If you snoozed US labour data, here’s a quick run through: NFPs underperformed (again), yields are down, but markets still expect some sort of tapering announcement on next weeks’ monetary policy meeting. That explains little activity on the eurobond market. On the other hand, domestic investors are scratching their heads over possible local HRK bond in one months time (CROATE 2.75 07/08/2021 roll over). To find more, browse through this brief research piece.
Another cold shower for financial markets came on Friday when NFP figure came significantly under market consensus, printing 559k versus 675k expected by Bloomberg survey. And yes, this is the second time the print disappointed the analysts. Moreover, there are still some 7.3 million jobs lost since the pandemic began and at this pace this loss would not be fully absorbed until late next year. In a classical twist of bad news becoming good news if it might cause FED to postpone the tapering decision, USGG10 dropped to 1.57% and financial markets are looking closely at next week’s policy meeting (scheduled for June 15th-16th). Looking at other employment indicators, such as the broadest measure called U-6 (USUDMAER Index), it might be too early to call the “T word” on next week’s meeting: U-6 is currently at 10.2%, significantly over 7.0% in February 2020. In the aftermath of 2008-09 crisis FED responded with accommodative monetary measures, and once they were no longer needed, the reversal was done in a glacial and gradual pace: first emergency facilities were cut off, then bond purchases were tapered (FED never sold any of these securities, but instead chose to let them mature in reduce the B/S in such a way) and finally interest rates went up. The difference between then and now lies in the fact that 2008-09 was followed by a period of deflation/disinflation and this time price rises threaten to get out of control. So far, FED was successful enough in mitigating risks of overheating economy, however ubiquitous and anecdotal price rises keep markets on the back foot since nobody really knows can inflation get out of control.
Here’s something worth thinking about: BIS economist Kristin Forbes made an eye-opening research into what drives inflation in globalized/free trade world and found out that there has been an apparent shift in importance away from factors such as domestic slack and domestic inflation expectations and more towards the global slack, global output gap and global inflation expectations. Mrs. Forbes did a principal component analysis and found out that in 1990-94 period the share of global component of CPI amounted to 27%; in 2015-17 the share rose to 57%. This effectively means that you can not make accurate forecasts on let’s say, US inflation, by looking just as US unemployment data (this is just what dusty, good old Philips curve does). Instead, US inflation is strongly driven for instance by global labour slack, which is still ample given that majority of EM countries haven’t been fully vaccinated and hence their economies are not ready to fully open. Yet.
OK, so US labour market is recovering slow(er), anecdotal evidence of price growth is self-evident, however it’s not turning up in official figures (or it’s averaged out the same way used car prices are) and all of this might cause the FED to taper more slowly. What does all of that mean for Croatian bonds? If you glance at a selection of Croatian UCITS funds, they are still in red in YTD terms, but are regaining lost value looking on a shorter, one month horizon. CROATI yield curve has been frozen in time for the past month and it seems that prices you see on the screen are calculated by dealers using benchmark (mid swap or German curve) plus some fixed spread. This means that very little is really going on, although it’s worth mentioning that last week we were still seeing switches being offered by dealers with the intention of reducing duration (one idea was buy CROATI 1.125 03/04/2033, sell CROATI 1.5 06/17/2031, 5mm EUR lot). This means that market is still playing defense, cutting duration where it can and buying the paper only when it musts. Croatian investors are nevertheless focused on approaching refinancing of 6bn HRK worth CROATE 2.75 07/08/2021, which is maturing in one month’s time. Given the 66bn HRK excess liquidity, the interest is expected to be huge, however it hinges on the maturity and there haven’t been any indications on that point yet.
Source: Bloomberg
In the first five months of 2021, Croatia observed a rise in tourist arrivals by 42% YoY and a rise in tourist nights by 38% YoY.
With the improvement of the epidemiologic situation in Europe and Croatia, in May 2021, we see a sharp increase in tourist arrivals and nights compared to May 2020. According to the report of the Croatian National Tourist Board, In May 2021 the number of tourist arrivals reached 0.45m (vs. only 86,413 in May 2020). Meanwhile, tourist nights reached 1.88m, representing an increase of 259% YoY. We do note that the average stay was shortened in May to 4.2 nights (from 6 nights in May 2020).
