TAP THE EXPERTS @SSI

SSI is fortunate to have Teams of Investment Professionals who display exemplary depth and continuity. This section serves as a forum for SSI Investment Professionals to address current investment topics and issues.


INSIGHT
SPOTLIGHT TAP THE EXPERTS LEARNING RESOURCES

Q:

A:

October, 2015

Florian Eitner, CFA

Portfolio Manager

We had a chance to sit down with Florian Eitner, CFA a  Portfolio Manager on SSI’s Convertible Investment Team, to discuss his outlook for the Health Care Industry. Here is what he had to say.

“Investors – in Healthcare or otherwise – dislike uncertainty.  The less certain the data is that investor projections are based on, the less of a valuation multiple the related assets will be able to attain.  With the 2016 election cycle looming, this will become especially important in the Healthcare sector and could manifest itself in more neutral investor positioning in the latter part of this year.  We will continue to monitor sentiment closely and continue to incorporate its implications into our portfolio construction process.” - January, 2015… read more

Florian, you provided a mixed outlook for the health care industry at the beginning of the year. Where are we today?

One of our primary concerns earlier this year was the pending 2016 elections. Recent rhetoric by Democratic presidential candidates around drug price inflation and a general perception that the Healthcare sector as a whole might have reached overbought levels after its historic run sent health care stocks and convertibles lower. The coming election will serve as a platform for further grandstanding by politicians to raise issues in a variety of areas which impact Americans, one of the most important being health care. It is our job to sort out what is insignificant chatter and what is meaningful to the fundamentals of the companies in this space. Given our view earlier this year and the recent developments in the health care area, we had positioned the portfolio more defensively. However, attacks on drug pricing by Democratic candidates are headline risk at best, as a Congress that is likely to be Republican will not support government price-control initiatives. In the event that government price controls were to be enacted via Medicare Part D, the companies impacted most significantly are Pfizer, AstraZeneca, Gilead, AbbVie, Sanofi, Merck and Novo Nordisk.  Our portfolios maintain a small (underweight) position in Gilead and hold no securities of any of the other drug companies above.

Q:

Now that the health care sector has suffered over the past several months, what are your expectations moving forward?

A:

With this recent pullback in the health care sector, opportunities are once again emerging. We expect volatility to remain elevated and there will likely be increasing performance dispersion across the health care sector. However, there are clearly some attractive health care convertible issues in the market.


We are very closely monitoring the sector and looking for attractive buying opportunities as well as evaluating situations where the fundamentals are deteriorating and a sale is warranted. Something that we also mentioned back in January is that moving forward we do not expect broad outperformance of the health care area relative to other sectors. This view has begun to manifest itself. In this environment, active management is very important in determining the potential winners and losers and adjusting the portfolio to optimize risk-adjusted returns. That is the goal we strive to achieve each day.

Ravi Malik, CFA

Portfolio Manager,
Principal

Currently, we believe that the decline and level of oil prices at around $40 bbl is more a reflection of too much supply than it is of global demand. To be sure, large economies, such as China, have been slowing. However, the US economy has been growing at a modest pace, while Europe has been inching up. In terms of the numbers, at the beginning of 2015 consensus expectations were for demand to increase by 1.2mm bbl/day in the US. These expectations were exceeded as the actual increase this year has been about 1.6mm bbl/day. The current expectations for an increase of 1.3mm bbl/day next year may be understated.


The real issue has been supply. US oil production, which has declined from 9.6mm bbl/day to 9.2mm bbl/day, is expected to fall to below 9mm bbl/day in 2016.  While oil production in the US has declined, it has not declined fast enough.  Oil and gas companies have become more efficient in the production process in that they have been able to maintain production with fewer rigs. As a result, a higher level of production has been achieved than would be expected given the level of prices.

What is SSI’s view on the likely future course of oil prices?

Q:

Given our view that the US economy and most global economies will produce slow, but positive GDP growth, we think the demand side of the equation will remain relatively steady with a reasonable probability to surprise on the upside. On the supply side, the production that is coming off line in the US is likely to be offset by increasing supplies outside of the US. For example, Iran is expected to increase production by 0.5mm to 1mm bbl/day as sanctions are lifted. In addition, Saudi Arabia has maintained its record level of output, but is operating at full capacity. Libya is also reported to be making progress in bringing two oil fields back into production.


The net result is that we expect the reduced production in the US to be offset by an increase in non-US production. With supply reasonably constant, the modest increase in global economic growth in 2016 will likely push prices a bit higher. The recent range for oil prices has been between approximately $35 bbl and $50 bbl. The recent OPEC meeting unexpectedly failed to get any explicit quota on OPEC production. This is likely to place upward pressure on supply and inventories even more in the short term. As a result, an overshoot of oil prices to $30 on the downside is possible. However, the oil markets should move toward an equilibrium in the 2nd or 3rd quarter of next year at which time we believe the equilibrium price is likely to be at the upper end of the current range ($50 bbl).


A:

A:

Q:

What factors are continuing to affect oil prices?

November, 2015

Ravi Malik, CFA Florian Eitner, CFA
HISTORY TEAM PHILANTHROPY
SPOTLIGHT TAP THE EXPERTS LEARNING RESOURCES

9440 Santa Monica Blvd., Suite 800, Beverly Hills, CA 90210  Tel: (310) 595-2000  Fax: (310) 595-2089

 © 2016 SSI Investment Management Inc. All Rights Reserved. Use of this website is governed by the Terms and Conditions

|

|

|

|

STRATEGIES INSIGHT LIBRARY HOME ABOUT SSI HOME

HOME     |     CONTACT US     |   COMPOSITE PRESENTATION    |    SITEMAP     |     LEGAL DISCLOSURE