ATIS Market Roundup: Issue 4 (28/11/14)

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Welcome to the fourth issue of the ATIS Market Roundup Newsletter.

Yet another busy fortnight for ATIS. SIM Challenge was hosted for a week in which the ATIS team came second, (unfortunately), Lloyds held a presentation, we visited the PwC Office in Birmingham for an insight, there was a Presentation and Pitching workshop the day after PwC, and then the day after that a Business Plan workshop. The following week HSBC held a penultimate year and final year presentation, there was a networking event with Fidelity, Deutsche Bank, and Morgan Stanley on the Wednesday, and the day after ATIS were invited to pizza at the Grant Thornton office!

The next main event coming up will be huge. We call it Speed-Networking: speed-dating, but networking. How it works is every student spend 3 minutes with every representative from every company, and you will essentially sell yourself to the company in an elevator style pitch, with everyone bringing their CV. We had this event last year, and there were 8 job offers on the spot, so we are delighted to host this event again. There are limited spaces available, so if you would like to reserve your spot email one of the committee asking to attend: we will screen all applicants and reply to those successful. If you are successful you must attend.

Companies attending Speed-Networking include Accenture, PwC, HSBC, Lloyds, Barclays, Oxygen Accelerator, Base Group, Grant Thornton, and many more

The coming events include: • Lloyds Banking group drop in: Tuesday 2 December, 11-3pm, Main Building foyer. • Grant Thornton, day in the life of an auditor: Wednesday 4 December, 3-5pm, MB108. (Auditing is a great stepping stone to get into corporate finance as it provides fantastic groundwork of knowing business books, so do not dismiss this event!) • Speed-Networking: Thursday 11 December This should be a superb event, so we do encourage you to email one of the committee asking to be put on the screening list

Oliver Ward

Oliver Ward President, is a second year BSc Business & Management student, focusing on Economics & Analytics for year 2. Along with being President of ATIS, he is a Director of the World’s largest University based consultancy, and the General Secretary of the Aston University Badminton Team, along with being a very keen badminton player himself. His strengths lie very much in sales, strategy, and growth, and he wishes to pursue this as a career path.

Joel Ntamirira Trading Officer, is a second year student studying BSc Honours Finance. As well as being Trading Officer with the Aston Trading and Investment Society, Joel is Utilities and Healthcare Portfolio Manager with Aston Capital. His equity investment philosophy is concentrated, research driven, focused on value and growth ideas. He wishes to pursue a career in equity research & investment management.

Sharandas Thampi Contributing Writer, is an MSc Business and Management student at Aston Business School, with a keen interest in the Investment Management and Strategy Consulting industries. He holds an undergraduate first class honours degree in engineering and has 2 years of part-time and full time entrepreneurial leadership and management experience, leading a start-up team of engineers in the internet industry in India. His interests include financial markets/trading, business analysis and technology.

Contents

3,4 Mexico Poised for growth

5,6 Black Friday What is the real significance?

7,8 Oil WTI Crude falls to $70 for first time since June 2010

9,10 Bill Ackman Heads I win, Tails you lose

11,14 Apple First member of the $700bn club

15,16 Q&A with J.P.Morgan The head of EMEA Graduate Recruitment talked to our silver sponsors

1 2

Mexico Mexico is the second largest Latin American country and the most populous Spanish-speaking country in the world. Economically, the North American republic has faced difficult times due to a shrinking of industrial output, social unrest and a lack of productive investment. On Friday, 21st November 2014, third quarter results from the Mexican economy did not live up to analyst expectations and the Mexican government has cut its growth outlook for the year to between 2.1% to 2.6% from its earlier forecast of 2.7%, the second downgrade this year.

In spite of the negativity, why are some analysts optimistic about Mexico?

Two rounds of recent constitutional legislation were made by the Mexican government, both of which, in combination, have the potential to unlock the Mexican economy in the way that India’s economy was opened up through large scale liberalisation and privatisation in 1991.