The numbers are encouraging, given that almost 80% of nights realized come from foreign tourists. Of that, tourists from Germany lead the list with 31.3 % of total nights realized, followed by tourists from Slovenia (8.6%).
When observing the arrivals realized in May by counties, Istria leads the list with 29.5% of total arrivals and 33.8% of total tourist nights. When observing the type of accommodation, camps account for 26.3% of total nights, followed by private accommodation and hotels with 24.2% and 23.6%. Also notable, nights realized in nautical accommodation account for 9.7%.
When observing the tourist development since the beginning of the year, tourist arrivals are up by 42% YoY, while tourist nights noted a rise of 38% YoY.
Where does Croatia stand upon the beginning of the summer season?
Looking at the table below we can see how the tourist segment must perform in the following four months to reach the numbers of the pre-pandemic year of 2019.
Arrivals needed to reach 9M 2019 levels (in the next four months)
| wdt_ID | 9M 2019 | to reach 2019 arrivals | YoY change (%) |
|---|---|---|---|
| 1 | 100% | 17.747.040,0 | 166,90 |
| 2 | 90% | 15.867.794,0 | 138,60 |
| 3 | 80% | 13.988.548,0 | 110,30 |
| 4 | 70% | 12.109.302,0 | 82,10 |
| 5 | 60% | 10.230.056,0 | 53,80 |
| 6 | 50% | 8.350.810,0 | 25,60 |
Source: Croatian National Tourist Board, InterCapital Research
Tourist nights needed to reach 9M 2019 levels (in the next four months)
| wdt_ID | 9M 2019 | to reach 2019 tourist nights | YoY change (%) |
|---|---|---|---|
| 1 | 100% | 99.004.259,00 | 99,70 |
| 2 | 90% | 88.714.199,00 | 78,90 |
| 3 | 80% | 78.424.139,00 | 58,20 |
| 4 | 70% | 68.134.079,00 | 37,40 |
| 5 | 60% | 57.844.019,00 | 16,70 |
| 6 | 50% | 47.553.959,00 | -4,10 |
Source: Croatian National Tourist Board, InterCapital Research
For today, we decided to present you with a DuPont analysis of Slovenian companies, a useful technique used to decompose the different drivers of ROE.
The DuPont analysis is a useful technique used to decompose the different drivers of ROE. This model allows stock analysts and investors to examine the profitability of a company using information from both the income statement as well as the balance sheet. This gives the analyst a thorough view of a company’s financial health and operating efficiency. Note that for this analysis we used Q1 2021 results (trailing 12m).
Speaking in broad terms the equation allows analysts to dissect a company, and to efficiently determine where the company is weak and where it is strong. This allows analysts to quickly know what areas of business to look at (inventory management, debt structure, margins) for more answers. However, the measure is still broad and is not a substitute for detailed analysis.
ROE of Slovenian Blue Chips (TTM results)
DuPont tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
For the purpose of this analysis, we will observe some of the biggest Slovenian non-financial companies. Two of the five observed companies recorded double digit ROE, with Krka leading the list (15.8%). Such a ROE mostly came on the back of a high profit margin of 19.8%, the highest of all observed companies. Meanwhile, its asset turnover stood at 0.6 while equity multiplier is at 1.3.
Looking at profit margins, 3 companies have a double digit profit margin, Krka, Luka Koper and Cinkarna Celje. On the flip side, Petrol has the lowest profit margin of 2.5%. This could partially be attributed to the industry the company operates in and drop sharp drop in net profit in 2020 of 32.4%.
In terms of asset turnover, Petrol has by far the highest one of 1.7, indicating that the company is using efficiently its assets to generate sales. All other observed companies have an asset turnover lower than 1. However, one has to take into account that we should not directly compare these ratios to draw conclusions on the efficient use of assets, as that could vary across industries. Therefore, we advise looking at the peer comparison as well.
Turning our attention to the equity multiplier of the companies, one can observe that none of the companies are heavily using leverage to increase their ROE.