Author: Kenley Scott

Kenley Scott is a senior equity analyst and sector strategist covering the APAC region and the Energy sector. He is a member of the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets. Kenley also writes the Global Sector Summary, part of the Sector Strategy service, which identifies emerging sector strength and weakness across 46 countries every week. After working as a commodities broker, Kenley joined the firm in July 2006. He has a B.S. in Statistics from the University of California, Riverside and also holds a Series 65 securities license.

Global Energy Sector

Posted on January 4, 2018January 5, 2018 by Kenley Scott

U.S.

Despite still being the worst sector over a trailing one-year period, the U.S. Energy sector is the second leading sector over four weeks with a 9% gain. The S&P 500 is up 3.5% over the period. It has also overtaken the S&P 500 on a trailing six-month basis for the first time in a year (see first chart below).
Crude prices are sharply outperforming Energy sector performance, up more than 40% since a June 2017 bottom, versus a 14% gain for the sector. Crude gains have been further supported by the OPEC/Russia deal to extend output cuts, which was reached at the end of November; as well as recent tension in Iran that could threaten supply. As for the outperformance versus the sector, we partially attribute this to future price contango. Contracts of WTI crude are about $2 below spot prices a year out, $6 below two years out, and $8 below three years out. OPEC output cuts, which are temporary in nature, and sharply increasing U.S. output are likely the reason for contango.
We favor U.S. shale producers with a focus on the Permian Basin. Top Permian picks are FANG, CDEV, and JAG. FANG is slightly extended, while CDEV and JAG are actionable. These three names screen the best when looking at current and forward top- and bottom-line growth and quantitative ratings/rankings (strong RS Ratings, improving money flows, trading near 52-week highs). Each is a low-cost producer, rapidly increasing production, and set to generate sharply increasing amounts of free cash flow over the next couple of years.

EMEA

While the EMEA Energy sector (WS002.R2) has performed decently over the past few months, the selection of high conviction recommendations is sparse. Rubis (RUI.FR; RUI:FP) is our sole Focus List pick in the region.
Beyond that, there are only a few names, including Royal Dutch Shell (RDSA.NL; RDSA:NA), worth owning in large-cap portfolios.

APAC

The APAC Energy sector (WS002.R3) remains the strongest of the three regions over the long term. It gained nearly 20% in 2017, versus single-digit gains in EMEA (WS002.R2) and the Americas (WS002.R1). While it is lagging the Americas region over the past month, it has still posted a solid 4% gain. Looking at the sector chart, it is a bit extended (9%) from its 40-WMA and may be due for some consolidation.
Our top picks, Petronet (NET.IN; PLNG:IN), Energy Absolute (ENAP.TH; EA:TB), and BCPG (BCPG.TH; BCPG:TB), remain unchanged from our November sector report. BCPG is actionable now.

Global Sector Commentary

Posted on December 29, 2017December 29, 2017 by Kenley Scott

Emerging market and frontier market indices finished with the best gains for the year, slightly leading the Nasdaq Composite and easily outperforming the developed market index and other U.S. indices (S&P 500 and Russell 2000). The European Stoxx 600 was by far the worst of the bunch.

U.S. sector performance varied, with Technology (+29%) leading the average by 12% and leading the worst, Energy, by 33%.

197 U.S. industry groups averaged an 18% gain, led by Homebuilders (+100%) and Computer Sftwr-Gaming (+79%). Ten of the bottom 14 groups were Energy or Retail sectors, and the worst group was Retail/Whlsle-Office Sup (-39%).

Looking at stocks on the S&P 500 Index, the average gain was 19%. The top three gainers were Align Technology (ALGN, +136%), NRG Energy (NRG, +129%), and Vertex Pharmaceuticals (VRTX, +105%). The worst three performers were Range Resources (RRC, -49%), Under Armour Cl A (UAA, -47%), and Scana (SCG, -46%).

Global Sector Commentary

Posted on December 22, 2017December 22, 2017 by Kenley Scott

From the beginning of December, several of the smallest emerging markets have been the best performers. The trend has held true this week as well with markets such as Chile, Greece, Argentina (Frontier), South Africa, Turkey, Colombia, Indonesia, and Thailand all outperforming the iShares Emerging Markets ETF.

