Citibank Global Market Challenge 2020 (Top 3 in UNSW)

Citi Global Markets
Challenge 2020
By: Quenstance Lau, Emily Pope, Sharon Lee and Jayson Chaplin
1

Meet our diverse team at Quest Capital Partners!
2
QUENSTANCE JAYSON
THE VALUER THE RESEARCHER
• UNSW Finalist for
GMC 2019
• 1st for 2020
Tableau DataViz
Competition
• Worked at a
global investment
firm (GIC)
• Co-Marketing
Director at UNSW
Cryptocurrency and
Blockchain Society
• Nationals Volleyball
Player (AVSC)
SHARON
THE ARBITRAGER
EMILY
THE ECONOMIST
• 10 years market
research
experience
• 5 years consulting
experience
• 4 x Australian
Kendo Champion
• Worked at BDO
Australia with
Corporate Finance
Team
• Careers Director of
UNSW Real Estate
Society

3Investment Overview Assets Overview Major Catalyst Equities Foreign Exchange Fixed Income Commodities
Investment Thesis
Investment Strategy
Adapt to the latest events and use Markowitz Mean-
Variance model to continuously determine the optimal
asset allocation for long-term portfolio based on
desired return that is consistently greater than FundX.
Our portfolio is dynamic: It has the option to capitalise
on changing market events by changing assets, get the
latest data and solve for new weights based the
desired risk and return, constantly tracking if it has
outperform Fund X with portfolio performance
evaluations.
Investment Objectives
To create an active portfolio of diverse global
assets seeking arbitrage opportunities present in
the market and to consistently outperform Fund X.
• Restriction: +/-5% holdings in each asset class
• Restriction imposed by regulation (Europe, US): banned short sales
• Mean-variance optimization
Considerations

4
Asset Allocation
Investment Overview Assets Overview Major Catalyst Equities Foreign Exchange Fixed Income Commodities

5
Asset Allocation

6
Performance Evaluation
Portfolio 3 trumps the other
portfolio under
consideration and
outperformed FundX
Choose Portfolio 3 Weights
Our position

8
Code GOOGL (4%) MSFT (28%) JPM (6%) BABA (16%) ASML (8%)
% below
fair value
33.2% 21.1% 49.7% 89.9% 17.1%
P/E
compared
to Industry
Avg
Same,
21.7x
Lower
23.7x vs 34.6x
Lower
7.8x vs 8.7x
Lower,
19.5x vs 20.5x
Higher,
34.9x vs 22.6x
Dividend
Yield vs
Industry
Avg
N/A 1.5%
Same as Market
4.3% vs 4.9% N/A 1.3% vs 2.9%
EPS 49.16 5.74 10.70 3.50 6.96
Strategy
Catalysts
1 Equities
• Opportunities: Evident arbitrage opportunities in these selected stocks that are severely
undervalued.
• Long these undervalued stocks for a long term
• Exit when it is overvalued (i.e. sell at higher price to realise capital gains)
• Efficient Market Hypothesis:
Arbitrage opportunities will dissipate
• Company intervention
• Regulation intervention

• Azure cloud: cloud computing service
• Annual revenue of $5 billion, recording >
60% growth rate over past 3 years
• Stable legacy products and services
E.g. Windows and Microsoft Office 365 Suite
– consistent revenue and diversification benefits
• GitHub (subsidiary)- gained 30% for the latest
quarter vs a 22% increase in Q4
Why now?
• Stock price has severely declined, strong support from long
term perspective – revenue growth + consistent profits
• Revenue expected to grow 12.7% and 11.7%,
respectively in fiscal 2020 and 2021
• 1.44% dividend yield, 36% dividend payout ratio
• Tops the 10-year U.S. Treasury’s 1.06%, Apple’s 1.26%
• COVID-19 impact - millions now working from home- huge
spikes in demand for Cloud services
• Microsoft Teams: 775% increase in monthly users (Italy)
• 42% increase in Power BI software use in past week- data
visualization for COVID-19 information –graphs & visuals
• Launched new consumer 365 package, Skype grew 70% this
month to 40M users
Company Average Stock Price pre-
pandemic (10 Feb-14 Feb)
Stock Price
Mar 18, % Δ
Price now
(Mar 31), % Δ
Microsoft
(MSFT)
$185.38 $140.40,
-24.26%
$158.73,
+13.06%
9
Factor 2017 2018 2019
EPS 3.25 3.88 4.75
P/E ratio 25.4x 46.3x 26.5x
Beta 1.09
1 Equities
Competitive leading technologies Good return to combat Coronavirus volatility
Microsoft (MSFT)
March 30 update

