The Weekender

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Includes: ARMH, ARZTY, BMWYY, CRARY, DTEGY, EKTAY, ISNPY, LBTYA, MDIBY, NVZMY, PUGOY, RHHBY, SWGAY, TI, UNCFY, VOD
by: Aviate

What if interest rates rise / inflation picks up?

This week it was difficult to avoid supranational issues related to Greece's 'accounts payable' ledger accompanied by yet another round of last-minute posturing and brinkmanship. As the business week draws to a close, it seems the Greek can is being kicked further down the European road, this time by bundling IMF repayments into 'one easy monthly amount.' Rising rates is the most anti-consensual trade but this discussion from some weeks back remains highly relevant in the midst of the current bond rout. Yields in Europe continue to move higher with the German 10yr yield up by over 1000% YTD. We have been warning of a possible retreat in bond markets for some time. As discussed, rising rates would trigger us to add more cyclicals, especially banks (see Aviate Reflation Recovery Basket). Questions over discount rates for growth stocks would arise, as would the relative appeal of Dividends. Our view remains that dividend stocks are fine to own as long as the dividends are higher than alternatives; and growing. Of the classic bond proxies we remain sellers of Utilities (ex renewable exposures) but we are adding more to Telcos (more below).

Stay long Recovery/Reflation, especially Banks

According to the OECD Europe is the only region seeing an acceleration in GDP growth. As we discussed last week there are only a handful of markets globally seeing an early summer acceleration in macro trends and/or a steepening yield curve, Italy being one of them. Just this week the Italian manufacturing PMI printed at new recovery highs of 54.8. What is important about this is unlike last year where April marked the peak for Italian Macro (and so some investors have been cautious of a repeat) trends have accelerated since April this year. Improving PMIs should drive further lower NPLs which is a material driver of earnings revisions going forward. We continue to add exposure and take comfort from the fact a number of Italian stocks are making new highs, indicating positive momentum which we believe portends further outperformance over the medium term. Mediobanca (OTCPK:MDIBY), Intesa Sanpaolo (OTCPK:ISNPY), UBI, PMI, UNI, UniCredit (OTCPK:UNCFY), Credit Agricole (OTCPK:CRARY) all remain buys.

Telcos remain a buy

The telco sector remains one of our favourite areas of exposure. The environment in Europe is one where consumers now have good prices but poor broadband coverage relative to other countries. We think therefore consolidation will be allowed in order to encourage investment. These trends are slow burning but the context for years to come should be very positive. It is happening too in fixed/mobile, in EU/US. Eventually in the EU we think we will have 5 operators. The change in the capital cycle is key to the performance of the SXKP. Telecom Italia (OTC:TI) remains one of our highest conviction calls in the sector and indeed the wider market. Orange's senior management this week has said that Telecom Italia could be among its targets in a future round of consolidation in the European telecom market. It's also a target for Vincent Bollore and also Sol Trujillo not to mention a great turn-around story and geared to one of our favourite countries in Europe.

John Malone and Telcos

This week Vodafone (NASDAQ:VOD) has confirmed they are in talks with Liberty Global (NASDAQ:LBTYA). We think all options will be discussed - JVs, asset swaps and full combination. In response to speculation, Vodafone has responded as per the rules and said the bare minimum we think; so far in "early asset swap talks". Liberty Global wants the UK, Dutch and German assets of Vodafone. If Vodafone sells these assets then this catalyses the breakup of Vodafone - a further positive in our view. Most of all, Liberty Global wants the UK (UK is 33% of op cash flow at LBTYA, 10% at Vodafone) because a BT/EE combination is lurking around the corner. Will Vodafone sell only the UK? We don't think so. We think it prudent to be long Vodafone and Liberty Global. Deutsche Telekom (OTCQX:DTEGY) is another of our favoured telco names affected (indirectly by Mr Malone). This week we picked up on Malone's potential involvement in a T-Mobile/Dish tie up. Not only would a deal unlock significant revenue and spectrum synergies but Deutsche Telekom's standalone exposure is geared to improving European consumption, IoT, consolidation, yield and China Mobile partnership.

