LCM Dawn Patrol – 27.06.13 – JPM downgrades chemicals, GS on EM, GS adds Allianz to CL, other Stuff for breakfast.

Bonjour,

Europe to open higher on eased concerns regarding the Chinese credit crunch and the tapering of QE. Volumes were quite low in the US after the European close. These are really short term views as we paddle in choppy surf, but it seems that investors still like equities more than the rest. In spite of the poor GDP number, the US jobs trend is what matters and central bankers are doing what they can to calm investors’ fears. The next few days will bring very few key economic data, so it’s the right time to consider where to put that money… Also consider that this is the end of the quarter so window dressing is mentioned as a reason for the rebound. EM are doing okay, but commos continue to suffer.

Today, we’ll figure out what the agreement reached by the Eurogroup really means for the banks (bail ins) and European companies. We’ll also check our screens to see what the Fed’s Dudley and Lockhart have to say. However, we shouldn’t spend too much time on Fed’s speeches and statements, I think we already know what the plan is and it’s quite clear. Let’s focus on the consequences and the facts… In terms of macro data: The German consumer confidence survey, the US Q1 GDP, the US jobless claims…

It’s coming…
TOUR DE FRANCE 2011 : PINEROLO / GALIBIER SERRE CHEVALIER

NEWS

Soc. Gen  CEO says that rise of interest rates would be positive for French banks. He sees no need to increase 2015 cost cutting targets (Reuters)
BASF/Solvay/Lanxess. JPM downgrade to UW today
Subsea7 warn FY EBITDA will be flat on 2012 on Guara Lula costs rising, higher tax rates
Debenhams 3Q LFL Sales Flat; Est. Rise 1.5%
Vinci, Credit Agricole to Bid for 9.5% ADP Stake, L’Agefi Says
Total in Retail Accord With Darty, Decathlon, Le Parisien Says
Hon Hai Growth Guarantee May Be ’Difficult’ to Achieve: Barclays
YPF Says Argentine Government Didn’t Submit Offer to Repsol
Clearwire shares fell 2% to $4.99 in heavy volume after Dish formally withdrew its $4.40-a-share tender offer for the company.
Shares of Progress Software Corp. jumped more than 8% in light volume after the data-management-software company reported quarterly earnings of 7 cents share on revenue $81.7 million

CURRENT STUFF

US Pension gap
from the FT citing Moody’s analyst : “US states would need to raise $980bn to cover the aggregate shortfalls in their retirement schemes for public sector workers.
If all 50 states had to make good on their pension shortfalls immediately, which they do not, it would need, on average, 66 cents of every dollar in revenue, including that from federal block grants and aid, to fill the gap”
“The research also highlighted vast differences between states: while Nebraska would need only seven cents of each dollar collected to cover its shortfalltoday, Illinois would need to collect another $1.41 on top of every dollar it now raises to fill the gap.”

Sluggish growth data give Fed cause for caution on tapering: “The US economy grew at an annualised pace of 1.8 per cent in the first quarter, significantly slower than previously thought, which could give the Federal Reserve some reason for pause as it weighs slowing its support for the recovery. The surprisingly sharp downward revision – from an earlier projection of 2.4 per cent first-quarter gross domestic product growth – offers evidence that US growth remained quite sluggish even as the Federal Reserve began contemplating tapering the tempo of $85bn in monthly bond buys.” (Financial Times)

Italy probes use of derivatives to hedge public debt: “Italy’s judiciary has opened an inquiry into the Treasury’s use of derivatives to hedge public debt after reports that the state faced potential losses of billions of euros on contracts restructured during the eurozone debt crisis last year. Nello Rossi, Rome’s deputy prosecutor, told the Financial Times on Wednesday that he would meet the various institutions involved, including the Treasury, the Bank of Italy and state auditors. He stressed, however, that this was not a criminal investigation.” (Financial Times)

Emerging economies lead switch to renewable energy: “Renewable energy will provide more of the world’s electricity than gas-fired power plants by 2016 the International Energy Agency has said, as sources such as hydro, wind and solar power grow rapidly in emerging economies, especially China. The IEA, a think-tank backed by rich countries’ governments, said it had raised its forecast for growth in renewable energy from last year’s estimate and now expects renewables to provide about 24 per cent of the world’s electricity in three years, just ahead of gas and roughly twice as much as nuclear power.” (Financial Times)

