Nordic Investment Partners Looks good but slower speed ahead NIP monthly.pdf‘Be patient...

End April 2019 update www.nordic-investment-partners.com www.advicecapital.dk

Nordic Investment Partners

Nordic Investment PartnersMay 2019 update

Looks good but slower speed ahead



Key investment view towards 2030Since the financial crisis in 2008 the global economy and financial markets have been on a diet of free steroids provided by central banks and politicians pushing the pedal via fiscal and monetary stimulus. The fiscal steroids have created ever larger government debts and will probably continue to grow beyond what is sustainable in some countries.

On a positive note we have underlying growth in global affluence, which is an an unstoppable force. Every year 120 million individuals join the global middle class. This is driven by Emerging Markets that grow 2-3 times faster than Developed Markets. The underlying need for better food, water, electricity, transportation, communication, energy, education and health is a firm hand under global economy.

However, global economic growth has been declining since 1960s from 6% to around 3% as population and productivity growth both decline. Global growth is probably 2.0-2.5% in 2030 unless a significant productivity boom comes.

There’s nothing wrong with 2% GDP growth, but many investors have been accustomed to 8% annual return, while the realistic forward return is more likely to be below 5% and achieved with 3% earnings growth and 2% dividend. Annual swings are likely to remain in the 15-20% interval, so it’s not going to be boring no matter what.

The traditional business and inventory cycle still applies, so from period to period growth and inflation will change. However, in a world with evermore data and analytics the efficiency of eco systems will likely reduce the magnitude of economic swings as end-to-end value chains reduce slack and inefficiency. Risks of financial mis-allocation of capital is the same.

In a investment world on those conditions Advice Capital Vision Fund and I focus on identifying companies and business clusters with unique structural growth and then invest in these when growth/profitability/valuation triangulation justifies it. The investment focus in Advice Capital Vision Fund is on identifying, holding and harvesting multibaggers based on the experience and principles the investment manager has learned. Good stewardship and ESG applies to the companies invested in.

‘Be patient – multibaggers takes time’



Seasonality shows slower speed ahead

Global stock markets rose another 3% in April 2019. For the year stocks are up 16% and back to September 2018 levels

Despite all the trades and news flow we have not moved very far since September 2018, but media and market commentators are more focused on calendar year moves. And that’s good news as markets are up 16% in 2019. But is the 16% increase a sign of better times ahead or was the market decline in late 2018 just a mistake? And where do we go next?

The macro economic data points are turning better and pointing towards 3% global growth in 2019, employment is good and inflation is under control. Corporate earnings are as expected, but the absolute performance is a bit worrying for 1Q 2019 performance; US sales are up 5% and earnings down 2%, European sales are up 1% and earnings are down 4%. My interpretation is that costs have gone up, but some of it could be cost loading into 1Q 2019 making the coming quarters better. That’s just seasonality noise and as long the economic activity remains decent then there’s good scope for better earnings in the coming quarters. However, you should pay attention to an old saying;

Sell in May and go away After one of the best starts for years it’s natural to ask if we’re due for a correction, so I took a look at historical facts and patterns

The winter half year is on average better than the summer half yearI have data on MSCI back to 1969 and it shows that if you invest on 1 November and sell on 30 April every year you make 7.3% plus dividends. In the other period from 1 May to 30 October you make 0.5%. I then tested for Value and Momentum (data since 1973) and the winter season generates 8.3% and 9.7% respectively, while the summer season generates 0.1% and 2.3% respectively. If the road ahead of us is an average road then we can look forward to 6 months of flattish markets, so the speed in 2019 will probably slow down in the coming months.



The 2019 jump in prices is not unsual

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

50

500

5000

1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

MSCI World in USD (ex dividend)Index (log scale) 6 month change

12 episodes of 10% declines over 6 months or more since 1969

20 episodes of 20% increases over 6 months or more since 1969



Sector positioning

Going into 2019 the sectors that stood out as interesting (based on a mixture of earnings growth, profitability and valuation) were automotive, energy and tech.

Automotive and tech still screen positively despite significant increases in 2019.

Energy stocks are inexpensiveand performs like the overall market despite a 30% jump in oil prices.

The hydrogen stocks (not part of energy index but part of AC Vision Fund) are particularly good performers in 2019 as the demand for infrastructure and storage needed in 2021-25 is getting more visible.

Sector performances (price in local currency)

1 month 20192018-21 EPS

CAGRP/E19 PEG ratio

Auto 0,9% 10,3% 6% 7,2 120Banks 6,7% 19,5% 4% 11,5 288Food/beverage 5,2% 12,9% 5% 18,5 370Healthcare -3,0% 3,9% 8% 15,4 193Oil/gas -0,9% 15,4% 10% 18,0 180Retail (incl Amazon) 4,1% 21,0% 11% 18,8 171Tech 4,6% 27,3% 9% 19,0 211Semiconductors 8,7% 34,7% 9% 16,9 188

S&P500 2,7% 17,5% 11% 16,8 153

Auto 4,5% 20,5% 6% 7,5 125Banks 4,8% 14,6% 3% 9,6 320Food/beverage 2,7% 21,6% 8% 19,0 238Healthcare -2,2% 10,9% 6% 15,7 262Oil/gas -1,2% 12,2% 9% 12,1 134Retail 1,1% 22,7% 4% 16,1 403Tech 5,9% 25,6% 12% 21,3 185Telecom -1,3% 0,7% 4% 13,7 343

Stoxx 600 1,3% 12,3% 6% 13,5 225

Based on consensus

30/04/2019



Telecoms – opportunity or dead in the water for a reason?During April I attended an investment conference and one of the attendees suggested a telecom company. My instinctive reaction was negative and I got the same impression from others. That made me think, could telecom be the biggest under appreciated asset around?