• Alibaba Cloud - fastest growing cloud in public cloud market and
largest cloud player in China (59% market share)
• Cloud revenue rose 62% to $1.3 billion in Q2 2020 earnings
• Forecasted to grow by $5 billion over the next 5 years
• E-commerce business:
• 50% share of China’s online retail sales, driven by Tmall and
Taobao
• Accounts for 88% of Alibaba’s total revenue, rose 40%
annually to $14.4 billion (2019)
Why now?
• Stock price now significantly undervalued after 17.39% drop (March
2020), owing to economic instability and uncertainty brought about
by COVID-19
• Comparatively, e-commerce business experienced tremendous growth
after SARS (2003)
• Currently offering AI platform and advanced cloud-based technology
to fight the COVID-19 pandemic (connects medical professions
around the world)
10
1 Equities
Leading competitive advantages
Good return + investor optimism in new technology
Alibaba Group Holding Limited (BABA)
Factor 2017 2018 2019
EPS 2.58 3.70 4.97
P/E Ratio 41.4x 48.5x 36.1x
Beta 0.70
• Chinese economy has entered a recovery stage, Chinese market has
already recovered to 80-90% of the normal level
• Investment decision: plans to acquire at least 10% of Yunda Holding
Co Ltd (courier) –step forward for Alibaba to gain bigger say in
China’s growing express delivery industry
• AliBaba has trained an ‘eye recognition’ algorithm with biometric
mask detection model – overcomes challenge to manually monitor
and enforce limitation on people leaving homes
March 30 update
Average Stock Price pre-
Stock Price Mar
18, % Δ
Price now
(Mar 31), % Δ
$219.46 $180.00,
-17.98%
$192.04,
+6.69%

Currencies
11
• As of Jan 2020, "The Economist" determined that the Japanese Yen is
38% undervalued against the USD, while GBP and AUD 22%
undervalued. 3 currencies have been selected for diversification purposes.
• The most undervalued currencies include Turkish Lira, Russian Rouble
and South African Rand, however these currencies do not fluctuate highly
• Buy low sell high – purchasing stable currencies that are likely to increase
in value
ContextConsiderations
• For bilateral exchange rates, it is important to determine the suitability of
the base currency. Fluctuations in base currency can affect the perceived
performance of the term currency.
• Due to CovID-19, these 3 currencies, especially AUD have fallen by a
large value. However several economists predict a substantial drop in US
GDP. This will lead to a fall in the USD and subsequent rise in the 3
currencies above.
Strategy
2
JPY (1%)/GBP (11%)/AUD (14%)
• Purchase JPY, GBP and AUD to
hold for 6 month period – 26.21%
of total portfolio
Our position
Catalysts
• CovID-19: reduction in business and drop in economic growth

12
• Across developed countries, 10 year bond yields have been dropping, while
US Bonds yields have maintained at a relative premium – partly due to a
bullish share market
• Recently COVID-19 events have pushed US yields up, due to demand for
cash to cover positions
• To reduce risk in the portfolio and maintain liquidity to capitalise on price
changes should bond yields continue to decrease
• Our view is the global and US economy will recover within the next 10 years
post COVID-19 crisis
• Downward pressure on US bond yields as global investors seek safety over
the longer term provides potential capital gain upside
• US Bonds higher yields still maintain a relatively attractive premium vs global
market bonds
StrategyContextConsiderations
7-10year T-Bond ETF (7%)
• Hold 7% in a 7-10year T- bond ETF to
reduce portfolio risk, whilst maintaining
the flexibility to capitalise on upward
pressure on prices over the medium term
• Specifically the IEF ETF tracks the
aggregate bond market well and has
delivered strong performance relative to
the category (see appendix)
Our position
Catalysts
• Fed rates cut
• Plans to buy $700b in government & mortgage bonds
Fixed Income3

Commodities
13
• Recently, corn futures have been in decline since China has suspended its
national ethanol mandate and COVID-19 impacts on demand for biofuels
and animal feed
• Corn yields in the US have risen dramatically since the 1960’s, but so has
volatility- especially during the 2012 drought (see Appendix)
• To protect against inflation, Corn has strong intrinsic value underpinned by
long-term demand from biofuel, agriculture and food industries
StrategyContextConsiderations
• The US ethanol mandate remains, as does reliance on corn to feed both
animals and people, which we believe underpins demand over the longer
term
• We also anticipate Corn yields to be volatile over the longer term, which
will push prices up when adverse weather conditions negatively impact
yields
• There’s demand upside once China economy recovers post COVID-19
4
Corn futures (5%)
• Hold 5% in Corn futures to hedge
against inflation, given Corn prices
are have recently been supressed by
stable yields and weakening demand
from China.
Our position