The first round of reforms, made by the Mexican government, changes the landscape of competition in the economy along with providing growth opportunities to the telecomm and energy sectors in particular. Competition has been enhanced through the delivery of anti-monopolistic policies that, for example, caused Mexico’s largest telecomm firm América Móvil owned by multi-billionaire Carlos Slim to divest its assets. Mexico’s state run oil firm Pemex has a history of poor management and productivity due to a lack of investment. On the back of the shale oil boom in the neighbouring USA, Congress legislation in Mexico recently allowed for Foreign Direct Investment (FDI) in the nation’s deepwater and shale fields, thus providing growth opportunities to the energy sector as a whole. Liberalisation of the electricity industry is also on the agenda.

Credit for these internal successes are due in large part to the political stability that has been the result of a majority in Congress for the current Enrique Peña Nieto administration, thus reducing the obstacles involved in passing legislation. Partisan politics have also seen a decline in recent times with broad political co-operation at the highest levels in pushing reforms.

Another external macro-economic development that provides potential momentum to the Mexican growth story is its close trade ties with the USA. With the recent upswing in the American economy, there is potential for increased export revenues for the Mexican economy.

Below is a pie-chart that shows Mexico’s exports to various countries. The chart depicts the high dependence of Mexico on the USA as an export market.

The yield on 30 year (long-term) bonds issued by the Mexican government has consistently moved downwards in the period from 2001-2013, especially in the periods of 2011-12 and 2012-13 when the new Enrique Peña Nieto administration took over the political mantle. This is shown in the figure below:

This shows a positive outlook for growth in the long term for Mexico, assuming that the momentum of the recent reforms can be continued in the future.

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Black Friday 28th November, the day after Thanksgiving, is the busiest shopping day of the year. Commonly known as ‘Black Friday’, the day marks the beginning of the winter holiday season with retailers attempting to outdo each other to provide massive savings deals for consumers.

What is the real significance of Black Friday for the retail industry and for the consumers?

The winter holiday season is responsible for 20-40% of retailer revenues on average, thus making it the most critical part of the year. Black Friday acts as a tool for retailers to maximise sales by getting large numbers of consumers to congregate and make purchases in a small window of time (i.e 1 day). The statistics prove the success of Back Friday as marketing tool for the retail industry. In 2013, approximately 92 million people shopped on Black Friday alone, with total spending estimated at upwards of $57 billion.

Retailers, both online and brick-and-mortar slash prices on items in demand for a limited period of time, thus drawing a large number of consumers to their respective stores. The graph below shows the decrease in prices for certain products at John Lewis and Boots for Black Friday in 2013:

The origin of the word ‘Black Friday’ is debatable. The majority believes that it signifies the day on which the profits of most retailers move into the black (i.e they become profitable). Another theory is that the term originated in the United States due to the excessive levels of chaotic vehicular and pedestrian traffic on the day.

Whatever the origin of the term might be, retailers seem to be making the most of the shopping craze and delirious consumers seem to be playing right into their hands. Whether the increase in sales would have an effect on the share price of retail stocks is also debatable. The spending, and hence sales, is expected to increase for Black Friday 2014 due to higher levels of disposable income through the recovery in the UK. This does not necessarily mean that profits/earnings would go up since increases in quantities of product transacted are compensated by decreases in price of the product.

The 5-year share price movement of Marks and Spencer, as shown below, seems to show a correlation with the Black Friday rise in sales through the spikes in the share price in the November period of 2010, 2012, 2013 and 2014.

In order to turn the marketing screw even further, Black Friday has been expanded to its online version for e-retailers Cyber Monday, the Monday after Thanksgiving. Cyber Monday has in recent years shown even greater sales than Black Friday. Given below are the deals provided on Black Friday by the U.K’s biggest retailers.

Amazon Black Friday page

Argos Black Friday page

Very Black Friday Page

Currys Black Friday page

John Lewis Black Friday page

5 6

Oil Price Slump Continues Brent crude fell to the lowest in four and a half years yesterday at $70, and WTI at $65 when OPEC announced that they wouldn’t curb production levels to support oil prices. The Organisation of Petroleum Exporting Countries met in Vienna, with members of the group deciding to keep production levels the same. Weeks before the meeting, there was speculation that they would decide to cut production to support oil prices. If approved, this would have been the first production cut since 2008.