Other stuff

BlackRock Demonstrates The Awesome Power Of Diversification (Business Insider)

STRATEGY

GS (Eoyang) EM Strategy. And now… the hard part
Restacking EM equity for a rising DM yield / better US growth regime

The monetary / growth regime is changing
Our base case is for an inflection towards tighter DM monetary policy and  better US growth, and flattish commodities prices. EM assets are obviously  starting to adjust rapidly to the change in monetary conditions.
More EMs may be hurt by rates than helped by growth
We survey the EM equity markets and conclude that there are more issues  with the change from easing to tightening than in the modest impact from  US growth. Many EMs are dependent on domestic demand, excess credit  growth, and foreign inflows; those situations are quickly becoming difficult.
BR / TR / SA: significant headwinds, vulnerable valuations
Brazil and South Africa remain challenged by weak growth, high inflation,  and CA deficits; we add Turkey to our underweights because higher core  rates make its imbalances a serious concern. EM valuations have dropped  — but the heavy discounts are in Russia, China, and Korea. We see more  potential downside in our underweights of Turkey, Brazil, and South Africa.
Broad EM should underperform DM, prefer KR and MX
We argue there are now fewer reasons to warrant broad EM exposure and  that a selective approach is preferable. We prefer Korea and Mexico for  their better US exposure and manageable risk in portfolio flows.

UPS&DOWNS

European Chemicals (JPM,  Evans) Supply increases will cut returns – leading to earnings revisions. Downgrade BASF, Lanxess, Solvay to UW
After 3 years of tailwinds the good times may be over. The recent boom years for chemicals were driven by a confluence of several one-offs (major restocking, capacity shortages & raw material inflation). However – and in sharp contrast to consensus – we believe that current margins are not sustainable as we see potential major headwinds: 1) new capacity in Asia and Europe 2) limited potential for further cost savings and 3) significant cost advantages going forward for US chemicals peers due to cheaper feedstock from shale gas. We therefore downgrade BASF, Lanxess and Solvay to Underweight (from Neutral) with materially reduced forecasts for 2014-16

Alcatel-Lucent (MS, Meunier) Extending debt maturities positive for equity holders
(I still don’t like it…)

Alcatel-Lucent yesterday issued a €630m convertible bond maturing in 2018 – The proceeds will be used to repay part of the convertible bond maturing in July 2015 (€806m outstanding). The interest will be lower at 4.25% vs. 5% for the 2015 convertible bond, hence in the right direction for interests payments.

Allianz SE (GS, Malhotra) Buy: PIMCO flow concerns offer opportunity, add to Conviction List
We add Allianz to the Conviction List as we believe the market’s concerns around PIMCO’s bond flows offer an attractive opportunity. We present a scenario analysis based on a worse-than-1994 experience of US bond funds and yet we still see 9% upside.

BASF CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
CARILLION RAISED TO HOLD VS SELL AT LIBERUM
CARILLION RAISED TO HOLD VS SELL AT LIBERUM
CENTRICA CUT TO NEUTRAL VS BUY AT UBS
CENTRICA RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
DKSH RAISED TO HOLD VS SELL AT BERENBERG
ENRC CUT TO NEUTRAL VS BUY AT UBS
ETALON CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
HEIDELBERGCEMENT RAISED TO BUY VS HOLD AT BANKHAUS LAMPE
LANXESS CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
MARINE HARVEST RAISED TO STRONG BUY VS BUY AT NORDEA
PGE RATED NEW HOLD AT SOCGEN
PRADA RAISED TO BUY FROM HOLD AT DEUTSCHE, PT HK$84
SMITHS GROUP RAISED TO BUY VS NEUTRAL AT UBS
SOLVAY CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
TAURON RATED NEW BUY AT SOCGEN
TAV CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
TPSA CUT TO SELL VS HOLD AT SOCGEN
TURKISH AIRLINES RAISED TO OVERWEIGHT AT MORGAN STANLEY
UMICORE CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE

Have a great day!

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