As part of Netwealth's portfolio construction webinar series Dr Graeme Shaw, Director at Orbis Investment Advisory, shared how to look for investment opportunities in places others fear to tread.
5. Orbis Investments
For professional investors only
Dr Graeme Shaw
Director, Orbis Australia
How to Spot Contrarian Investment Opportunities in
Emerging Markets
Going Against the Crowd
12. Introducing Orbis
Data as at 30 April 2017. Source: Orbis. Past performance is not a reliable indicator of future results. Returns may decrease or increase as a result of currency fluctuations. Strategy returns
represent combined returns for all Funds following the same investment objective. Most of the funds are domiciled offshore and are not available to Australian clients to invest in. Australian clients
should refer to the Product Disclosure Statement for the Orbis Global Equity Fund (Aus Reg). Net returns are for the Retail Class Fee. WHT stands for withholding tax.
12
Early 1990s:
No Japanese
stocks.
Mid-1990s: >30%
in technology
stocks.
1998–03: Minimal
exposure to technology.
2008: 30%
in Japan.
2015–17: >25% in
emerging markets.
6,000
10,000
20,000
30,000
40,000
60,000
100,000
200,000
300,000
Value(AUD)
A$210,490
A$56,856
90 92 94 96 98 00 02 04 06 08 10 12 14 16
6.6% p.a.
MSCI World Index
(net of WHT)
11.8% p.a.
Orbis Global Equity
Strategy (net,
Retail Class Fee)
13. The classic pitch for Emerging Markets
13
Evidence: Emerging Market stocks have produced higher
performance than developed markets.
Theory: Emerging Market economies are more rapidly
growing and high economic growth is good for investors.
15. The Theory: growth is good for investors
Source: Credit Suisse Global Investment Returns Yearbook 2014, Elroy Dimson, Paul Marsh and Mike Staunton. 15
Real equity returns and economic growth, 1900 – 2013
GDP per capita growth % p.a.GDP growth % p.a.
Realequityreturn
R2 = 0.08
R2 = 0.26
17. The Theory: growth is good?
Source: Credit Suisse Global Investment Returns Yearbook 2014, Elroy Dimson, Paul Marsh and Mike Staunton. 17
Real equity returns and economic growth, 1900 – 2013
GDP growth % p.a.GDP growth % p.a.
With rapid
immigration
Without rapid
immigration
Realequityreturn
18. The Theory: growth is good
Source: IMF, Datastream. *Data are collected for the 20-year period to 31 Dec 2011, for 20 emerging markets with the exception that four markets only had 17 and 18 years of data available. 18
Emerging markets, 1991 – 2011
R² = 0.0901
0%
2%
4%
6%
8%
10%
12%
0% 2% 4% 6% 8% 10% 12%
Realstockmarkettotalreturn
Real GDP growth
China
19. The Evidence: are emerging markets long-term outperformers?
Source: Credit Suisse Global Investment Returns Yearbook 2014, Elroy Dimson, Paul Marsh and Mike Staunton using data from the DMS database, MSCI Barra and S&P/IFCG. 19
Returns in US dollars (%)
1900 – 2013 1950 – 2013
Emerging Markets (EM) 7.4 12.5
Developed Markets 8.3 10.8
EM Premium -0.8 1.5
Which one is
right?
20. Emerging Markets have underperformed recently
Source: MSCI. 20
0
1
2
3
4
87 92 97 02 07 12
RelativePrice
MSCI Emerging vs Developed Markets: price index
21. PE multiples are high … except in Emerging Markets
Data as at 30 April 2017. Source: Datastream, Orbis. P/E series for stocks use the Datastream Developed Markets, US Market, and Emerging Market indices. 21
5
10
15
20
25
08 09 10 11 12 13 14 15 16 17
Developed market stocks P/E US stocks P/E Emerging market stocks P/E
22. 22
EMs trade near historical lows relative to DMs despite similar ROEs
Data as at 31 March 2017. Source: Datastream, Orbis. Statistics are compiled from an internal research database and are subject to subsequent revision due to changes in methodology or data
cleaning. EM = Emerging Markets, DM = Developed Markets.
Relative price-to-book valuation and return-on-equity difference between
shares in the MSCI EM and MSCI World (Developed) Indices
EM/World Relative Price/Book (left axis) EM ROE minus World ROE (right axis)
(10%)
(5%)
0%
5%
10%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Dec 16
Price to book ratio
MSCI World 2.3
MSCI EM 1.6
Discount 30%
Lower Price/Book
Similar RoE
23. 23
Valuations differ substantially between individual EMs
Data as at 31 March 2017. Source: Bloomberg.
