CEO Insights Week Ending Friday 14/10/2016

“Too many incentive schemes that get offered to CEOs are a no lose scenario and this doesn't necessarily align with the interest of the shareholders. It also creates an environment where a CEO might take a swing at things he shouldn’t because the downside is nothing and the upside is enormous. When there's real skin in the game, and real dollars invested where this would hurt me, when there's a shift from being a CEO to an owner, then the effect is subtle but dramatic" Brett Blundy, CEO, BBRC Retail

As part of the NAOS investment process, we pay particular attention to the comments made by company CEO’s and business leaders in order to gain a greater understanding of the current investment environment and key trends that may be emerging. Below are quotes from the week which in our view detail some of the most important and prominent industry trends and economic factors impacting their businesses.

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Healthcare

"If the business model of health insurance is so unattractive that it requires a huge government subsidy every year and a taxation regime to coerce people to buy your product, it tends to suggest it's pretty weak. If the benefit of that $6 billion [government subsidy] was actually put into the creation and the subsidisation ...of a medical savings regime, I think that's much more durable than the current system"

Chris Rex, MD, Ramsay Health Care

"Healthcare spending hit 10 per cent of GDP according to a recent report, for the first time as a country, and we face a demographic time bomb. The way that healthcare is managed and delivered has to be addressed"

Robert Cooke, CEO, Healthscope

Vitamins/Infant Formula

“New cross-border ecommerce rules introduced in China created uncertainty for Daigou and we saw re-sellers sell off stock to reduce risk”

Michael Howard, Director, Swisse

“A significant proportion of our Chinese sales are to Daigou shoppers”

Laura McBain, CEO, Bellamy’s

Financial Markets

“Some of the old valuation benchmarks have gone out the window. It’s very hard to be precise in valuing some companies, especially the high growth and high quality companies: whether they are worth 30 times earnings or 100 times in an era of negative interest rates. It’s very hard to get them on the cheap, but I think they’re much better investment opportunities than buying bonds on a negative interest rate”

Phil King, Chief Investment Officer, Regal Funds Management

“The most exciting part of the market for me at the moment is the growth companies in the small to mid-cap space. The market as a whole will struggle to go up because there’s not a lot of earnings growth at the larger end of the market and that’s going to constrain share price appreciation”

Phil King, Chief Investment Officer, Regal Funds Management

“Central bankers have fostered a casino like atmosphere where savers/investors are presented with a Hobson's Choice, or perhaps a more damaging Sophie's Choice of participating (or not) in markets previously beyond prior imagination. Investors/savers are now scrappin' like mongrel dogs for tidbits of return at the zero bound. This cannot end well”

Bill Gross, Portfolio Manager, Janus

“We’re not negative [on the banks] because the main exposure the big four banks have is the housing market and while we recognise house prices have moved up a long way, we don’t see an imminent collapse. Lending standards have improved in recent years so we don’t see enough storm clouds on the horizon for the banks for us to go negative on them”

Phil King, Chief Investment Officer, Regal Funds Management

Commodities

“I do think the worst is behind us”

Andrew Forrest, Fortescue, Chairman

“The Alumina market is in deficit of approximately 1.6 million metric tons, representing a larger market deficit than what we had reported in the second quarter. The deficit increased due to the combined impact of three main factors: higher Alumina demand in both China and the rest of the world from increased smelter production; lower rest-of-world supply, as Sherwin curtailment and slowed expansion in India combined to lower the overall rest-of-world supply; and in China, a few faster restarts and additional expansions have increased 2016 Chinese Alumina supply”

William Oplinger, CFO, Alcoa

Oil & Gas

“In the current situation we think that [an oil output] freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector. Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join”

Vladimir Putin, President, Russia

“Global oil inventories are far too high – in the view of some producers – and they aren’t being worked off nearly fast enough”

Report By International Energy Agency (IEA)

“The market – if left to its own devices – may remain in oversupply through the first half of next year. If OPEC sticks to its new target, the market’s rebalancing could come faster”

Report By International Energy Agency (IEA)

Airlines

“The underlying fundamentals are solid and profitability of the airlines is at an all-time high; travel demand up; robust commercial jet orders, the order book is still over 9 years; there are very low level of cancellations, 1.9% of the order book, well below the historic numbers; but at the same time, we do see 2016 as a transition year”

Klaus-Christian Kleinfeld, CEO, Alcoa

“As we look to the fourth quarter, we believe production of aero engines will increase. We also expect continued price pressure and airframes supply chain destocking for legacy model components. In addition, we expect strong North America IGT growth, while oil and gas, European IGT and North America commercial transportation markets will continue to be soft”

William Oplinger, CFO, Alcoa

Telecommunications/Technology

“In the second quarter sales trends were negative especially for Networks. We said that those sales trends were also expected to prevail for the second half of this year… What we see now is that these negative industry trends have accelerated further”

Jan Frykhammar, CEO, Ericsson

“Sales through digital channels are growing at roughly double the rate of the total business at 18% in the UK. Orders through app and mobile accounted for 82% of delivered sales in the quarter, a record”

David Wild, CEO, Domino’s Pizza Group

Global Economy

“Specifically, we saw accelerated growth [in Q3] in Asia, with the exception of Japan, and continued good momentum in the U.S. and Europe outside of France. Both Japan and France were impacted by lower tourism, albeit for different reasons, or rather, lower tourist spend”

Christopher Hollis, Director of Financial Communications, LVMH

“Wines & Spirits continued its good momentum with strong performance in the U.S. and improvements in China. In Fashion & Leather Goods, Louis Vuitton turned in a very good performance thanks to the appeal of both its iconic lines as well as new products”

Christopher Hollis, Director of Financial Communications, LVMH

“For the US banking industry, [loan growth] will be a challenge, but we’re competing fiercely for more than our fair share of that business”

John Shrewsberry, CFO, Wells Fargo

“The uncertainties and risks facing the world economy have increased as some major economies have entered the general-election season”

Lou Juwei, Finance Minister, China

“Too many politicians are backing trade barriers in a misguided effort to boost national growth in the short term. The medicine that is often being prescribed is protectionism, and that is exactly the kind of medicine that is going to hurt the patient, not help him"

Roberto Azevedo, Director General, World Trade Organization (WTO)

“When the world’s large economies debate protectionism, I think it doesn’t all go well for the world”

Arun Jairley, Finance Minister, India

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About NAOS Asset Management

NAOS provides investors with niche product offerings in asset classes and sub sectors where they lack the time, resources or expertise to research and invest themselves. We adopt a high conviction, value driven, long/short approach to investing. Our investment approach looks to realise value over the long term by sourcing and combining investment opportunities that present the greatest opportunity to realise positive absolute returns in the form of capital growth and income generation over the long term.

NAOS Emerging Opportunities Company Limited's (ASX: NCC) objective is to provide investors with concentrated exposure to quality undervalued emerging companies, whilst maintaining a focus on long term capital protection.

NAOS Absolute Opportunities Company Limited's (ASX: NAC)  objective is to provide investors with exposure to quality undervalued mid-cap companies whilst having the ability to selectively short overvalued lower quality companies, this aims to minimise the risk of permanent capital loss and produce uncorrelated returns to general market movements over the long term.

In addition, the emerging opportunities strategy is available to sophisticated investors via a unit trust, The NAOS Emerging Opportunities Fund.

For all enquiries please contact [email protected]

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