To find out I sorted all the pro’s, con’s and undecided into buckets;

Pro Con Balanced

1. No growth2. Pricing pressure3. Margin pressure4. Capex intensive5. Asset heavy6. Big debt loads7. Poor capital discipline8. Regulated9. Bureaucratic10. 5G capex and auctions

1. Good cash flow2. Stable demand3. Growth in data4. High dividend yield5. Essential – we cant

live without communication services

6. Time for telecoms totake the power backfrom handset providers?

1. Small part of stock market2. Disliked3. Defensive4. Low vol stocks5. Lacks momentum6. Large companies

The value of telecom stocks is based on dividends and not their value in making the world go around



Dead in the water is a phenomenon since 2016

Stoxx 600

Telecom

Telecom 1 year moving average



Apple has same market cap as top 12 telecom operators

Company Ticker Price CurrencyMarket cap

in USDNet

debt/EBITSales in

USDP/S

EBIT growth

2017-21

EV/EBIT19

P/E19Div yield

2019ROE

2019

China Mobile CHN 75,70 CNY 231.343 -3,5 113.433 2,0 2% 9,1 13,1 3,8% 10,0%

Vodafone VODI 1,66 EUR 54.017 7,5 50.176 1,1 10% 19,3 20,8 9,0% 3,4%

Orange ORA 14,41 EUR 42.930 4,4 46.592 0,9 3% 11,2 14,1 5,2% 8,2%

Deutsche Telekom DTE 14,97 EUR 79.825 4,7 88.480 0,9 7% 11,6 16,8 5,0% 12,9%

Telecom Austria TELA 6,76 EUR 5.031 4,0 5.047 1,0 11% 11,9 11,3 3,1% 14,7%

Telecom Italia TIT 0,50 EUR 11.889 6,9 21.151 0,6 3% 10,1 7,1 0,0% 6,8%

Telefonica TEF 7,48 EUR 43.496 5,6 54.544 0,8 0% 11,5 10,4 5,3% 17,1%

Swisscom SCMN 477 CHF 24.709 3,8 11.500 2,1 -2% 15,8 16,4 4,6% 16,6%

Telia TELIA 40,85 SEK 17.688 4,3 8.700 2,0 2% 16,5 16,5 5,9% 11,2%

Telenor TEL 170 NOK 29.680 1,7 13.176 2,3 2% 11,1 17,2 5,3% 29,7%

Sunrise SRCG 67,8 CHF 3.051 7,0 1.886 1,6 13% 25,3 32,4 6,5% 6,9%

KPN KPN 2,73 EUR 12.848 6,1 6.334 2,0 5% 19,8 24,8 4,8% 20,0%

Verizon VZ 56,66 USD 243.355 3,3 132.000 1,8 4% 11,2 12,1 4,3% 29,4%

AT&T T 30,85 USD 235.571 4,1 184.000 1,3 5% 10,6 12,0 6,6% 10,1%

T-Mobile TMUS 73 USD 62.196 3,7 45.500 1,4 11% 14,9 19,1 0,0% 11,5%

Growth EV/EBIT P/E19 Div yield ROEAverages 1.097.628 4,2 782.519 1,5 5% 14,0 16,3 4,6% 14%

Source: Marketscreener consensus



Triggers for telecom stocks gaining momentum

My instinctive reaction was negative when I heard the telecoms idea, but it triggered a deeper dive into what's going on in telecom

From the pro and con slide it’s obvious there’s more con’s than pro’s, but can it change?

Telecom’s are dominated by shareholders that hold it for the dividend. And those kind of investors don’t like dividend to be reduced, so the management teams in telecom have to walk carefully on initiatives that can grow their business if it dilutes cash flow in the shorter term.

However, telecoms have not been very good in telling their real value; imagine how your day would be if your computer or smartphone didn’t have connection?

We can't live and function without this asset…..but that’s not the same as the stock prices will increase, so a few triggers:

Triggers for change can be;

1. better pricing discipline for the valuable service they provide. Lots of people would pay more just to get it

2. a regulatory loosening to ensure investments in the future networks

3. making healthier balance sheets with increased cost focus

Labor content in telecom work will be lower in the future as networks, billing and infrastructure monitoring is digitized more and more. See illustration above for cash flow per employeeA 2% reduction in work force per year can have quite significant impact telecoms ability to maintain dividends and reduce debt

no change

2% work force reduction p.a.

