Idio Focus – 22V analysts have identified three equity strategies to position for lower or stable oil prices — all differentiated from the typical input-cost plays, and with better risk/reward now that those trades have already moved. They are…
- Long Ecolab (ECL), a liquid cooling play
- Long Brazil ex Commodities
- Short Hang Seng (Hong Kong index). This is an interesting call as it suggest China consumers don’t get a kick save or rebound from lower oil prices.
LONG ECOLAD (ECL): Dauvin Peterson, 22V’s Data Infrastructure / Commodity analyst, views ECL as a top long given its position as a key beneficiary of liquid cooling demand in AI data centers (HERE). The easing of oil-driven input cost pressures is a catalyst to a reversal. Raw material costs have been a key sentiment headwind – the correlation between ECL and Oil has been -50% since the beginning of the war. Oil moving lower allows investor focus to shift toward ECL’s leverage to hyperscaler demand for liquid cooling infrastructure and AI-related spending.
LONG DOMESTIC BRAZIL – We hosted a webinar with João Landau, Founding Partner & CIO of Vista Capital, one of Brazil’s leading hedge funds. Replay link HERE. João thinks there is asymmetric upside in domestic-facing Brazil equities, with the presidential election as a catalyst. Stripping out commodities is particularly important now – Petrobras alone is nearly 13% of the EWZ Brazil ETF.
The background supports are: 1) real interest rates stabilized around 8% over the past year, 2) the unemployment rate has reached historic lows (~5%), 3) inflation has exceeded forecasts but remains relatively contained given the urate (this has been a major surprise), and 4) Brazil’s equity market valuation has reached decade lows, with IVBX P/E ratios around 12x.
The upcoming election has been an overhang on the index. In short, investors REALLY dislike President Lula and Lula’s odds of winning have recently increased. President Lula faces hurdles in re-election amid low approval ratings, especially among evangelicals and youth. The polls are misleading in Joao’s view. Joao made the case that local investors with money are likely to reallocate a significant amount of capital back to local Brazil if Flavio Bolsonaro wins.
Joao notes it is underappreciated that fiscal adjustments, which are needed in some form, do not have to come with large hits to growth and significantly higher recession odds, particularly because the economy is starting from a point of strength. Own the EWZ ETF ex commodities. EWZ ex commodities, charted below, have fallen -14% as Lulu’s odds of winning the election have improved, which provides an interesting opportunity to be long now.
SHORT HANG SENG: Michael Hirson and Houze Song, 22V China Research team, believe lower oil prices will not trigger a rebound in China’s domestic consumption. From the team, “… There is little evidence that previously high oil prices crowded out spending in other sectors… Widespread contraction indicates that consumer pessimism is the root cause of consumption weakness, likely driven by recent labor market softening.” Additionally, the risks surrounding policy support of consumption are asymmetric. The team thinks “The government’s response remains biased toward being insufficient and behind the curve.” Full details HERE.
The Hang Seng Index of Hong Kong equities is declining and underperforming relative to the US. It remains an absolute and relative short. This is in contrast to the Shanghai Shenzhen Index. The composition of the Hong Kong Index is more levered to domestic Chinese demand (and Chinese financials) whereas the Shenzhen is levered to AI-driven exports, which make up almost half of China’s export growth right now. The ChiNext growth index (ETF ticker CNXT) is even more levered to the AI exports, and a good long to pair against Hong Kong.
John Roque, head of 22V Technical Analysis, adds that for the Hang Seng support is failing and the 14-Week RSI is heading lower – the combination is a concerning technical setup and implies lower levels.
The technical setup the ChiNext Index, on the other hand, is a breakout from potential “Brobdingnagian BASE,” a favorable technical set up for a potential tenured upside move.
