The Dawn Patrol – 18.03.13 – Special Strategy (MS, JPM, GS). Cyprus, Italy, USofA, Bonuses…


Markets to open down on the Cyprus’ plan to tax depositors… What can’t they tax?

SX5E Futures: 2659.00y -17.00. Support at 2597/2608 which is where it’s looking like opening….2608 has been a strong support and uptrend just below. Resistance 2647 then 2669

Today, Markets will focus on the Cyprus situation today which is already affecting the Euro and Asian markets. Cyprus took some very aggressive measures which were expected, but the tax on deposits (6.75% on deposits below €100,000 and 9.90% above) is a big and nasty surprise. The risks of a Euro collapse are going to be the main headlines again… Let’s see if the measures are passed (they need 29 votes in the 56 member parliament)… The debate begins at 14.00 GMT today with a vote expected this evening.

The Dawn Patrol is back… Which means skiing is almost over too. It was great…
New adventures ahead…


12m MSCI Europe index target Raised to 1,310 at Morgan Stanley

Banco Popolare 2012 net loss EU944.6m vs loss EU2.26b Y/y

Bertelsmann to start sale of RTL shrs in early April: Reuters

France Denies Planning to Open EDF’s RTE to Investors, AFP Says

GDF Suez Interested in Bord Gais Unit, Sunday Business Post Says

German Rail Union Calls Warning Strikes in Wage Dispute

M&S Margin Focus Likely Given Bid Speculation, Nomura Says

M&S Undervalued, Speculation Provides Support: Morgan Stanley

Morgan Stanley Sees European Insurers’ Profits Falling: FT

Novartis Wins EU Approval for Jetrea Eye Drug

Roularta 2012 Net Loss EU2.5m vs EU14.4m Profit; Omits Dividend

European banks. The IMF acknowledges some progress but warns more work lies ahead and says Europe’s banks face the possibility of suffering further losses. WSJ


On Cyprus
Cyprus’s government was working on a proposal to soften the blow of a bank deposit levy on smaller savers ahead of a parliament vote on Monday on the measure central to a euro zone bailout designed to avert bankruptcy (Reuters)

On Italy
Bersani was successful in getting his candidates elected to both houses, helped by abstentions and some rebel defectors of the 5-Star movement. President Giorgio Napolitano is due to begin consultations with political leaders on Wednesday to see if there is any chance of establishing a government. Reuters

On Bonuses
European parliament wants to restrict bonuses that exceed salaries for Ucits fund managers. “The parliament’s draft negotiating position, seen by the Financial Times, would enforce a maximum 1:1 ratio of bonus to salary and requires up to 60 per cent of the variable element to be deferred and largely paid in units of the fund the manager runs.” (Financial Times)

On the US Budget
the WSJ expresses some optimism in Washington being able to strike a budget deal but acknowledges time being of the essence (there is only a small window of time in which a compromise can be struck). Meanwhile, large gaps still exist between both sides on fiscal priorities. WSJ

To Read
WSJ: The Shocker from Cyprus: A Roundup of Analysts’ Reactions

FT (Munchau): Europe is risking a bank run


MS (Global Strategy Team) Spring Global Strategy Outlook
The Return of the Alpha.
Alpha to trump beta in 2013.
After four years where beta dominated, we believe alpha will make up a bigger slice of the (smaller) returns pie in 2013. Asset classes, regions and countries will be less correlated, in our view, with lower systemic risk and higher company-specific risk.
We maintain a strategically constructive view on equity and credit markets, as neither are structurally expensive, implying that additional moderate gains are likely over a 6-month horizon. Our view also rests on central banks’ determination to maintain highly abnormal monetary policy despite a gradually normalizing macro environment. Bull case: investor flows turbo-charge and front-load risk asset returns, with equities the key beneficiary. Bear case: any sign of global liquidity withdrawal earlier than we expect would roil all markets.
Near term, risk markets are fully valued and sentiment excessively bullish, making them vulnerable to a tactical correction. Two potential triggers: a fiscal tightening-driven shortfall in 2Q13 US growth (we forecast 1% growth in Q2 vs. 2% consensus) and a return to the CRIC cycle in Europe. However, we view both factors as temporary and would consider such a correction as ‘a pause that refreshes.’
Our strategic preference is for equities over credit over government bonds. Equities are cheap relative to credit on risk-adjusted valuation. Within equities, we strongly reiterate our preference for quality growth and income. Japan is our most favoured equity market and Europe now least favoured. Core government bonds should generate negative total returns over the next six months, but policy limits downside.
Upgrading the US. We remain bullish US housing and boost our 2013 house price forecast from +4-6% to +6-8%. Securitized products levered to rising house prices are our favorite credit play. We increase our price target for the S&P500 from 1434 to 1600, driven by further liquidity-fueled multiple expansion. We believe the USD is becoming an ‘asset-driven currency’ and shifting towards a positive correlation with risk assets.
FX leads on dispersion. We expect a broader breakdown of the ‘normal’ correlations within currency markets. The USD is one example of this, while we also expect more dispersion within EM FX markets, favouring MXN and INR over BRL, ZAR and HUF. We expect more downside for the JPY and GBP. Credit markets should also follow the dispersion theme, and in corporate credit we favour Europe over Asia or the US.