China Mobile is 27.000$ cash flow/employeeAT&T and Verizon is 145.000$ cf/employeeEurope is 45.000 $ cf/employee



Roadmap 2019 check



Follow up on key assets for route 20194 months along the roads and we have reached destination for 2019 in terms of expected return. Some large investors say they have been selling, but stocks have continued upward anyway. We will probably go into aperiod of flattish performance before markets can resume the upward trajectory based on 2020 earnings

Asset/item Actual End 2018

Forecast end 2019

Forecast return 2019

Actual April 2019

Residual return 2019 Comment to expectation for 2019

MSCI World 453 505 11% 16% -4% 3% dividend and 8% earnings growth

S&P500 2.607 2.900 11% 13% -2% 2.5% dividend, 1% multiple contraction and 8% earnings growth

Stoxx 600 336 385 15% 16% -2% 3.7% dividend, 8% multiple expansion and 3% earnings growth

MSCI Asia Pac 146 160 10% 13% -3% 3% dividend, 6% earnings growth and 1% multiple expansion

Brent oil 54,2 70 29% 32% -3% New oil exploration is low. Givng supply/demand balance a lift

Copper 2.648 3.200 21% 5% 15% Electrification (EV etc) lift demand for copper

10 year bond € 0,28% 0,75% 0,07% Normalization of ECB quent easing will increase yields

10 year bond $ 2,91% 2,85% 2,50% Slower economic pace will reduce bond yields

Smartphone sales 1.435m 1.460m Flattish 1.5bn since 2016, so replacement starts in 2019

Car, SUV sales 97m 99m Europe and US flattish, China weaker and EM stronger

Data center traffic 11.6 ZB 14.1 ZB Streaming services (Netflix) create very high demand growth



Summary (unchanged from previous month)

2019 roadmap is for a fairly good investment year due to a mix of continued but uneven economic expansion and fair valuation of stocks. To get a really good investment climate it requires a few things;

1. the trade war threat and subsequent risk of a global recession gets solved

2. the economic activity levels grow 3%. 1-2% in developed regions and 4-7% in emerging markets

3. inflation and interest rates continue to be around 1-3%

4. wage growth is moderate, but provides enough comfort for consumers to continue spending

5. expectations for earnings growth has come down significantly and fast, and 2019 most likely will be a flat year (a recession obviously will take earnings into negative territory). 2020 earnings must show at least 5% growth

6. 2019 can be a 10%+ year as valuations normalize to 20 year averages. Expect the first half to be volatile and very sensitive to new data points. And second half the fundamentals improve and confirm investors that got on the slopes early

The global demographic glacier is moving and unstoppable. Products and services that can reduce healthcare cost while improving the quality of living will see increased demand. So healthcare will continue to provide good growth and high profitability

Some sectors like Automotive have seen significant declines and several companies with massive net cash positions are now valued as if they don’t exists in 3-4 years. A rerating of beaten up sectors is likely but be alert as those sectors are often of cyclical nature



Advice Capital Vision Fund was launched in November 2018 and is part of Advice Capital, an investment fund

boutique founded in 2009 in Copenhagen.

Ole Søeberg, founder of Nordic Investment Partners, is board member and advisor for Advice Capital Vision Fund.

The fund is an Alternative Investment Fund (alternativ investeringsforening) as defined and regulated by

Finanstilsynet in Denmark. The minimum investment is 100.000 €

The fund strategy is long only, absolute return and focus on structural growth. The fee model is 0.00% fixed fee,

20% performance fee, high-water mark and a entry/exit fee applies.

The investment philosophy is based on the belief that financial markets are not efficient in valuing financial assets.

The fund selection criteria is growth at an reasonable price (GARP). Companies in the investment portfolio are

characterized by a strong franchise with growth, good profitability, a solid financial position as well as good

stewardship and discipline in operational and financial matters

For further information please contact Ole Søeberg at +45 4030 0004/[email protected], Stefan Rasmussen at

++45 3930 6081/[email protected] or Lars Fetterlein at +45 2216 4081/[email protected]

Vision Fund



Disclaimer

This material has been prepared by Nordic Investment Partners and Advice Capital A/S. Advice Capital A/S is a Danish asset management

company, under supervision of Danish Financial Regulator.

The material is for personal information only and only for individuals who have received the material from Nordic Investment Partners or

Advice Capital A/S. The material is based on public available information’s and own analysis of data.. Nordic Investment Partners and Advice

Capital A/S do not have responsibility for the correctness, accuracy or the full scope of the information's in this material. Any opinion or viewpoint should not be taken as recommendation to buy or sell the financial assets discussed in the material. Nordic Investment Partners

and Advice Capital A/S has no responsibility for decisions taken based on content in the material.

Information about historical performance and stimulation of previous and future performance is not to be used as a reliable indicator for future returns. Performance and returns can be negative as well as positive and several factors such as currency moves can impact

performance. The material is not to be used as an offer to buy or sell and investment product.

This material is confidential and to be kept private. It is not allowed to forward or distribute the material without prior consent by Nordic

Investment Partners and Advice Capital A/S.

Nordic Investment Partners Looks good but slower speed ahead NIP monthly.pdf‘Be patient...

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