15
Source: https://www.theguardian.com/world/ng-interactive/2020/mar/16/coronavirus-map-how-covid-19-is-spreading-across-the-world
Coronavirus
• Economic conditions
• Lockdown in China,
U.S., Europe
• Political intervention:
• Quantitative easing
to stimulate market
Catalysts
Thus, adopt value investing and
negative correlated assets

18Overview Equities Foreign Exchange Fixed Income Commodities Equities
Methodology

19
Methodology

20
Methodology
• Negative covariance between assets,
as highlighted in red, indicates that
the movement of one asset is
opposite to the movement of the
other.
• Critical to include assets that are
inversely related to mitigate the risk
of long exposure
Catalysts
Short Sales Restriction
RiskMitigationInvestment Overview Assets Overview Major Catalyst Equities Foreign Exchange Fixed Income Commodities

21
Methodology

22
Performance Evaluation

• Azure cloud: cloud computing service
• Annual revenue of $5 billion, recording >
60% growth rate over past 3 years
• Stable legacy products and services
E.g. Windows and Microsoft Office 365 Suite
– consistent revenue and diversification benefits
• GitHub (subsidiary)- gained 30% for the latest
quarter vs a 22% increase in Q4
Why now?
• Stock price has severely declined, strong support from long
term perspective – revenue growth + consistent profits
• Revenue expected to grow 12.7% and 11.7%,
respectively in fiscal 2020 and 2021
• 1.44% dividend yield, 36% dividend payout ratio
• Tops the 10-year U.S. Treasury’s 1.06%, Apple’s 1.26%
• COVID-19 impact - millions now working from home- huge
spikes in demand for Cloud services
• Microsoft Teams: 775% increase in monthly users (Italy)
• 42% increase in Power BI software use in past week- data
visualization for COVID-19 information –graphs & visuals
• Launched new consumer 365 package, Skype grew 70% to
40M users
Stock Price
Mar 18, % Δ
Price now
(Mar 31), % Δ
Microsoft
(MSFT)
$185.38 $140.40,
-24.26%
$158.73,
+13.06%
24
Factor 2017 2018 2019
EPS 3.25 3.88 4.75
P/E ratio 25.4x 46.3x 26.5x
Beta 1.09
1 Equities
Competitive leading technologies Good return to combat Coronavirus volatility
Microsoft (MSFT)
March 30 update

Context
• Economic instability and uncertainty brought about by COVID-19 has wreaked havoc on global financial markets
• S&P 500 index has dropped 12% since Feb 19, recording the sharpest drop in nine years (March 9, 2020)
• Stock price now significantly undervalued
• Alibaba heavily relies on Chinese businesses and consumers. As Chinese markets are now recovering (successfully contained the virus), Alibaba’s cloud revenue and
core commerce business set to bring investors substantial gains
Financial Impact
• Current Share Price: BABA17.39% compared to the trading week before the pandemic began to influence markets
• BABA is recovering faster and outperforming the S&P 500 index
Stock Price indexed to 10 February 2020 for fairer comparison. FactSet, 2020
Company Average Stock
Price pre-
pandemic (10
Feb-14 Feb)
Stock Price
Mar 18
% Δ
Alibaba Group
Holding Limited
(BABA)
$219.46 $180.00 -17.98%
Stock Prices the trading week before the pandemic began to influence markets. FactSet, 20
March 2020
1
25
Alibaba (BABA)
Equities

Qualitative analysis and Outlook for Alibaba
Leading competitive advantages:
Alibaba Cloud  Fastest growing cloud in public cloud market and largest cloud
player in China (59% market share)
• BABA’s cloud revenue rose 62% to $1.3 billion in Q2 2020 earnings
• Cloud revenue forecasted to grow by $5 billion over the next 5 years
E-commerce business:
• 50% share of China’s online retail sales, driven by Tmall and Taobao
• Accounts for 88% of Alibaba’s total revenue, rose 40% annually to $14.4 billion
(2019)
• Comparatively, e-commerce business experienced tremendous growth after SARS
(2003)
26
Factor 2017 2018 2019
EPS ($) 2.58 3.70 4.97
P/E ratio 41.4x 48.5x 36.1x
Beta 0.70
Quantitative Analysis
1 Equities
Alibaba (BABA)
• Currently offering AI platform and advanced cloud-based
technology to fight the COVID-19 pandemic (connects
medical professions around the world)
• Chinese economy has entered a recovery stage, Chinese
market has already recovered to 80-90% of the normal
level
• Investment decision: plans to acquire at least 10% of
Yunda Holding Co Ltd (courier) –step forward for
Alibaba to gain bigger say in China’s growing express
delivery industry
• AliBaba has trained an ‘eye recognition’ algorithm with
biometric mask detection model – overcomes challenge
to manually monitor and enforce limitation on people
leaving homes
March 30 update
Stock Price
Mar 18, % Δ
Price now
(Mar 31), % Δ
Alibaba
(BABA)
$219.46 $180.00,
-17.98%
$192.04,
+6.69%