China and the Golden Visa

As China's benchmark stock index hit a new seven-year high, topping 5,000 for the first time since 2008, the government has moved further to free up its capital account. This could (according to the BoE in 2013) re-direct as much as US$7 trn towards foreign investment (equivalent to nearly 50% of US GDP). Anecdotally, we understand the Portuguese property market is already subject to Chinese direct investment because Chinese investors are able to buy property under the Golden Visa programme in Portugal and receive a European passport in return for a very short period of time on the ground in country each year. Spending from China will help drive consumption and underpin an ongoing improvement in the wider Portuguese economy. In an interesting side note, we have heard this via South African contacts who are seeking the same route to Europe via Portugal. Such behaviours are good for house prices and so the banks (Caxia?). Is it any wonder the Chinese are clamouring to buy Banca Nova? It's good for consumption and it so it should be good for NOS.

Autos and China

With respect to BMW (BAMXY) note China is to expand its parallel import trial for cars sold through unauthorised dealers, something we have been discussing for months and highlighted again last week as Alibaba started parallel imports of BMW cars on their website (with better after-sales service). This is the New Normal that BMW alluded to a few weeks ago and is something the market needs to recalibrate for as there is pressure not only on volumes but also price. The real growth globally is Europe, which is where our preference would lie although we struggle to get too excited by Peugeot (OTCPK:PUGOY) above €20 (our original target), and so for now our focus turns more towards Fiat. The Ferrari IPO will reveal a cheap stub-value, one we believe to be unjustified should Jeep continue to grow as it currently is.

Aviate shorts

Swatch (OTCPK:SWGAY) remains one of our conviction sells. IHS has forecast a 250% increase in smartphone displays this year driven by Apple Watch. Moreover the momentum and supply chain suggest no slowdown in related component orders, despite supply constraints at launch in April. Apple Watch is expected to use 84% of AMOLED smartwatch panels in 2015. The Hurun report has published a survey stating that 79% of Chinese want to buy a smartwatch. Swatch is ONLY developing 'smart' watch for the Swatch brand and it will only include some sports measurements and NFC payment capability for certain markets (EU). Company and management remain woefully behind the curve. We get the feeling something is very wrong with Aryzta (OTCPK:ARZTY). It is a loved stock, and yet is down 38% from its peak and we can't make head nor tail of their current strategy. Why buy Picard - a Franco frozen food distributor costing 8% of market cap with no obvious synergies in a totally different business which they don't control; one that's low growth, highly levered and pays no dividends? Perhaps recency bias at work here and our scepticism for management hubris is compounded by our Elekta (OTCPK:EKTAY) call, but we fall on the side of "…management are not telling us something…" Until there's clarity, we remain a lone seller. Speaking of Elekta, we note this from Chairman Laurent Leksell on May 13:"On the dividends, we have no intention of changing our dividend policy, and the cash flow, we remain confident on the cash flow….So no changes on the dividend side". This week, Elekta cut its dividend….??? Unsurprisingly, we remain sellers.

Aviate stocks in the news

Feedback from company meetings with NOS management has been resoundingly positive. NOS have confirmed our views on the Portuguese Economy which is running ahead of the average in Europe. An independent study of Roche's Gazyva presented by Dr Laurie Sehn (British Columbia Cancer Association) earlier this week showed patients had median progression free survival of 29.2 months when receiving Gazyva in combination with bendamustine compared to 14 months in patients on bendamustine alone. Roche (OTCQX:RHHBY) has the largest pipeline in the 'revolutionary' technology based I/O set to transform medicine in the next decade and beyond. Last weekend's ASCO, as expected, showcased Roche's leadership and differentiation. Interesting volte face by UBS on Novozymes (OTCPK:NVZMY) last week, due to, it seems, a greater appreciation of the opportunity presented by the animal biome. As discussed we view this is one of the mega-trends in food production and the 4 or 5 companies that control this market, of which Novozymes is one, are likely to see significant secular growth over the coming years. We remain buyers of ARM (NASDAQ:ARMH). Broadcom is the latest semiconductor company to be acquired and, at $37bn, is the largest in the space. Which begs the question. Why not buy the disruptor? Why not buy ARM?