MS (Secker & Al) European Strategy
Spring Update – More upside on a 12m View.
Stay OW equities but expect a more volatile 2Q
Strong recent performance coupled with elevated investor sentiment suggests that equity performance in 2Q will be more volatile than in 1Q. However, ultimately the macro backdrop remains supportive for equities longer term.
Increasing our 12m index target to 1310
We are raising our 12m MSCI Europe index target to 1310, 5% above current levels. This is driven by a 0.5pt increase in our 12m PE assumptions that primarily reflects continued strong liquidity conditions. We also introduce a ‘valuation overshoot’ scenario whereby we apply a ‘bull case’ multiple to ‘base case’ EPS – this would imply 16% upside from here.
OW UK – raising FTSE100 target to 7000
We believe European investors should OW the UK. We raise 2013e UK EPS by 3% to reflect ongoing GBP weakness and raise our FTSE100 index target to 7000. UK valuations are attractive versus Europe and, unusually, the UK is outperforming in a rising market.
UW Europe within global context
From a global standpoint Europe is our least preferred region, as it has the weakest growth outlook and the least aggressive central bank. On 12m PE, Europe is close to a 7-year relative valuation high versus the US and EM, with an inferior EPS trend.
QE = Quality Equities
Investors should continue to overweight stocks that offer quality growth and/or quality income. Relative valuations of our Nifty Fifty+ basket are now back at historical averages and offer a good entry point. Given investors’ structural demand for income, we update our ‘High & Secure’ dividend yield screen.

JPM (Loeys) The J.P. Morgan View
Any reason left to hold bonds?

Asset allocation –– We remain decently overweight equities versus bonds, on value (high equity risk premium) and corporate buybacks and M&A. But we have not gone short duration in bonds yet, and need significant growth upgrades to go dramatically short bonds.
Economics –– Better than hoped US retail sales allow us to raise Q1 from 1.5% to 2.3%, and global Q1 from 2.5% to 2.7%. But the overall set of activity data and surveys do not send a message of upside risk from here.
Fixed Income
–– UK and Japanese breakevens have further to rise.
–– Sector position and momentum favor Telecoms in US.
–– We turn to neutral on EMBIG, from OW, and reduce our NEXGEM exposure.
–– Relative rate moves have displaced risk on, risk off as the main driver of currency moves.
–– Without stronger growth, we stay UW vs equities and HY.

GS (Moe) Portfolio Strategy Research
EM Equity in Two Decades – Refreshed

Significant equity market shifts lie ahead
Substantial expansion in global equity market capitalization. Using our updated trend economic forecasts, we continue to expect substantial increases in emerging equity market capitalization in absolute terms and relative to developed markets by 2030. Rapid economic growth and capital market deepening are the core drivers.
EM share of global market cap and index weighting will rise.
We expect EM equity cap to increase from US$17tr in 2012 to US$33tr in 2020 and US$72tr in 2030, bringing the EM share of global equity cap from 31% to 42% and 53% by these respective dates. The EM weight in the MSCI AC World index would also rise from 13% to 19% and 31% by 2020 and 2030. China could exceed the US in market cap terms by 2030, even after a lower trend growth forecast than before.
Key money flow themes: DM allocations to EM, institutionalization of EM savings.
DM institutional asset managers currently hold 6.3% in EM equities within their total equity portfolio. This weighting may rise to 18% by 2030, implying net purchases of $3.6tr. We expect further rapid growth in EM institutional assets and equity ownership, driven by economic growth and financial deepening.
Implications for investors and financial intermediaries.
EM equities offer investors attractive potential returns, as long as they do not overpay for growth. Financial intermediaries have substantial revenue opportunities from growth in primary, secondary and related activities. But both they and DM institutional investors face the challenges of managing increasing geographic, cultural and regulatory diversity.


Aviva Cut To Hold VS Buy at Berenberg (Cites increasing price pressure in French mobile mkt.)
C&C Group Raised to Outperform VS Neutral at Exane
Lafarge Raised to Market Perform vs Underperform at Bernstein
Marks & Spencer Raised From Equalweight At Morgan Stanley
National Grid Raised to Neutral vs Underweight at JPMorgan
Novo Nordisk Cut to Underweight vs Neutral at JPMorgan
Prudential Cut To Neutral VS Buy at UBS
Santander Brasil Raised To Neutral at Credit Suisse
Siemens AG Raised to Buy VS Neutral at BofAML
UniCredit Cut to Underperform vs Neutral at Exane
Vivendi Cut to Neutral vs Buy at Nomura
Vodafone Raised To Buy VS Neutral at Citi


Asian markets
Nikkei 225 down -241.08 (-1.92%) at 12,320
Topix down -18.94 (-1.80%) at 1,033
Hang Seng down -478.11 (-2.12%) at 22,055

US markets
S&P 500 down -2.53 (-0.16%) at 1,561
DJIA down -25.03 (-0.17%) at 14,514
Nasdaq down -9.86 (-0.30%) at 3,249

European markets
Eurofirst 300 down -4.82 (-0.40%) at 1,203
FTSE100 down -39.76 (-0.61%) at 6,490
CAC 40 down -27.55 (-0.71%) at 3,844
Dax down -15.52 (-0.19%) at 8,043

€/$ 1.29 (1.30)
$/¥ 94.73 (94.16)
£/$ 1.51 (1.51)

Commodities ($)
Brent Crude (ICE) down -1.20 at 108.62
Light Crude (Nymex) down -0.89 at 92.56
100 Oz Gold (Comex) up +13.60 at 1,606
Copper (Comex) down -8.80 at 342.00

10-year government bond yields (%)
US 1.92%
UK 1.94%
Germany 1.45%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.17bps at 98.42bp
Markit iTraxx Europe +0.96bps at 104.96bp
Markit iTraxx Xover +1.3bps at 404.15bp
Markit CDX IG +0.49bps at 78.74bp

Sources: FT, Bloomberg, Markit


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