Price-to-book valuation and price-to-earnings ratio of MSCI EM country indices, and MSCI EM and MSCI
World (Developed) indices
China
KoreaRussia
BrazilTaiwan
Mexico
South Africa
India
Malaysia
Indonesia
Thailand
Turkey
MSCI World
(Developed) Index
MSCI EM Index
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0 5 10 15 20 25 30
Price/bookvalue
Price / earnings
24. Fear #1 = rising US interest rates
Source: Datastream, Orbis Dec 2015
0
1
2
3
4
0%
2%
4%
6%
8%
10%
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
US 3-month rates (LHS) EM vs. DM Price Index (RHS)
24
25. Fear #2 = bear market in developed equities
Source: Credit Suisse Global Investment Returns Yearbook 2014, Elroy Dimson, Paul Marsh and Mike Staunton using data from the DMS database, MSCI Barra and S&P/IFCG. Orbis calculation.
Date of peak
Prior EM 5-year
relative performance
Worst performer
in bear market
1918 − Tie
1930 − DM
2000 − DM
20?? − ?
25
28. 28
0.0%
0.5%
1.0%
1.5%
2.0%
0
0.25
0.5
0.75
1
2008 2009 2010 2011 2012 2013 2014 2015 2016
Globalmarketshare
Globalsales(mn)Electric vehicle growth
Data as at 30 April 2017. Source: IHS, European Automobile Manufacturers Association, Orbis. *Global data for EVs relates to battery electric vehicles and plug-in hybrid electric vehicles.
**Norwegian data for EVs relates to battery electric vehicles, extended-range electric vehicles, plug-in hybrid electric vehicles and fuel cell electric vehicles.
6%
14%
22%
29%
Global passenger EV market share (right axis)
Global* passenger electric vehicle (EV) sales (left axis)
Norwegian** passenger EV market share
29. 29
Expectations for growth in the electric vehicle market are changing
Data as at 30 April 2017. Source: Continental estimates. *Powertrain business.
Continental'svehicleestimates*
(mnunits)
April 2017November 2014
Gasoline Diesel Electric Vehicles
Estimate
up 11x
0
20
40
60
80
100
120
2015 2020E 2025E 2016 2020E 2025E
30. 30
Cylindrical Prismatic Pouch
Cost per cell
(USD/kWh)
140 – 160 170 – 200 155 –190
Life cycle
(charges)
1,000 – 1,200 2,000 – 2,500 2,000 – 2,500
Inherent stability
Manufacturing skill
required
Space efficiency
Electric vehicle battery types
Data as at 30 April 2017. Source: Johnson Matthey Battery Systems, SNE Research, Bernstein estimates and analysis.
31. 31
Electric vehicle battery suppliers
Orbis Investments I 30 Apr 2017 I Source: Company information, Morgan Stanley research. *OEM = Original equipment manufacturer.
Type Cylindrical Prismatic Pouch
OEM*
customers
32. 32
Projected electric vehicle capacity (2020E)
Data as at 30 April 2017. Source: Company information, BofA Merrill Lynch Global Research estimates. *May not sum due to rounding.
Capacity (GWh)
Samsung SDI 30
LG Chem 30
BYD 25
Tesla Gigafactory 30
Total Industry 239
13%
13%
10%
13%
Capacity market
share
÷ 50kWh/car
=
~5mn cars
48%*
33. 33
0
4
8
12
16
20
Net cash and
other investments
Chemicals Samsung
Display
Batteries
USDbn
Samsung SDI: sum-of-the-parts valuation
Data as at 30 April 2017. Source: Company results, Datastream, Orbis estimates.
Market value on 30 April = $8bn
36. Sberbank – dominant in the Russian banking market
Source: Central Bank of Russia, company data, Datastream, Orbis. *Sberbank’s share of cumulative total Russian banking sector pre-tax income from 4Q 2011 to 4Q 2016. Other market share
data at 1 February 2017.
36
0%
10%
20%
30%
40%
50%
60%
Assets Equity Retail
deposits
Pre-tax
income*
SberbankmarketshareofRussianbankingsector
0%
5%
10%
15%
20%
25%
Sberbank Russian banking sector
excluding Sberbank
Averagereturnonequity,4Q11-4Q16(pre-tax)
37. Management has steered Sberbank through significant economic volatility without loss or dilution
Data as at 28 February 2017. Source: Bloomberg, company data, Datastream, Orbis. Some statistics are compiled from an internal research database and are subject to subsequent revision due to
changes in methodology or data cleaning Sberbank’s number of issued ordinary shares has remained stable since July 2007.
