The Dawn Patrol – 03.12.12 – JPM 2013 European outlook and top picks and more!!!

Bonjour,

European markets to open slightly up. Asia mixed this morning, strong in the beginning on better PMI data in China, but then dipped on profit taking. The Fiscal Cliff battle in the US continues and this week will be key in terms of data with the PMIs and NFPs.
Today, we’ll look at EZ Manufacturing PMIs, US PMIs and bills auctions from France and Germany.

Here is December, the last month of a roller coaster year. Who would have guessed we’d be up 13% on the S&P and 26% on the Dax by now?
The current issues will remain for a while… We should have some decision on the Fiscal Cliff before year end; Europe managed to kick Greek problems further down the road and the Chinese growth seems to trend upwards… These give a somewhat better backdrop than we had a few weeks ago and as strategists give rather optimistic views of 2013, we may see another leg up until year end… All the strategists are now focused on 2013. What adventures lie ahead of us? I’ll be collecting all the 2013 outlook strategies pieces, so if you see one, don’t hesitate to send it to me. Today, I have a look at the one by Mislav Matejka (European Equities at JPM).

GS upgrades DELL from SELL to BUY. This really surprised me. Deep value call and a way to highlight the 30% drop since they assumed coverage with a Sell…

TELEFÓNICA is working on plans to list between 10-15 per cent of its Latin American operations. Analysts have valued the business at about €40bn given its strong business in a healthy Brazilian telecoms market. FT
CSN said to bid about 3bn for TKA’s Americas

WOODSIDE snaps up Leviathan stake

EADS : Agreement was reached at a board meeting yesterday acc Les Echos : Germany will buy 7.5% of EADS from DAIMLER and a part of the stake held by the Dedalus consortium. Germany will hold its 12% stake via KfW bank. France will hold 15%, with only a 12% stake being part of a new shareholders’ pact & France and Germany will have parity in strategic decision-making.
IBM starts takeover bid for Openet

DPW expect record Christmas
RWE may sell its Nabucco project stake to OMV
IFX says revs will fall this year Focus

DELTA in talks to buy Virgin Atlantic stake: “Delta Air Lines is in talks to buy Singapore Airlines’ 49 per cent stake in Virgin Atlantic, reviving a deal long discussed in the airline industry”. FT

SOCGEN’S Ouda says French banks going through the crisis well

Nestle Completes Purchase of Pfizer Nutrition Unit

FACEBOOK May Be in Talks to Acquire WHATSAPP: TechCrunch (We’re big fans of WhatsApp at LCM)…

UPS & DOWNS

ARM Raised to Outperform from Neutral at Exane
BANCO ESPIRITO SANTO Raised to Overweight at JPMorgan
BETFAIR PT Cut 14% to 900p at Exane; Kept at Outperform
E.ON Cut to Hold VS Buy at Santander
ERICSSON Raised To Outperform VS Sector Perform at RBC
GLAXOSMITHKLINE PT Cut to 1,530p vvs 1,610p at Berenberg
INDITEX Rated New Underperform At Credit Suisse, PT Eu105
JAZZTEL an Interesting M&A Target For Vodafone, Berenberg Says
JAZZTEL Rated New Buy At Berenberg, PT Eu6.55
NOVARTIS PT Raised to Chf67 VS Chf65 at Berenberg, Stays Buy
PRADA Rated New Market Perform at Raymond James
RAIFFEISEN PT Cut to Eu27 From Eu30.60 at Berenberg
ROCHE PT Raised to Chf205 VS Chf195 at Berenberg, Stays Buy
SANOFI Cut To Hold From Buy at Berenberg
SANOFI PT Raised to Eu76 VS Eu71 at Berenberg
VOLKSWAGEN Named a Most Preferred Stock, Peugeot a Least at Citi

CURRENT STUFF

On Europe
Merkel prepared to consider Greek bond losses. “If Greece one day handles its revenues again without taking on new debt, then we must take a look at the situation and assess it,” the chancellor told Germany’s Bild am Sonntag newspaper, although she stressed this was “not going to happen before 2014-2015”, even if Greece’s adjustment programme was on track. (Financial Times)

On Spain
PM Rajoy acknowledged in an interview over the weekend that Spain might not hit its 2012 budget deficit target and said he may wind up seeking a bailout. “Up to this point I have not considered it necessary but if in the future I think it [OMT] is in our interests, I will not have any doubts about turning to the ECB.” He went onto say “It is very complicated to reduce the deficit by 2.6 points in a context of recession, with as many problems with revenue and such high financing costs” Reuters

On China
China’s manufacturing PMIs showed more expansionary growth with the official survey for November rising to 50.6 from 50.2 the previous month, and the final HSBC/Markit PMI recording 50.5, up from 49.5 in October. However the breakdown of the official survey components indicated growth is concentrated in the state sector, with a retrenchment in smaller and medium-sized companies. (Reuters)

On the Fiscal Cliff
Fiscal cliff stalemate as Geithner challenges Republicans on budget: The Treasury secretary said Republicans should specify the budget cuts they want to see. He rejected a proposal from John Boehner for a compromise on taxes on high income earners. “There’s no path to an agreement that does not involve Republicans acknowledging that rates have to go up on the wealthiest Americans,” Geithner said on NBC’s “Meet the Press”.(Financial Times)(Washington Post)

America’s Thelma and Louise moment – FT.com http://on.ft.com/QZYnBc

STRATEGY

JPM (Matejka) Equity Strategy
Year Ahead 2013.

