure (gold, in two large holdings).
4) Preference for Book Value based cheapness over near-term earnings (platinum holdings).


References:
http://www.investecassetmanagement.com/south-africa/upload/pdf/SA_Fact_Sheet_Value_Fund.pdf
http://www.investecassetmanagement.com/namibia/upload/pdf/SA_Inv_Comm_Value_Fund.pdf

Cost to GDP of the 2013 Fiscal Cliff Deal

Here is what I've come across so far in terms of what the deal will do to US growth in 2013:

Feroli (JPM) says growth will be hit by 1%
Rosenberg (Gluskin Sheff) thinks it will be 1.5%
Goldman Sachs says 1.3%
Kit Juckes (SocGen) oddly sees the deal adding 0.5% to GDP. Perhaps this is from a baseline of a fiscal cliff occurring.

In summary, US GDP should struggle in 2013, coming in around 1.0% - 1.5%.

UPDATE: Chicago Fed Charles Evans sees US growth at 2.5% for 2013