Actionable names from the above countries include Sociedad Quimica Y Minera de Chile (SQB.CL, ADR-SQM), Bank Tabungan Negara (BTN.ID; BBTN:IJ), BCPG (BCPG.TH; BCPG:TH), and Interconexion Electrica (ISA.CO; ISA:CB).

Global Sector Commentary

Posted on December 15, 2017December 18, 2017 by Kenley Scott

Twenty-three developed markets fell 0.3% on average, breaking the streak of five consecutive weekly gains. Fourteen marketsare in a Confirmed Uptrend, of which six are in an Uptrend Under Pressure.
• As of Thursday this week, the Stoxx 600 was down 0.09% compared with last Friday’s closing price. At the end of the week, the index was down to four distribution days, after two distribution days aged out this week. APAC markets were split between winners (Hong Kong, 0.7%) and losers (Japan, -1.1%).Twenty-three emerging markets gained 1.0% on average. Nineteen are in a Confirmed Uptrend (including eleven in an Uptrend Under Pressure), the 51st week with a majority.
• All emerging APAC markets rose this week, led by Malaysia (1.8%) and Indonesia (1.5%). EMEA markets also rose solidly, led by small markets like Greece (3.7%) and Egypt (2.1%). South Africa (-1.2%) was the weakest emerging market.

Global Capital Equipment Sector

Posted on December 13, 2017December 18, 2017 by Kenley Scott

The U.S. Aerospace and Defense segment continues to benefit from favorable global macro factors. The sector has maintained stable growth momentum over the last two months, as reflected by its Industry Group Rank which has consistently been better than 30. Long-term tailwinds boosting the sector include:
• The U.S. government’s announcement of the fiscal 2018 defense policy bill has been the key driver of the country’s defense industry. Valued at roughly $700B, the allocation is sharply higher than 2017’s budget of $619B.
• Geopolitical tensions between the U.S. and North Korea over the last few months helped contractors pull in new orders. Demand for products and services from companies catering to the U.S.’s defense needs has been strong.
• Major U.S. defense companies are also foraying into foreign markets, taking advantage of ongoing geopolitical tensions in the Middle East. The U.S. government’s involvement in the region and technological superiority has provided inroads to many Middle Eastern countries.
• Strategic acquisitions and cross-border agreements among the big aerospace and defense players are other key trends in the market. Technical specialization, increasing competition, and macro challenges within the industry are
prompting for such deals.
• Further, the commercial aviation industry has witnessed a revival recently. A strong increase in global air traffic, backed by increasing disposable income and competitive airfares, has boosted demand for aircraft production.
• Along with revenue growth, strong macro factors are reflected by the industry’s healthy margins and free cash flow generation.

Global Sector Commentary

Posted on December 8, 2017December 9, 2017 by Kenley Scott

Twenty-two developed markets gained 0.46% on average, marking this as the fourth consecutive week of gains. Fifteen markets are in a Confirmed Uptrend, of which seven are Under Pressure.
• The Stoxx 600 continues to face resistance along its 50-DMA despite strong price action on Friday. Five APAC markets lost 0.4% on average, with the worst performances from Hong Kong (-1.5%) and Singapore (-0.72%). New Zealand (0.36%) and Australia (0.03%) were both up slightly.
Twenty-three emerging markets lost 0.3% on average. Seventeen are in a Confirmed Uptrend (including ten in an Uptrend Under Pressure), the 50th week with a majority.
• APAC market gains were flat, led by the Philippines (2.0%) and Indonesia (1.3%), while Taiwan and China fell 1.9% and 1.3% to below their 10-WMA. EMEA was down 0.4% this week, mainly dragged by Egypt (-2.8%) and South Africa (-2.3%). Turkey (+4.2%) gained the most.

