Edison Investment Research

C’est l’économie… French and German bond yields diverge

It’s not the unlikely election of Le Pen, it’s the economy ...

The recent divergence between French and German government bond yields has been widely attributed to a possible victory for the anti-euro Marine Le Pen in the French presidential election. In our view this is not the whole story. The widening gap in terms of borrowing costs also mirrors the increasing economic divergence between France and Germany. Therefore, the increased risk premium for French government debt should be expected to persist, even after the election of a mainstream candidate, adding to pressure on the euro project.

Witan Investment Trust announces the appointment of a new emerging markets manager

GQG to manage a segregated emerging markets portfolio for Witan

Witan Investment Trust (WTAN) has announced the appointment of GQG Partners to manage £70m (c 4% of WTAN’s net assets). GQG is an investment boutique formed in June 2016 by Rajiv Jain. As at 31 December 2016, it had £615m of assets under management across three products: global, international and emerging market equities, with a focus on long-term, quality growth investment. GQG runs concentrated, low-risk portfolios that are benchmark agnostic. The appointment of GQG follows WTAN’s change of benchmark at the beginning of 2017, where emerging markets now represents 5%, having had a zero weighting in the old benchmark.

Market Commentary - Housing, Infrastructure, Construction and Services 16th February 2017

News from Dutch engineering consultant Arcadis and unquoted housebuilder CALA tells us that not everyone is taking a half term break. CALA makes a noise at each period end as if is quoted which is a sound discipline of course. Balfour Beatty released its second “Positioning Paper” for this year this morning, entitled “Unlocking the benefits of PF2”.

Yellen’s hawkish testimony: Rate increases ahead

The strong performance of asset prices in the post-2008 era remains in our view largely attributable to lower than expected growth rates being offset by much looser than expected monetary policy. However, as expressed recently by Bank of England Governor Mark Carney “..we’re coming to the last seconds of central bankers’ fifteen minutes of fame”. If, as we believe, central banks are in the early stages of stepping back from unconventional monetary policy this is likely to have significant implications for asset prices.

Russian Roulette

General Flynn resigns as US National Security Advisor over links to Russia

In my blog last December I described President Trump’s new security team of General Flynn and General Mattis as a ‘fiery and intriguing cocktail’. After less than a month in office, Gen Flynn has indeed set the sparks flying over his liaisons with Russian officials, and on Monday evening handed in his resignation. So what happened and where does this leave President Trump’s foreign policy now?

Filicudi discovery - positive start to 2017 Barents exploration

Lundin’s Filicudi discovery is a successful start to exploration drilling in 2017 for the Barents Sea. The prospect holds an estimated 35 - 100mmboe and encountered 63m of oil and 66m of gas in high quality Jurassic and Triassic sandstones. Filicudi is on trend with Johan Castberg around 40km to the north east and the discovery has derisked the adjacent 218mmboe Hurri prospect together with the 285mmboe Hufsa. As a result, both prospects now carry a 25% CoS, and Lundin and licence partners AkerBP and Dea are considering drilling one or both of these later this year.

Market Commentary - Housing, Infrastructure, Construction and Services 15th February 2017

We have to admit that by the standards of most school half terms this one is quieter than most. It may be the calm before the storm next week when the December year ends start to report their Prelims. The leader of the pack yesterday was Capita which rose 2.5% thereby recovering the previous day’s losses. Compass was the back marker falling 1.3% to 1427p which we believe as a single one day move is not that significant. What is of note of that it is struggling to gain traction at this level.

Baidu - One trick pony?

Baidu may be giving up on its ecosystem.

Magic Leap – Creations great but not small

The technology is there but the size is miles off

While Magic Leap is capable of producing an augmented reality (AR) experience that far outstrips anything its peers are offering, it is years away from fitting that technology into anything that a consumer will tolerate. The latest leak from Magic Leap shows a unit that is clearly a development board in a clear plastic box powered with an external battery pack and a fairly large head unit which is reported to be the latest prototype called PEQ, product equivalent. The company will be presenting the prototype to its board and investors this week, all of whom will be looking for results from the $1.39bn raised so far.

Magic Leap CEO, Rony Abovitz, has been quick to identify the device as a R&D test rig used for data collection that helps with the creation of surfaces and textures in AR. This follows a number of data points that Edison Research has collected over the last month. There appear to be problems with the core fibre optic technology that has led to the company having to redesign elements of its offering to make it smaller.

Suppliers have described conversations with Magic Leap engineers that strongly imply that some parts of the system are not even past the concept stage. Silicon Valley chatter also highlights the possibility of infighting between the Silicon Valley operations and the mothership in Florida as well as some high-level departures and very short senior tenures. The key to understanding what is happening at Magic Leap comes from Rony Abovitz himself who describes his prototypes as being in “agile build cycles”. 

This means that the hardware and software design and specification of the PEQ product, that Magic Leap intends to launch, are far from being locked down. Consequently, there is no point whatsoever in spending a fortune trying to miniaturise the hardware as all that investment would be wasted if something has to be changed. We suspect Magic Leap has been forced by the pressure to start generating revenues into producing a compromised product.

Edison research indicates that the older, far bulkier prototype uses all of the Magic Leap technology and produces a great user experience but remains far too bulky to wear. Consequently, it appears that to make it wearable, Magic Leap has been forced to make compromises in the user experience. These would include features like field of view, resolution and refresh rate. This would explain why the feedback generated by the few who have experienced the technology appears to have gone from “wow!” to “ho-hum.”

Magic Leap is very far away from producing the kind of product with which it could take the AR market by storm. We do not think that this is a problem as almost all of its competitors are looking to sell their units to enterprises where the user experience is much less important.

Magic Leap is aiming for the consumer and given how poor the general AR experience is today, we cannot see anyone producing a successful consumer device for 2-3 years at least. This gives Magic Leap time in terms of the market it is aiming at but the real question is what time frame did it promise its investors and will they be willing to pour a lot more money into this company. One thing we are pretty sure of is that Magic Leap is going to need it.”

Market Commentary - Housing, Infrastructure, Construction and Services 14th February 2017

There is no formal news this morning from UK based HICS stocks. Heidelberg Cement issued its Preliminary results for 2016 yesterday. The complete country by country result and outlook is of limited relevance but the growth shown in the UK market last year and the expectation of a stagnant market here this year is interesting. Morgan Sindall is one of a number of UK contracting based organisations that we believe will surprise on the upside. The others that are near the top of the list include Balfour Beatty and Costain.