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European bank meltdown

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The hardest hit sector due to Brexit is definately the European banks. Banks like Standard Chartered and Deutsche Bank have been making headlines long before Brexit with share prices plummeting. To me the share price weakness is starting to smell like a buying opportunity in selected European banks. On top of my list is Stan Chart, Credit Suisse and Deutsche Bank.

Lets put things in perspective by looking at Market Cap of the Swedish bank SEB (in red) which has performed reasonably well the last 5 years to the devastating performance of its much bigger competitors (i threw in Santander as well). Please observe the logarithmic scale.

SEB_vsBanks_MCAP

As can be seen Stan Chart, Credit Suisse and Deutsche all have a total value in the same tange as tiny SEB. Top line revenue is a factor 5-7x larger for these companies compared to SEB. So is SEB expensive, the other three cheap, both, or the market is valuing these correctly?

My wager is on one or several of these giant banks being cheap at the moment, more study is needed before i take an investment decision.

Heat of the moment

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It was the heat of the moment, as the 80s rock group Asia used to sing. For me personally true on several levels as Im taking some vacation in very hot Italy while the Brits decided to turn up the heat in the financial markets – wow I did not forsee that at all. Especially when the last polls just before the vote counting started, came out with 52% for Bremain. I should have listened to my old boss, who is british, he called this a long time ago.

Initial responses were strong sell offs in European equities (for the markets that were open) and of course an equally sharp response in the currency markets with GBP being the big loser. Interesting was that SEK and NOK traded even weaker than the EUR. From a USD investor perspective, as this is the denomination currency of the blogs fund, I see attractive opportunities in Europe where both stock prices dived and currency weakened against the USD.

My portfolio is somewhat underweight European stocks which will help somewhat to keep ahead of the benchmark, although a few of my holdings have really suffered lately. I plan to deploy my cash buffer from the SAS Pref sale a few weeks ago. Interesting times indeed..

SAS – Im out

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SAS came with a surprisingly weak quarterly report today, well below consensus estimates. On top off that the Swedish Pilots are threatening to strike again and are demanding 3.5% salary increases as well as stronger protection for newly hired pilots (bacisxally meaning they should be paid well too). Although all this is not catastrophy as a Preference share holder, I no longer see the same upside in the Pref. In this case I must say my analysis done 3 months ago, so far turned out wrong, but my bet on the Pref share anyway turned out above expectation. I sold the first half a week ago and Im happy to give away the rest of my Prefs at these levels.

Portfolio Update & Trading

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The portfolio has been running neck-and-neck with the benchmark MSCI World Gross Return, but with the help of the bid on SAFT and strong performance from Criteo and a few other holdings we have managed to de-couple somewhat over the last two weeks. An unexpected bid is always a lucky shot, but I believe this shows big things is going on in the battery sector, we have both the whole electric car side as well as electricity storage from the grid. This is probably not the last battery buyout we will see over the coming years. I’m staying cautious still though, the industry is still driven by subsidies and China will most likely favor the Chinese makers.  It is still many years until we see big profits from the Korean companies like Samsung SDI and LG Chem, I’m waiting for a good entry-point in Samsung SDI as the best pure-play in the sector.

Performance graph

Graph_20160522

Trading

I have also decided to take one new position and add further to an existing holding.

Microsoft

I have been looking for a good entry in Microsoft, it never gets cheap but with a little bit of weakness here I use 4% of my cash to make a first entry in the stock. The short rational is how Microsoft is pushing hard for cloud computing and I believe they will succeed taking a huge part of the corporate market. Corporations are already heavy Microsoft Office / SQL Server etc users and are so ensnared that they automatically go for Microsoft Azure cloud. This will be a huge deal over the coming 10 years.

NetEase

This is already a holding at 6.6% and I decided to make it a high conviction position at 9% by allocating 2.4% cash. Within a few days a bigger piece on the company will be out explaining the rationale, so stay tuned.

I’m now fully invested with only a small cash residual and I’m truly live, putting my neck out there to see if I have any alpha/skill. 3 months has passed since the first pen-strokes on the blog and 2 months of live performance and I feel I passed the trial period of the blog. Now let’s do this great!