Global themes 2018

Our top investment ideas



It’s that time of the year when we gather the collective heads of CLSA to read the tea leaves and prognosticate what the next investment year may hold. Scroll down for a quick synopsis.

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Macro themes 2018

Economics: Synchronised world-trade upturn
Strategy: Trump's tax reform to underwhelm
MICROSTRATEGY: Time to rotate
Technicals: Sell dollar strength

Economics

We believe the global economy is in good health. We see no further acceleration in global trade but equally no need for capitulation. We are unperturbed by quantitative tightening and expect rate hikes to complete in 1H18.

Strategy

We advise the absolute return community to hedge via volatility contracts and credit spreads as this cycle ages. We are highly sceptical of the alleged pro-cyclical nature of US tax reform, though proposed corporate tax cuts are positive for US equities.

Microstrategy

The likelihood of a renewed US capex cycle has increased with the passage of the US tax bill while central banks look to pull back on zero-interest-rate regimes. We favour value stocks with earnings momentum, including the banks.

Technicals

While short-term price action in the US dollar (DXY) and US-dollar trade weighted index has become choppy, the long-term cycle and structure remain intact. Our suggested tactics through 2018 would be to sell US-dollar strength.

Key thematics

Artificial intelligence: Awaiting the reveal
AUTOMATION : Tech + robotics = reality
BLOCKCHAIN: Blockchain builds mainstream support
Healthcare: The rise and rise of immuno-oncology

Artificial intelligence

AI is ramping chip demand. However, the internet platforms have defacto developed proprietary solutions: TPU for Google, Altera-Intel for Microsoft and Nervana-Intel for Facebook while ARM-Cadence-TSMC-Xilinx has announced a design platform available in 2H18. Watch out for Huawei in 2018.

Robots break free from automotive industry shackles

Automation

We see little need for inter-sector hedging. Automation's reputation as an auto-industry derivative has been challenged. Sharp 2017 auto growth deceleration had no impact on robotics demand. On the contrary, it accelerated finding new opportunities in electronics and logistics.

Blockchain

With numerous service providers touting 'scaleable' platforms, We believe 2018 will be the year blockchain begins to become a mainstream technology with broader-based multi-sector adoption by industry leaders.

Sectors themes 2018

Autos: Industrial chrysalis
Banks: US attractive, Chinese discount overdone
Consumer: Chinese tourists essential
Commodities: Steel markets stay firm
ESG: Supply-chain weakness
Gaming: Mass takes over
Luxury goods: Luxury goods still shining
Materials: Lithium-ion batteries at inflection point
Oil & Gas: Progress on market rebalancing
Smartphones: Content-dollar growth continues

Autos

We argue that the three auto industry mega-themes of electrification, autonomy and connectivity continue to gain momentum. As these trends globalise and accelerate together, supply constraints will demand more market attention.

Armageddon pricing of China banks is overdone

Banks

As the USA attempts to exit quantitative easing, banks will benefit from NIM expansion. But GFC-related regulatory legacies still prevail and the implementation of IFRS 9 and Basel 4 capital reforms will act against financial stocks.

Commodities

While recognising some headwinds, continue to see opportunities in the sector. In particular, we remain bullish on steel in the near and medium term with market tightness not fully
appreciated and equities set for earnings upgrades.

Consumer

We expect Chinese tourists to continue to shape the fortunes of many companies in Asia. A revival in travellers to Korea is likely to be a key point and drive a recovery for retailers and FMCG firms, especially cosmetics.

chinese tourists continue to shape the fortunes of many
Cobalt shortages should not pose an existential threat 

ESG

Consumer electronics and auto brands have struggled to ensure batteries have not been made using cobalt mined by children.
The short supply means EV makers run the risk of getting blindsided. China controls the rare-earth metals at the core, with officials cracking down on filthy mining/processing.

Gaming 

New casino openings will serve as catalysts in 2018. We expect a shift from VIP growth to mass supported by the opening of the Hong Kong-Zhuhai-Macau Bridge as well as the MGM Cotai, Morpheus and Grand Lisboa Palace.

Luxury goods

We expect the structural rise of ecommerce to accelerate in luxury goods. Top high-end brands are pursuing selective partnering with proven third-party platforms and investing in their own ecommerce sites. This encourages more brand crossovers and could possibly lead to more M&A in 2018.

Materials

Despite long-term potential, solid state batteries are unlikely to be commercialised in the near term, due to various obstacles that need to be overcome before mass production can begin. We estimate total lithium-ion battery shipments to rise by 16.3% YoY, primarily driven by electric-vehicle applications.

Component value is increasing, not smartphone units

Smartphones

Global smartphone consolidation is to China's advantage. We see consolidation speeding up, with the combined global market share of the top-four Chinese smartphone brands (Huawei, Oppo, Vivo and Xiaomi) reaching 30% in 3Q17. The gains will continue in 2018, especially in the premium segment.

Oil & Gas

We see average crude prices rising only gradually to US$58/bbl in 2018. Lower-for-longer oil prices have provided a windfall to oil-reliant downstream producers. But persistent price hikes are set to test 2018 downstream margins.

China themes 2018

Autos: Green cars drive disruption
Conglomerates: NAV growth the key for 2018
Infrastructure: Playing a critical role
Internet: New retail
Macro: Bulls dominate
Power: Freshening up
Property: Interest-rate insensitivity
THRU TRAINS: Milestone events 

Autos

Chinese auto OEMs interested in lifting new-energy-vehicle sales will slow internal-combustion-engine volumes to meet Green Car policy targets. We believe this move may result in short-term pain in 2018, but it will position them for long-term growth.

Fast & Furious

Conglomerates

In 2018, we see less scope for discounts to narrow, barring divestments of underperforming assets or higher dividends. As such, conglo share-price performance will require NAV growth, either organically or through acquisitions.

Infrastructure

We expect the sector to play a bigger role in stabilising economic growth as China embarks on supply-side reform, financial deleveraging and property-price cooling. PPPs will be a new driver and state-owned contractors are key beneficiaries.

CHINA's one belt, one road INITIATIVE is moving ahead
Obor sets its sights on Southeast Asia in 2018

Internet

The internet giants continue to dominate. We believe ecommerce and online advertising could grow faster with consumption upgrades, brand expansions and growing eFinance. We see China's ecommerce reaching 25% of retail sales by 2020.

Macro

There are grounds for optimism about China's economy. Power has been consolidated, reform is underway and progress is being made in headline programmes such as supply-side and financial-sector reform and the environmental cleanup.

Power

Once a mere catchphrase, 'Beautiful China' is now an overarching policy driver in the energy sector. We expect wind and solar to dominate new power capacity in 2018. Paradoxically, the cleanup may benefit some of the world's biggest carbon emitters.

CAN alibaba double?

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