Happy New Year! And what a new year we are in for.
When you have the leader of the “free world” tweeting economic policy, you can be absolutely certain of two things: volatility and opportunity.
My view is that the better investment opportunities lie outside of the USA. US equity valuations are high and there seems quite a lot of “hope” priced in. I don’t think President Trump can deliver change in the timeframe markets expect and I tend to think US equities will underperform other markets this year.
I think there are better investment opportunities in terms of value and growth in Europe, the UK and China. There are also better opportunities selectively in Australia.
While the “Trump Trade” has gathered all the headlines, and fair enough, quietly in the background all things China have been rallying. From commodity stocks, through to Macau casino’s, luxury goods stocks and the Australian dollar, they have all outperformed Wall St so far in 2017. For example, the Australian dollar itself is +5% already year-to-date and the S&P Global Luxury Index +3.3% year-to-date.
It would appear clear that the positive price action in all things China is trying to tell you something about the Chinese consumer and Chinese GDP growth. I clearly think that message is positive and one that Australian investors haven’t noticed or have ignored due to stock specific China facing issues such as Bellamy’s.
Bellamy’s, to me, is a clear one-off. I absolutely don’t believe BAL’s problems are a guide to anything other than BAL’s mismanagement. However, I do believe the BAL episode has weighed unfairly on other China consumer facing Australian companies and in that underperformance there is opportunity.
As we enter 2017, I continue to believe the investment case for Treasury Wine Estates (TWE) is very strong. However, the stock price has been marking time around $10.50, as investors wait for further earnings growth confirmation from the company at its February result. I also think BAL sentiment has unfairly weighed on TWE, as has the rotation from growth stocks to so-called value stocks post the US election.
TWE is in a multi-year earnings upgrade cycle, driven by excellent management execution. This is a global luxury brand stock that just happens to be listed on the ASX.
Morgan Stanley this week upgraded their recommendation on TWE to “overweight” and set a $13.00 12-month price target. That’s in line with my thinking and why I hold a large position in TWE. However, the broader TWE analyst community isn’t so sure, with four buys, six holds, and three sells. That reminds me that there is far from “universal bullishness” on TWE. That’s a good thing.
Let’s look at a few key bull points on the TWE investment case.
1. Market still underappreciates TWE’s China opportunity
The Morgan Stanley AlphaWise survey of alcoholic beverage consumers in China gives us greater conviction in TWE’s long-term opportunity. It is still early days in China for TWE but we turn more constructive given:
(i) the long term gradual shift from beer/baijiu to wine.
(ii) wine priced >Rmb1,000 has the highest expected consumption growth, according to Chinese consumers.
(iii) the increasing popularity of Australian wine at the expense of French wine.
(iv) a lack of availability of Australian wine, which we believe can be easily resolved; and
(v) TWE’s growth in China is broad-based.