The chart below shows the dip in prices (WTI) when OPEC announced they plan to stick to production targets.

The 12 member cartel plan to keep producing 30 million barrels a day; analysts say a cut of 1.5 million barrels a day would support oil prices. The lack of action is bad news for Nigeria, Russia and Venezuela who need $90/barrel oil to meet their economic targets. Over half of the Russian Government revenues come from oil and gas; low prices are putting additional pressure on the economy.

However; worse off are American shale oil producers, where the extraction cost per barrel is much higher; at $50 - $100 per barrel, compared to $10 - $25 per barrel via traditional methods. Lower oil prices could also halt the shale oil boom in USA. Analysts predict that 40% of forecasts for 2015 would be uneconomic if prices stay below $80 per barrel. When US players liquidate and US production is smaller and more concentrated; the price of oil should then pick back up; only the cheapest producers will survive. Hedged contracts at $90/barrel are keeping many US oil firms in production; when they expire, it will be much more difficult for many to stay afloat.

To view the OPEC press release click: HERE

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850m loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. Rival bankers estimate that if Barclays and Wells attempted to rectify the $850m loan now, it could go for as little as 60 cents to the dollar. The 30% drop in price since June has impacted on currencies, national budgets, and shares of energy companies shares. Although it is notorious prices of oil do not fully translate into savings for a consumer due to sellers of oil wanting a higher profit, the fall in price has been noticeable, which might possibly be one of the reasons USA grew 0.4% higher than expected, to 3.8% in Q3. The impact has not been limited to OPEC countries such as Saudi Arabia & the US though: Euro inflation slowed to 0.3% as the ECB is poised to discuss stimulus for the Eurozone.

The price slide is having a serious impact on oil producers that rely on revenues from crude exports to balance their budgets. The Russian rouble has lost 27% of its value since mid-June, when crude began to fall, while on Wednesday the Nigerian naira touched a record low. The US dollar strengthened to a 5 year high: it climbed 0.8 % to 118.63 yen after advancing to 118.98 on Nov. 20, the strongest level since August 2007. It added 0.1% to $1.2452 per euro, with the yen depreciating to 0.7% to 147.72 per euro.

How will the producers and oil react?Investors are concerned that companies such as Royal Dutch Shell (RDSA) and BP (BP) won’t have enough cash to cover both investment plans and dividends. Breakeven costs vary from $40 - $100 a barrel, so profit margins are currently being squeezed. In the long run the greater dilemma for oil producers are that the costs of developing new reserves remain higher than ever. An extended period of lower prices will prevent companies such as RDSA and BP from being able to replace production as existing oil fields begin to dry up.

7 8

Bill Ackman

Pershing Square - Heads I win, Tails you lose. Activist hedge fund manager Bill Ackman and his team at Pershing Square Capital Management have pulled off one of the smartest investment plays of the year. Making his investors a staggering $2.2 billion in a day.

How did he pull it off? Firstly, Pershing Square Capital Management and pharmaceutical giant Valeant colluded to force a hostile takeover of botox maker Allergan. Pershing Square then very sneakily built up their stake through options; avoiding all the radars and checkpoints that would require disclosure of holdings at certain thresholds to the US Federal Trade Commission and avoids alerting the company. Bill Ackman then spent months trying to convince Allergan shareholders that Valeant was unlike any other pharmaceutical firms and CEO Michael Pearson was a particularly excellent CEO, branding him part of William Thorndike’s ‘Outsider CEOs’ group.

Allergan has been running away from the deal since April, making merger prospects extremely difficult and time consuming. The company has very strict rules on shareholder called meetings in a bid to suppress and fatigue shareholder action. The firm began fighting back by questioning Valeant’s business model and accounting practices in an attempt to diminish any attraction to Valeant's stock; which was to make up a large component of the deal. Allergan’s board also refused to negotiate the terms of the deal with Valeant, and refused to meet with Allergan’s largest shareholder; Pershing Square, without the management present.