1. What if interest rates rise / inflation picks up?

This discussion from some weeks back remains very relevant after the bond rout currently going on. This week we have seen the German Bund spread make new highs for the move.

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Ditto the UK curve, new highs. Italian curve, new highs. The Dutch 10yr's risen 390% since mid-April. The Bund has risen 1000%…

From our note on May 5th:

"Seeing as this remains the most anti-consensus trade of the year, and so represents one of the biggest tail risks, we believe more thought needs to be given to it least from a portfolio perspective, and would use last week's break-up in EU bond yields as a timely reminder to do so. Whatever your proclivity - to deflation or inflation - the fact remains the market has overpriced the risk of one outcome at the expense of the other. How else can you explain the fact the average Pension Fund Manager in the UK has doubled "our" exposure to bonds since 2000 and halved our exposure to equities to below 40% (the recommended level is c70% over the long-term - see Jeremy Siegel). This situation is fine if we get deflation but will cause a rush to exits should we get anything else, and is why we continue to suggest you think about protecting portfolios - if only tactically - to these outcomes no matter how unlikely you may think they are. Quite often pain comes not from what you own, but what you don't. And you don't own many banks - or miners - two sectors that could do ok under such a scenario."

2. NIMs: yield curves and financials

The average UK pension fund has 2x the exposure to bonds and half the exposure to equities than they should? Germany has only 6% of assets in Equities (ok regulation explains a part of this)? Or, why you don't own many Italian banks that will benefit if the Italian curve steepens? The problem is that when markets wake up to the fact deflation may be yesterday's risk, any rush out of bonds could get very messy - a.k.a. the Bund rout a month ago. And what could wake the markets up to such?

Inflation could.

While the breakevens have been pointing to both inflation (and yields) rising for some time (an outcome few portfolios seems positioned for), it takes headlines for the masses to react, headlines like "Eurozone Inflation rises 0.9% YoY", itself not a big number in absolute terms but is higher than expectations and directionally relevant, especially so in the context described above. It certainly surprised the German 2Yr breakevens which jumped over 200% from being slightly negative to +51bps, see chart below.

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This and we have more money printing to come. The benefits of a weaker Euro are being felt in pricing, so too the base effects of oil but the big one is wage growth, especially so in Germany. Turning to the bond markets, many fear for higher rates due to the leverage in the system - but Italy, for example, is not the UK. Yes the sovereign is levered, but the consumer is not (with the second highest savings rate in Europe). Nor are the banks that lend to them. While the ECB is buying up pretty much all net-new issuance, suppressing yields on the way, it's still not enough to prevent the yield curve in Italy steepening to the highest level of the year (see chart).

Now, if this was simply 'risk-off' other assets would be falling. Instead, this could simply be bond markets pricing in nominal growth.

What if?

This outcome in Italy - rising yields - as it is elsewhere in Europe is not something many portfolios are positioned for, and so it represents a big tail risk. To protect from such we suggest, and have done since January, to buy some banks - their NIMs rise as curves steepen. The cost of which is nearly as cheap as it was in March 2009 - the last time M3 was running north of 5%, and just before banks doubled in a year. While history probably won't repeat - at least in terms of 100% - it might rhyme and so we increase our overweight, especially in higher beta areas, like Italy as that is where the underweight is most extreme, except perhaps with Intesa Sanpaolo.