Sole provider of EUV, ahead of its DUV competitors
• Extreme ultraviolet lithography (EUV) machines in semiconductor
manufacturing- market monopoly
• Traditional DUV tools use 193-nanometer (nm) light to etch
patterns on silicon wafers - becoming too large for today's
smaller and smaller shrinking chip sizes
• EUV's 13.5-nm light is so small that it can reduce process steps
in leading-edge chipmaking by 75%- further yield in savings
• Breakthrough in production of next-generation chips
• Deep ultraviolet lithography (DUV) machines
Why now?
• 4 quarters of rising sales growth from 15.2% to 35.11% in Q4
(2019)
• Earnings (17.3% per year) forecasted to grow faster than the
Dutch market (13.2% per year)
• EUV made up 31% of sales in 2019, up from 23% in 2018
• Eventually, EUV could be used in DRAM memory
manufacturing, whereas today essentially only used in logic chips
- if that happens, ASML's growth will kick into another gear
Price pre-
pandemic (10
Feb-14 Feb)
Stock Price
current
% Δ
ASML Holdings $185.38 $148.16 -20.08%
27
ASML Holding- Semiconductors
Factor 2017 2018 2019
EPS ($) 5.55 7.18 6.89
Price-to-Earnings Ratio
(P/E)
29.4x 22.5x 42.8x
Beta 1.09
1 Equities
Competitive leading technologies
Strong revenue growth, EUV will further power unique growth

• Largest bank in the U.S, roughly $2.7 trillion in assets
• Revenue above $90 billion during each of the past 10 years
• Profit margin > 20% for six years straight
• One of the most efficiently run banks since the financial crisis- superior
ROA (1.3%)
• 2019 sales grew by 6% to $115.6 billion
• Earnings growth over the past year (12.8%) exceeds its 5-year average
(10.7% per year)
• Current dividend yields 3.7% annually, JPM has been increasing its
dividend payments since the GFC; more than doubled that paid in 2015
($0.44)
Why now?
• No.1 ranked investment bank, could benefit from merger
activity benefits if low interest rates become prolonged
• March $2 trillion stimulus package to appease financial
difficulties, reduced pressure of bank loan delinquencies and
defaults (not as bad as initially feared)
• Very high capital ratio- 12.4% common equity tier 1 capital
ratio; Lehman Bros like failure during 2008 GFC extremely
unlikely; JPM has fortress-like balance sheet to weather
downturn
Price pre-
pandemic (10
Feb-14 Feb)
Stock Price
current
% Δ
JPM $137.82 $92.52 -32.87%
28
JPMorgan & Co. (JPM)
Factor 2017 2018 2019
EPS ($) 6.31 9.00 10.72
(P/E)
16.9x 10.9x 13.0x
Beta 1.18
1 Equities
Competitive advantages- strength & stability
Undervalued today, safe for long run 'too big to fail'

• Dominant search engine –during and after this crisis, will continue
generating strong revenue growth and excellent profit margins
• Controls 92% of world’s search market share
• Profit margins from digital advertising (84% of Alphabet’s revenue 2019),
digital ads business grew 15.7% in 2019
• Cloud infrastructure market expected to average 21.5% over the next 5
years- IaaS market potential oligopoly
• Google Cloud Platform, G suite software revenue (Gmail, Calendar,
Drive) - sales grew 120% over the past 2 years
• Google Cloud revenues grew 52.8% in 2019 to $8.9 billion
• YouTube sales grew 86% over the past 2 years
Why now?
• Strong growth prospects in cloud infrastructure market- one
of few companies with financial resources and technology
expertise to compete
• $120 billion in cash and securities, only $4 billion in debt-
financial position to withstand disruptions + can increase share
buyback or become acquisitive
• In the last bear market, during credit crisis of 2008-2009,
Google’s revenue rose 42% from $16.6 billion in 2007 to $23.6
billion in 2009
Price pre-
pandemic (10
Feb-14 Feb)
Stock Price
current
% Δ
GOOGL $1513.89 $1101.62 -27.23%
29
Alphabet Inc. Class A (GOOGL)
Factor 2017 2018 2019
EPS ($) 18 43.7 49.16
(P/E)
58.5x 23.9x 27.2x
Beta 1.03
1 Equities
Competitive advantages
Proven resilient stock, durable business model