In that period, Pershing Square didn't own any shares in Valeant, but a 9.7% stake in Allergan. Pershing Square finally managed to get an special meeting in a bid to change the board of directors and fix the by-laws prohibiting and slowing progress on the proposed deal by Valeant.

On November 17th, global pharmaceutical firm Actavis, and Allergan agreed on a $219 per share, $66 billion deal; 20% over the highest price offered by Valeant. Pershing Square didn't succeed in convincing Allergan to accept Valeant’s $53 billion offer, however Actavis, as the white knight in this corporate battle, has made Pershing Square’s efforts ultimately successful.

This makes for a fantastic payday for Bill Ackman and his investors; his 29 million share stake was purchased at $3.7 billion and is now worth $6.32 billion. $344 million has been shared with Valeant consistent with the join venture agreement shared by the two firms; making a healthy gain for Mr. Ackman and his investors.

There are still questions about the legality of this deal. Bill Ackman knew about Valeant’s ambitions to merge with Allergen prior to acquiring his 9.7% stake in Allergan earlier in the year. This is material information that was available to Bill Ackman and could be a violation of insider trading laws; there is currently an investigation by the SEC. Pershing Square made $1 billion from the day they purchased the shares, to the day the deal was made public. Mr. Ackman claims he acted as a co-buyer and welcomes the SEC investigation. If the SEC finds that Pershing Square did violate insider trading laws, the penalty is as much as three times the firm’s gain on the deal.

For more information about the potential legal implications of the deal click: HERE

As much as Ackman tried to convince the public and Allergan shareholders that the gem in the transaction would be shares in Valeant; going as far as announcing he is willing to take no cash in the offering for his stake in Allergan and only Valeant stock. The diamond has always been Allergan. The botox maker is now merged with Actavis and collectively expected to make $23 billion in revenues in 2015. As mentioned above, Mr. Ackman has done very well as a result of this deal, Valeant on the other hand? Not so well. Mr. Pearson has plans to make Valeant a $150 billion pharmaceutical company by 2016 and has been making acquisitions (some questionable) in a bid to be a top 5 pharmaceutical company. Many predict their plan B deal is to acquire animals healthcare company Zoetis; which was spun off by Pfizer in 2013 and has a market cap of $22 billion. Ohhh, and guess who just bought a 10% stake in Zoetis? Pershing Square Capital Management.

Another big payday for Ackman in the near future?

9 10

Apple

Lonely in the $700bn club

Apple (AAPL) is the first company in history to top $700 billion in market capitalisation. The worlds most valuable company continues to make new highs; so, how can Apple (AAPL) be worth $700 billion? Under what basis? Does this signal a peak in the share price of the Cupertino based technology company? Or is there still more wealth to be gained by apple shareholders?

Performance is key at Wall Street; better yet, Cash is KING Apple’s has been, and continues to be a strong performer in the technology industry. iPhone demand remains strong and Average Selling Price (ASP) is expected to rise as the iPhone 6 plus is increasingly sought after by consumers. Apple achieved 6.95% revenue growth in FY’14, over $182 billion in revenues and over $39 billion in net income. Apple is a cash machine; currently sitting on $155 billion in cash, cash equivalents & marketable securities, which is the largest hoard by any company today. $137 billion of the cash and cash equivalents is held in overseas subsidiaries; to further reducing tax liability as these funds are not subject to US taxation unless repatriated. Cash generated from operating activities last fiscal year was a whopping $59.7 billion.

Apple has created a lot of wealth for shareholders. Below shows the gain that could have been realised if you invested $100 in Apple in September 2009 and how that compares to investing $100 in the S&P 500 Index, Dow Jones U.S Technology Supersector Index and S&P Information Technology Index; Apple shares have returned around twice it’s benchmarks since 2009.