3. Stay long Recovery/Reflation, especially Banks

Key liquidity proxies continue to accelerate, notably M1 and M3 data, released Friday. The M1 data is consistent with Euro-Zone PMIs in the 55-60 range in 2H which is a significant acceleration on previous years. In some peripheral countries like Spain the growth acceleration is showing up in data. Indeed Spain this week released new recovery highs in their PMI of 55.8. As discussed strong liquidity is a pre-cursor to a stronger economy as the following chart illustrates:

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Source: FT/Reuters

It also has a strong correlation with the relative performance of Bank stocks as this chart shows:

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As a reminder, the last time M3 was running this high was March 2009, around the same time banks stocks where this cheap vs. the market and just prior to a huge rally where they were the best performing sector over the following 6 months. They doubled over 12 months. While we wouldn't expect a repeat of that sort of performance, we do expect them to outperform from here.

As an aside, see commentary in the FT re UK banks, recovery plays, earnings growth and the fact they will all be paying big dividends next year. Housing recovery on-going is great for collateral value and confidence. Wage growth also coming…

4. Deflation vs. Inflation and the case for Deutsche Boerse

As discussed we're over-pricing one outcome, rampant deflation, and under-pricing another, recovery accompanied by the inflationary erosion of debt. The problem is that when markets wake up to that, any rush out of bonds could get very messy, especially so in Germany where only 6% of Assets are held in Equities. Surely that can't last, and so we would stay long Deutsche Boerse, for it should be one of the biggest beneficiaries of this secular change, if/when it comes.

5. Stick with PIIS

Greek risks aside key liquidity proxies continue to improve in Europe, notably M1 and M3, released Friday. This and the ECB is ACCELERATING money printing over the summer. Strong liquidity is a pre-cursor to a stronger economy, especially as the channel for growth in Europe is via Banks. The M1 data is consistent with Eurozone PMIs in the 55-60 range in H2 which is a significant acceleration on previous years, already seeing signs of in PIIS (that's PIIGS without Greece) and especially in Italy, our favourite. With more 'reflation' promoting more 'recovery', we suggest you stay long our basket of the same name: the Aviate Reflation Recovery Basket.

Please call for constituents.

6. Why invest in Portugal?

Because it is geared to three of the most powerful forces in markets:

1) Demographics and aging populations,

2) Safety (of capital and life), and

3) China opening her capital account.

As discussed, you can get a Golden Visa to live in Portugal (and so the EU) if you buy a property worth €500k and spend at least 1 week per year in the country (easy to do if you are a golfer). As such, many of our South African friends who live in fear of SA devolving further have purchased a property, giving their families a free ticket to live/work anywhere in Europe, including the UK. Freedom and safety are a key driver of their decision. What is interesting however, is they are forever being gazumped by Chinese buyers looking to do the same. And as we have discussed, the opening of the Chinese capital account which could unlock $7tr in domestic cashflow for foreign investments is no small amount! This at a time no-one can breathe in Shanghai because of SMOG. What we didn't know however, and what makes this idea more compelling is the fact it also a play on aging populations in Europe. As reported in the Telegraph on April 7, any European can retire in Portugal and reduce their tax they pay on pensions. In other words, these pension freedoms will allow you to move abroad, take your hard-earned savings with you - and potentially escape some of the taxes that would otherwise apply here in Britain or elsewhere.

Capital will go where it is best looked after and where you don't get shot.

This is good for house prices, and so the banks (Caxia?). Is it any wonder the Chinese are clamouring to buy Banca Nova? It's good for consumption and it so it should be good for NOS.

7. Stay long Italy and her Banks

As we discussed last week there are only a handful of markets globally seeing an early summer acceleration in macro trends and/or a steepening yield curve, Italy being one of them. Just this week the Italian manufacturing PMI printed at new recovery highs of 54.8. What's important about this is unlike last year where April marked the peak for Italian Macro and so some investors have been cautious of a repeat) trends have accelerated since April this year.

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Improving PMIs should drive further lower NPLs which is a material driver of earnings revisions going forward.