On the mend – key stock calls
This report contains JPM’s 29 key stocks to own and 26 to avoid in Europe. They expect European equities to deliver positive returns in 2013. They think the region is on the mend and is unlikely to be the main source of risks next year. 1H is likely to witness elevated volatility as peaking global profit margins challenge corporate spending plans and US negotiates increased fiscal drag. Key calls: 1) OW Eurozone vs the US (started on 16th July). Eurozone equities are more advanced in the fiscal adjustment process and remain exceptionally cheap relative to their US peers. 2) for ‘12 their top country pick was Dax. They do not think risk-reward for Dax stands out anymore. They were OW core over periphery for 3 years in a row, but now they expect periphery (Italy, Spain) to outperform core (Germany) in 2013.
Sector allocation and themes

This report details our sector and thematic calls into 2013. For ‘12 they had a preference for US topline exposure and were bearish Chinese exposure, mainly through caution on infrastructure plays. They stay bearish China plays, again largely through commodities. They shift their preference from US exposure to Eurozone. This is predominantly reflected through preference for Financials. In terms of styles they think the focus on high and importantly sustainable FCF yield will remain.

Another piece gives JPM top picks and top shorts for 2013: (I tend to disagree)…
ABERDEEN ASSET MGMT, ARKEMA, ALLIANZ, BRITISH AMERICAN TOBACCO, BRENNTAG, COMPASS GROUP, DEUTSCHE POST, ENI SPA, ERICSSON LM-B, GAS NATURAL SDG SA, GERRESHEIMER, COCA-COLA HELLENIC BOTTLING, HOLCIM LTD, ILIAD SA, ARCELORMITTAL, DEUTSCHE LUFTHANSA, OPHIR ENERGY, PETROFAC LTD, PPR, PSP SWISS PROPERTY, PUBLICIS GROUPE, RIO TINTO, SAP AG, SANOFI, SVENSKA CELLULOSA, UBS AG, UNILEVER, VOLVO AB-B, VOPAK,

There is also a list of thematic baskets, which really deserves to be looked at. The baskets:
Periphery Recovery Basket
Value in Financials Basket
Sustainable FCF Yield Basket
Earnings Aristocrats Basket
Sustainable Dividend Payers Basket
EM Consumer Plays Basket

JPM (Jan Loeys) The J.P. Morgan View
Asset allocation
–– QE did not destroy economic and market structures, but brought us closer to a normal business cycle. But QE did change relative valuation, making QE assets long-term overvalued, in our view.
Economics –– US Q4 is lowered from 2% to 1.5%. Lower projections for Brazil and India.
Fixed Income –– More central bank buying next year comes against the backdrop of falling net issuance.
Equities –– US equities continued to underperform in November for a fourth straight month. Stay underweight.
Credit –– We expect total returns of 6-7% in Asia credit in 2013.
Currencies –– Medium term, we are short JPY vs USD, NOK and EUR; and short USD vs AUD, RUB and KRW.
Commodities –– We expect modestly higher gold prices in 2013, driven largely by stronger EM economies and currencies.

NOMURA (Fraser-Jenkins) European Equities
Local macroeconomic backdrop remains very weak, reduction in probability of bad tail-risk event in medium term, and signs of growth elsewhere not adequately reflected in valuations, global head of quantitative strategy Inigo Fraser-Jenkins says.

• UK cut to neutral (no potential for repricing of tail risk plus input costs and comparative sector valuations not supportive)

• Keeps overweight on Basic Materials, adds gold exposure

• Increases weight in Energy to larger overweight

Within Consumer Cyclicals overweights Autos and underweights General Retail

• Keeps zero weighting to Consumer Staples and Utilities, significant underweight in Healthcare

• Lowers Tech and Media weights (to small overweight) and maintains neutral on Telco as preferred choice among defensive sectors

• Keeps thematic exposures to US housing and corporate capex

• Keeps Russian exposure

• Separately, Nomura upgrades Japan to overweight on rising prospects for very equity-friendly reflationary sea-change in monetary/FX policy following Dec. 16 general elections and new BOJ senior appointments coming in March-April

Max Kamir

Louis Capital Markets UK,LLP

Authorised and regulated by the FSA and Banque de France

39-41 rue Cambon

75001 Paris

T +33 (0)1 53 45 10 74

E mkamir
I http://www.louiscapital.com

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