1211

Not expensive relative to competition Below is a table by Healthy Appreciation from Seeking Alpha which shows how Apple compares in terms of valuation against close peers; who deal in both hardware and software, all pay dividends and have all been around for some time.

As shown above; particularly highlighted by the PEG figure, based on the growth estimates, Apple is valued less favourably by the market than its competitors. If you account for cash holdings; Apple’s Forward P/E adjusted for net cash brings Apple’s valuation to 12.77x. This figure is based on consensus forecasts on Yahoo Finance; Carl Icahn views Apple trading for 8x FY’15E P/E, based on his own forecasts.

Continued iPhone unit sales growth iPhones represent the largest portion of Apple’s revenues and unit sales. Nearly 170 million iPhones sold in the last fiscal year; representing 56% of total revenues. Analysts estimate vary, but based on the strongest iPhone launch ever this year, iPhone net sales is expected to rise by 30%; which is based on 22% unit growth and 7% price growth. iPhone sales grew 12% last year and strong sales in iPhones are integral if Apple is to continue to gain in market cap.

Company Fwd. P/E adjusted for net cash

Apple (AAPL) 12.77

Microsoft (MSFT) 14.3

HP (HPQ) 10.47

Oracle (ORCL) 12.5

Pressure from the street Apple has received increasing pressure from Wall Street to return some of its cash hoard to shareholders; Carl Icahn has openly called for Apple to pursue a tender offer of $133 billion; which has come down from the $150 billion he initially requested for, suggesting Apple should borrow money at cheap rates to fund a buyback programme. Apple hasn’t quite pursued Icahn’s strategy, but the company is increasingly shareholder friendly and has put in plan a total of $130 billion in a shareholder return programme, which includes dividends and share repurchases; with $94 billion already been spent. Carl Icahn has written an open letter; predicting $203 per share. Although theoretically possible, at that point (assuming today’s share count), Apple would be worth more than 6.6% of all USA listed companies combined.

Innovation The company continues to innovate; Apple Watch and Apple Pay are to add significantly to revenues in future. Although neither particularly revolutionary; we have seen the Moto 360 smart-watch and the Samsung Galaxy Gear watch prior to the announcement of Apple’s alternative, and Google Wallet was released prior to Apple Pay. But Apple’s implementation (working with major credit cards and banks), and communication about their latest developments is far superior to Samsung, Motorola’s and Google’s effort, and we are likely to see more consumers use such services as a result.

Conclusion History doesn't bode well for a hardware only company; 90% of Apple’s revenues come from hardware, although to the company’s advantage; it continues to innovate and diversify revenue streams and ultimately, consumers currently still love their products. Based on comparable companies, the valuation seems justified. The following quarterly results will be particularly important; Apple guidance is for $63.5 to $66.5 in Q1 revenues. From a macro perspective; consumers should have more disposable income because of the fall in oil prices which should benefit the company, but the strength in the dollar will adversely affect overseas earnings. All in all; Apple is currently in a very strong position this holiday season.

For the full annual report click: HERE For Healthy Appreciation’s thoughts on Apple’s valuation click: HERE For Carl Icahn’s open letter click: HERE

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J.P.Morgan Q&A

Our Silver Sponsors, Grad Diary, managed to talk to the Head of EMEA Graduate Recruitment at J.P Morgan, Belina Mann

Q: What do you believe makes J.P Morgan unique from other investment banks?A: I’ve only worked at J.P Morgan so I can talk about why I’ve spent 13 years here and why I think it’s a great place to have a career.

Firstly, there is such a breadth of different opportunities, from the Investment Banking divisions to Private Wealth, Treasury and Asset Management roles. There is also great support for mobility across the firm which can really give you a varied career – this is probably why I’ve been here for 13 years!