Currencies Pairs Selection
31
• Comparison of the price of a Big Mac in every country, with the exchange rate
being taken into account --> Law Of One Price concept
• Undervalued currencies: actual exchange rate (when base currency = domestic)
is lower than implied exchange rate
• To consider: Big Mac Index disregards transportation costs
• Consider external factors influencing investment eg interest rates, which in turn
affect ER
• Eg: Japan negative IR
• Big Max Index (The Economist)
Overview2
Currency Choices in Depth
1 USD should = 3.39/5.67
1 USD should = 0.6 GBP
1 GBP should = 1.66 USD
1 USD = 0.77 GBP
1 GBP = 1.29 USD
Example of Index Valuation

Currencies
32
• Undervaluation: negative interest
rates result in low investment: JPY is
weak.
• WSJ: Japan "hesitant to cut rates,
wants to focus on supporting
companies"
• Japan has demonstrated a low growth
rate in CovID-19 cases (Appendix:
Major Catalysts), thus will be
economically affected to a lesser
extent than the United States
• 2009 SARS Outbreak: value dropped
to 0.0101 in March 2009 and
recovered to 0.01154 in November
2009 (Figure 1.1)
• JPY
Overview2
Trends and Factors Influencing Currency
• GBP • AUD
• EU Trade deal to be negotiated – pre
Brexit: value of GBP around
1.55, during negotiation period
dropped to around 1.3, may go up as
Brexit has been passed
• See Figure 1.2
• Australia has also had a relatively low
rate of Cov-ID cases compared to
the rest of the world. However with
recent business shut-downs and
reduced trading hours, currency has
dropped significantly. However there
are signs the AUD is beginning to
recover. (Figure 1.3)
• Federal govt to provide $66 billion
economic stimulus package –
potential to reduce the extent of the
downfall
• Figure 1.4 – Economists predict
recovery in second half of the year –
likely dollar will go up compared to
USD

33
Overview2
Source: https://www.xe.com/currencycharts/?from=AUD&to=USD&
view=1M
Figure 1.3
https://www.xe.com/currencycharts/?from=GBP&to=USD&
view=10Y
Figure 1.2Figure 1.1
https://tradingeconomics.com/japan/currency
Note: in terms of USD, ie depreciation in
USD is appreciation in JPY
SARS: decline in USD relative to JPY
from 2009-2010, it is possible this
pattern will repeat for CovID-19 GBP strong pre 2016 sitting around 1.55-1.7,
dropped during 2016 to low of 1.22
Steady decrease from Mar 9, low increase
from Mar 23

34
Source: https://www.theguardian.com/business/commentisfree/2020/mar/11/four-experts-on-how-
coronavirus-will-wallop-australias-economy-and-what-the-government-must-do
Figure 1.4

36
7-10 year T-Bond ETF (7%)
Fixed Income3
• 1 month to 1 year matches our time horizon due to global uncertainty
• High returns over benchmark during this period
• Diversification and simplicity with holding a bond ETF
Why

37
Catalyst: Coronavirus
The Federal Reserve, headed by
Jerome H. Powell
Qualitative Analysis
A
B
Fed rates cuts to 0%
Plans to buy $700b in
government & mortgage bonds
COVID-19 Economic Response Our position
Anticipate that despite this rate cut, global investors
will continue to stimulate demand for T-bonds on
the secondary market as they look to reduce their
exposure to volatile equity markets
This may have temporarily supressed prices, Thus,
offering window of opportunity to realise capital
gains in the medium term
COVID-19 Triggered bond market volatility
• Saw bond markets deleveraging recently,
• potentially driven by investors responding to margin calls
Fixed Income3

Commodities – Corn Futures2
39
• Our position Corn Futures is based on volatile corn yields over the past 40 years (impacting supply), and strong fundamental demand from
biofuels, agriculture and food industry. Put simply, a lack of supply will push prices up and contribute to inflation – making Corn a good US
inflation hedge.
• Additionally – we believe prices have been supressed on the demand side by recent announcement by China to delay their 10% ethanal mandate -
citing a supply a shortage within China. Therefore should China and US trading conditions improve and China moves forward with their mandate
– demand will increase significantly
Source: https://au.investing.com/commodities/us-corn-streaming-chartSource: https://ourworldindata.org/crop-yields

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