Global Sector Commentary

Posted on December 1, 2017December 1, 2017 by Kenley Scott

Twenty-two developed markets gained 0.2% on average, avoiding a third consecutive week of declines. Twenty-one markets are in a Confirmed Uptrend, but the majority (12) are classified as Under Pressure.
• Volatility increased across the Stoxx 600 index as weak price action led to an increase to five total distribution days. The U.K. was the worst performer among the major European indices, adding three distribution days this week, while France and Germany each added two. APAC markets fell 0.8% on average, with the worst performances from South Korea (-2.7%), Taiwan (-2.3%), and Hong Kong (-2.3%). The only markets gaining this week included Japan (0.8%) and New Zealand (0.5%).

Twenty-three emerging markets fell 1.2% on average. Seventeen are in an Uptrend, the 49th week with a majority. Of the 17, nine are Under Pressure.
• APAC markets fell 1.5% on average. Three markets were shifted to Under Pressure, including South Korea (-2.7%), Taiwan (-2.3%), and the Philippines (-2.6%). Each market has five distribution days in the past five weeks. EMEA fell 0.8% on average. Hungary (-3.8%) and Poland (-3.3%) fell the most. Egypt (2.5%) and Greece (2.1%) gained the most from the prior week.

Global Sector Commentary

Posted on November 24, 2017November 25, 2017 by Kenley Scott

Global Gains Resume, U.S. Small-Caps Rebound Twenty-three developed markets gained 0.8% on average, rebounding after two weeks of losses. Twenty-one are in a Confirmed Uptrend, but a majority (13) remain classified as Uptrend Under Pressure.

• The Stoxx 600 index gained 0.7%, rebounding to close right at its 10-/40-WMA. Most EMEA markets gained, led by Italy (1.6%), France (1.5%), and Switzerland (1.5%). APAC markets gained 1.2% on average, outperforming for the eighth week in a row. Hong Kong (2.3%) was this week’s outperformer, rising to new 11- year highs.

Twenty-three emerging markets gained 0.4% on average. Seventeen are in a Confirmed Uptrend, the 48th week with a majority. Of the 17, eight are Under Pressure.

• APAC markets rose 0.2% on average. China (-1.6%) was the laggard for a second week, closing below its 40-WMA for the first time since August. Taiwan (1.4%) was the standout, rising to new all-time highs. India (1.0%) also gained solidly. Brazil (1.4%) closed higher for a second week, recovering from more than 6% off highs to 3%, but remains Under Pressure.

Global Sector Commentary

Posted on November 17, 2017November 17, 2017 by Kenley Scott

Twenty-two developed markets fell 1.2% on average, declining for a second week after seven weeks of gains. Twenty-one are in a Confirmed Uptrend, but we now have majority (14) classified as Under Pressure. Distribution day counts rose to 4.2 on average

Global Energy Sector

Posted on November 15, 2017November 15, 2017 by Kenley Scott

Sector at a Pivotal Stage in Recovery
We have been tracking a potential bottom in the broad Energy sector (WS002) since late June. After making new lows in August, the sector gained about 14% to November highs, breaking above its 40-WMA for the first time in seven months. However, the rally is now stalling, with the sector having pulled back 4% in the last week. It is now at a critical test of 40-WMA support (p.5), the results of which may determine if the sector can transition from medium-term improvement to long-term outperformance. As of Wednesday, the support level was not holding.
• Despite this week’s pullback, Energy is the third leading sector over 13 weeks,nwith a 6% gain. The S&P 500 is up 3% over the period.
• Energy is now trailing the S&P 500 by 6% over the most recent six months. Thenpeak lag was more than 23% in July (p.4).nInterestingly, oil prices are sharply outperforming the broader sector (p.5)
• Light sweet crude prices (0COIL) jumped 19% over 13 weeks, nearly tripling the gains of the Energy sector. Even more impressive, since crude’s June bottom, it is outperforming the sector 30% to 5%. This week, prices have finally begun to take a pause and are down about 4% off recent highs. Still, the uptrend is intact.
This is likely at least partially attributable to the wide spread between spot and future crude prices. As of November 14 midday, spot crude prices of ~$55.50 were higher than November 2018 futures prices of ~$54.50 and November 2019 futures prices of $51.00.