Secondly, there is a fantastic culture within the organisation; you work alongside hard working intelligent people who support each other.  The people I work with really make all the difference.   Q: What mistakes do you often see in applications?A: The one thing that really stands out is when a candidate has clearly copied and pasted an answer from another application to save time. It is something that can be spotted quite easily by a recruiter and is disappointing as we really want to see students tailor their application to J.P. Morgan.  Students also need to remember to use the full word count, structure their answers, and remember to include a variety of experiences from their CV.   Q: What would you like to see in a CV from candidates?A: When we are looking through applications the key things we want to see are the motivation, hunger and drive to succeed. We also look for solid academic performance and participation in extra curricular activities.  This can be anything from being part of a sports team to society membership; any positions of leadership within these activities should also be highlighted.   Q: What are some of the key competencies you look for in an applicant?A: As recruiters we understand that students won’t necessarily be the finished articles and that’s why we like to see a candidate who is willing and keen to learn.  We also look for those who are analytical, innovative and good communicators.   Q: What sort of work experience do you prefer to see on a CV?A: If you have experience on any insight programmes (such as our Spring Week programmes), or other internships, then they are a must to include as it demonstrates directly relevant experience. However, we also look for other work experience that has helped you to develop what we call ‘transferrable skills’.  These are skills that you have picked up whilst working elsewhere that will be useful in the role that you are applying

for. These can be from any type of work experience.

Q: Do you believe there are any misconceptions that students might have about the banking industry?A: I think the biggest misconception I find students have is that they believe investment banking is only a career path for those studying specific degree subject areas. Many assume that if they don’t have a background in Economics, Mathematics or Finance then they won’t be able to get a job in the investment banking industry. This is not the case – we actively recruit from other degree disciplines such as Science, Engineering, Humanities, Arts etc as students studying these courses have different skills which are highly sought after.   Q: What sort of hours do people generally work within the Investment Banking industry?A: It can vary greatly from division to division. People who work at J.P Morgan do work hard but more importantly they are encouraged to work smart. The company invests a lot in technology and systems that can help employees work efficiently. Personally what I have found great about J.P Morgan is the flexibility they offer and how they allow you to work around commitments in your personal life.   Q: What do you believe the biggest challenge is moving from university life to a role at J.P Morgan? A: I think it’s the same challenge faced by anyone leaving university to work in the corporate world – adjusting to a new lifestyle and regime. Adapting to waking up earlier and having a much more structured day is probably the biggest challenge you will face coming from university when your schedule is a lot more relaxed!   Q: What do you believe a career path in Investment Banking offers you for those who are still considering their options?A: If you are someone who likes a challenge and innovation then it is definitely a great career path. The industry is fast-moving and dynamic with so many different types of interesting roles.   Q: What opportunities are available beyond graduate jobs that students can look to apply to?A: J.P Morgan offers opportunities for both first and second year university students. For those in their first year there are insight programmes that give students a taste of the industry and the wide range of opportunities available including in Technology.  We also offer internships in a variety of different areas and divisions for those students in their penultimate and final year of study. These opportunities are offered, not just across the investment bank, but also across our Asset Management and Private Banking divisions.

We have programmes and internships outside of London in our Bournemouth and Glasgow offices, a Schools Program for A-level students and, Apprenticeship and Work Experience programmes available in Bournemouth. There are so many opportunities for students at all levels to experience working at J.P. Morgan.

All credit goes to our silver sponsors Grad Diary (http://www.graddiary.com/interview-tips/why-choose-a-graduate-career-in-investment-banking/) 1615

@FactSetCareers www.FactSet.com/careers

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@FactSetCareers www.FactSet.com/careers

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FactSet is a leading provider of financial data and analytic applications for investment management and investment banking professionals around the globe.

We hire Graduate Consultants every year. Combining knowledge of the industry and the technical expertise, Consultants work closely with our clients to ensure they are seamlessly integrating our software into their investment process.

Joining FactSet gives you an unequalled view into the investment world, working closely with high profile clients, helping then utilise the FactSet product suite effectively.

Find out more at www.FactSet.com/careers

There is a huge difference in mindset between someone who has a lot going on, and someone who has a lot to do

To contact the editors responsible for the ATIS Market Roundup: Oliver Ward wardos@aston.ac.uk Joel Ntamirira ntamirjl@aston.ac.uk Sharan Thampi sharanthampi@gmail.com