37
(20%)
(10%)
0%
10%
20%
30%
40%
(75)
(25)
25
75
125
175
Dec 06 Sep 07 Jun 08 Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec 12 Sep 13 Jun 14 Mar 15 Dec 15 Sep 16
Oil price (Brent), US$ (left axis)
Return on average tangible equity, % (right axis)
Growth in Russian GDP (year-on-year, constant prices), % (right axis)
38. Sberbank operating history
38
5.5x Earnings
1.1x Net Assets
19% Average
RoE*
20-23% Growth
Data as at 31 May 2017. Source: DataStream. * The average Return on Equity (RoE) is calculated for the period 2003 – 2016.
39. 1. Contrarian strategies have worked well historically.
2. Rapid economic growth is not the reason to invest in Emerging Markets.
3. Compared to Developed Markets, Emerging Markets offer
• Lower PE multiples
• Lower Price/Book multiples and similar RoEs
4. In Emerging Markets investors can find stocks with growth potential at
moderate prices.
Conclusions
39
40. Objective of the presentation To provide recipients of this presentation with some high level information about:-
(i) the Orbis Group, our history, location, investment philosophy and people,
(ii) the Orbis Global Equity Strategy (OGEF),
(iii) the Orbis Institutional Fund (IGEF), and
(iv) the Fund.
Please don’t take this presentation as an offer to sell or a recommendation that you should invest in the Fund or with Orbis. Please read the Fund’s most recent Product
Disclosure Statement (PDS) before deciding to invest in the Fund and seek professional advice, if necessary. A copy of the PDS is available from www.orbis.com
The Orbis Global Strategy Certain sections of this presentation refers to the Orbis Global Strategy/OGEF/IGEF, being the Orbis Global Equity Fund Limited and the Orbis Institutional Global Equity
Fund - funds domiciled in Bermuda. We use OGEF/IGEF to demonstrate certain investment themes which are generally consistent between the three funds. The Fund
and OGEF/IGEF share the same investment philosophy and for most part, the same stocks and geographical and sector allocations. Divergence between the three funds
do occur due to timing associated with subscriptions and redemptions and certain regulatory constraints.
Benchmark The benchmark for the Fund is the MSCI World Index in AUD. Prior to 2 October 2014, the benchmark for OGEF/ IGEF was the FTSE World Index. From 2 October
2014, the benchmark for OGEF/ IGEF is the MSCI World Index. There are some references to the old benchmark for historical performance information. The appropriate
benchmark should be clearly marked on relevant slides.
Issuer of units in the Fund Equity Trustees Limited, AFSL No. 240975.
Investment Manager Orbis Investment Management Limited.
Distributor Orbis Investment Advisory Pty Ltd, AFSL No. 237862.
Fund registration The Fund is a managed investment scheme registered with the Australian Securities and Investments Commission (ARSN 147 222 535). The Fund is also registered for
promotion in New Zealand.
Who can invest? The Retail Class is available to all Australian and New Zealand wholesale and retail clients.
No personal advice This presentation only provides general information or advice. All information provided does not take into account any investors personal financial circumstances,
objectives or needs.
Investments can go up and
down
There are risks with any investments, including one in the Fund. Please read the risk section of the PDS for more details. Past performance is not a reliable indicator of
future performance and the value of any investment in the Fund is not guaranteed.
Economic, market or stock
commentary
Such information is provided to indicate reasons for our investment decisions or represents our views on certain matters at the date of this presentation. It is not intended
to be personal financial advice. Such commentary is not a recommendation to deal in any security or instrument and you should not rely on our commentary to make any
investment decision. This is because our views may turn out incorrect, can and do change over time, and depend on particular set of circumstances at a point in time.
Returns Net returns for Orbis Funds are calculated gross of all income, net of fees and expenses, and assume reinvestment of dividends. Gross returns are calculated gross of all
income, net of all expenses, and assume reinvestment of dividends. Returns may decrease or increase as a result of currency fluctuations.
Audience This presentation has been designed for professional investors or professional advisors. If you don’t understand any part of the presentation, please ask and we can
provide further clarity.
Other We have tried to ensure this presentation is accurate in all material respects but cannot guarantee that it is. Please don’t copy any part of this presentation without our
consent.
About this presentation - Orbis Global Equity Fund (Australia Registered) (Fund)