As such we continue to add exposure and take comfort from the fact a number of Italian stocks are making new highs, indicating positive momentum which we believe will portend to further outperformance over the medium term. With respect to the banks we expect to hear plans on NPLs imminently, either via a bad bank or changes to creditor protection, which will give creditors possession of assets after two rather than nine years. Once passed this will create a line of sight for consolidation to begin in earnest.

Mediobanca, Intesa Sanpaolo, UBI, PMI, UNI, UniCredit, Credit Agricole all remain buys.

8. Telco sector: stay long

Excluding the anomaly of the GFC (when telcos were good defensive names and then not), this is what the Regulator has done - regulated returns away through price controls and increase the number of competitors (esp in Mobile). The sector has underperformed massively.

Now consumers have good prices but poor broadband coverage relative to other countries, consolidation will be allowed in order to encourage investment. These trends are slow burning, but the context for years to come should be very positive. And it's happening in fixed/mobile, in EU/US. Eventually in EU we will have 5 operators. The change in the capital cycle is key in SXKP.

9. Deutsche Telekom (buy): this should be up more

Neil Campling is probably best placed to discuss John Malone's potential involvement. Well worth a call. He is asking why DTE is not up more when there appears to be growing potential of a T-Mobile/Dish tie-up? We suspect two-fold, both of which are easily explained and offer a great opportunity to add.

One: TMUS has been in play three times before; rejecting Iliad's approach, Softbank thwarting the Sprint/T-M merger, and the DOJ preventing AT&T/T-M deal. It IS DIFFERENT this time. As Dish has to offer wireless services in 2016 or face giving back wireless spectrum to the FCC. Not only that but TMUS and DTE is now in a position of strength, with the best performing wireless carrier asset in the U.S., whereas the company has been on the defensive and in a position of weakness previously.

Second: TMUS CEO, Legere, appears to pour scorn on the reports; "snarky, sensational and shallow". No he doesn't. He calls out the derogatory interpretation of a deal as snarky, as Re/code describe it as "akin to two people who hook up because they are the last ones left in the bar at closing time".

In fact we know Legere and Egan hold each other in high regard and have been very complimentary of late. Consider these quotes:

Ergen, Dish: "T-Mobile is a company we think very highly of". "We admire what John (Legere) has done".

T-Mobile CEO: "John Ergen's done a masterful job". "We'd be a very interesting partner" for Dish. "We look at their (Dish) spectrum portfolio, and video, as a fascinating idea to consider".

The muted reaction in Deutsche Telekom, is a great opportunity to buy. Not only would a deal unlock significant revenue and spectrum synergies but DTE's standalone exposure is geared to improving European consumption, IoT, consolidation, yield and China Mobile partnership.

Buy

Call for more.

10. Vodafone/Liberty: just assets swaps? Highly unlikely. Here's why

The move lower in Vodafone is likely in reaction to the statement of exploring asset swaps, with no discussion of combining the two companies. YET. This was never going to be a marriage of convenience or simplicity. The two companies were always likely to be apart in terms of negotiations and philosophy at the start. But take a look at what each own.

Liberty want the UK. Actually Liberty need the UK, its 33% of their Operating Cash Flow. Vodafone see the UK as their highest using market for data and 4G, which is the mechanism Mobile carriers can see as the best opportunity to monetise. And Vodafone were adamant last month (analyst day) that the company was determined to move into TV and content in the UK. Adding this all together, can you see Vodafone selling Liberty the UK assets? No.

What of the other way round. Liberty's last quarter showed very strong results and momentum at Virgin, and their project Lightning (>4m home build in UK) is performing above plan. Can you see Malone selling his prize asset Virgin? No chance.

So the UK is key to both but they need to do something, as the new BT/EE combination is a threat literally just around the corner.

Liberty has issues in Holland. Vodafone has issues in Germany. Given the recent asset building in Germany (Kabel BW for Liberty, Kabel D for Vodafone) it seems they both want Germany and would be unlikely to walk away from the market.

Fact is the three core markets for each are the same. Outside of these three core markets there is cross over in Ireland, Czech and Hungary.

So they may start by talking about asset swaps but ultimately they really both need scale in the same markets. And the most likely means to get there is by a combination of the two, and then disposal of non core markets (perhaps Greece and Romania to Deutsche Telekom for example). Such negotiation will clearly take time, but for the first time, there is an admission that discussions have begun.

We remain buyers of both VOD LN and LBTYA US. Fair value in each in the region of 300p and $67. Call for the merger model.

11. Market repair in Italy. Stay long Vodafone

We think this goes to 300p minimum. Consolidation in Italy would also be positive for Vodafone - one of its last remaining weak core markets. But our view on Vodafone is still centred around the bigger picture and potential for a big, bold and game-changing deal with Liberty Global. If the tables have turned to the extent that Liberty Global is now the buyer, we think they could pay c.300p or more and still create value (assuming some major disposals - we have updated our deal flexer model to show this, available on request if you want to play around). But the size of equity issuance likely needed for that would dilute existing shareholders considerably. Vodafone buying Liberty Global could create much more value for both parties. That will require management to bow to what seems like increasing shareholder pressure. Given a fast-changing telco landscape, at least discussing deal options with Liberty is almost becoming a fiduciary duty. Stay long both.

12. TV: cable consolidation will lead to content consolidation

Malone wants content assets. There's few better than ITV.

We remain a buyer.

13. NOS (buy): positive feedback

Post company meetings feedback has been resoundingly positive. NOS also confirm our views on the Portuguese Economy, which is running ahead of the average in Europe (which incidentally is the only region seeing an acceleration in GDP growth according to OECD updates this week).

14. Roche (HQGB): momentum is with Roche's Genentech at ASCO

An independent study of Gazyva presented by Dr Laurie Sehn (British Columbia Cancer Association) shows patients had median progression free survival of 29.2 months when receiving Gazyva in combination with bendamustine compared to 14 months in patients on bendamustine alone.

NeoSphere study has shown strong PFS data for Perjeta. In combination with Herceptin and chemotherapy the PFS and DFS (disease free survival) for Perjeta were statistically significant. Patients receiving Perjeta were 31% less likely to experience disease worsening and 40% less likely to experience disease recurrence.

Competitor Bristol-Myers' Opdivo has shown it is little better than chemo and only works in non-small cell lung cancer patients with higher expression of the PD-L1 biomarker levels. Bristol-Myers had previously suggested its drug may work in patients irrespective of PD-L1 levels. In contrast, efficacy data from Roche's POPLAR trials suggests Roche is pulling ahead of the competitors. Atezo was associated with a 45% overall response rate (for TC3 or IC3 tumours), over 3x the 14% ORR in patients without TC3 or IC3 NSCLC.

Genentech's Atezo is likely to get an initial approval in the next 12 months and is a drug with the potential to clearly distinguish itself from the competition. Genentech views PD-L1 as the more significant driver behind cancer and Atezo has a potential in combination with other therapies as a big step change in both innovation and impact. Genentech chief, Chen, sees the drug as "one of the most potent cancer therapies" he's seen.

Roche has the largest pipeline in the 'revolutionary' technology based I/O set to transform medicine in the next decade and beyond. ASCO is, as expected showcasing Roche's leadership and differentiation. Stay long.

15. BMW vs. Peugeot and Fiat

With respect to BMW note China is to expand its parallel import trial for cars sold through unauthorised dealers, something we have been discussing for months and highlighted again last week as Alibaba started parallel imports of BMW cars on their website (with better after-sales service). This is the New Normal that BMW alluded to a few weeks ago and is something the market needs to recalibrate for as there is pressure not only on volumes but also price. The real growth globally is Europe, which is where our preference would lie although we struggle to get too excited by Peugeot above €20 (our original target), and so for now our focus turns more towards FCA. The Ferrari IPO will reveal a cheap stub-value, one we believe to be unjustified should Jeep continue to grow as it currently is. Italy is performing well (they were losing share here before), they are less exposed to parallel import pressure in China and Jeep is one of the best positioned brands globally, not least in China where SUVs are bucking the trends. Should Ferrari's value come anywhere near €9bn then you are paying sub .3x EV/Sales for the rump, which in a recovery looks pretty decent value.

16. ARM (buy): must be in play?

Broadcom is the latest semiconductor company to be acquired and, at $37bn, is the largest in the space. This is likely to be followed with Intel's $17bn offer for Altera. Add in NXP buying Freescale, Qualcomm buying CSR in the UK, and Xilinx, Renesas and Maxim all the subject of takeover talks in recent weeks (Bloomberg) and the appetite for M&A consolidation in the Semi market is clear.

The over-arching premise is that this is being driven by the disruptive nature of IoT. System on Chip (SoC) and the integration of semiconductor expertise (from Microcontrollers, to RF and sensors) is designed to increase functionality, speed time to market, offer one stop silicon solutions and increase potential silicon content per design win. Which begs the question, why not buy the disruptor? Why not buy ARM?

Broadcom is just one licensor of ARM technology. Add it, say, to Apple, Qualcomm, Mediatek and Samsung, four other licensors and you have over $1 trillion of market cap companies benefitting from this enabler. Simplistic perhaps, but these are just five of many companies who benefit from ARM IP and technology enablement. One that is valued today at just $25bn, or less than Broadcom alone?

Stay long ARM.

17. Swatch (sell): creative destruction in its most perfect form

IHS forecast 250% increase in smartphone displays this year driven by Apple Watch. Moreover the momentum and supply chain suggest no slowdown in related component orders, despite supply constraints at launch in April. Apple Watch is expected to use 84% of AMOLED smartwatch panels in 2015. Apple supplier of key flexible display semiconductors, OLED +2% in the U.S. to new highs, as is Sumitomo Chemical (polymer substrates on which OLEDs are produced). Apple has begun preparing its retail employees for the in-store launch of the Apple Watch this month. Until now the Apple Watch has been available from Apple solely online but supply constraints appear to have been overcome. Creative destruction in its perfect form.

Remain a seller of Swatch.

Note Riccardo is reiterating the technical short on Swatch this week.

18. Elekta (sell): this is far from over

Chairman, from May 13:"On the dividends, we have no intention of changing our dividend policy, and the cash flow, we remain confident on the cash flow….So no changes on the dividend side." Elekta this week, cuts their dividend….??? We remain sellers.

19. Aryzta: 10 buys, only 1 sell and down -38% from peak?

Something is very wrong here. Loved stock, and yet is down 38% from its peak and we can't make head nor tail of their current strategy. Why buy Picard, a Franco frozen food distributor costing 8% of market cap with no obvious synergies in a totally different business which they don't control, which is low growth, highly levered and pays no dividends? Either the market is wrong and this is a great deal/huge opportunity, or, the management are not telling you something. Perhaps Recency bias at work here and our scepticism for management hubris is compounded by our Elekta call, but we fall on the side of management are not telling us something. Until clarity emerges we remain a lone seller.

20. The mega trend in animal biome (cont)

Interesting volte face by UBS on Novozymes

Interesting volte face by UBS on Novozymes last week, due to, it seems, a greater appreciation of the opportunity presented by the animal biome. As discussed we view this is one of the mega-trends in food production and the 4 or 5 companies that control this market, of which Novozymes is one, are likely to see significant secular growth over the coming years aided and abetted by recent actions by McDonald's & Tyson Foods to eliminate human antibiotic produced meat which. Probiotics have been proven to improve animal health and so too yields.

Stay long good bacteria. Novozymes, Givaudan, Symrise and DSM.

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