LCM Dawn Patrol – 08.07.13 – The JPM View, Citi on Europe, GS on US, MS on oil & gas likes technip, JPM likes Ericsson… More!

Bonjour,

European shares are expected to open up after Friday’s drop but better jobs report and as we expect some (positive) news regarding Greece’s next tranche of bailout funds.

Hope you enjoyed this sunny week end. Strategists still push for stocks over bonds as you will read below (JPM). Central banks remain supportive despite the tapering, valuations are reasonable (although great stocks at a cheap price are getting scarce) and more importantly it seems that investors are less afraid of macro risks. The earnings season kicks off tonight with Alcoa and it’s hard to expect great things in Europe… European main economic releases this week are limited to May IP finals with Germany today , UK on Tuesday, Italy and France on Wednesday and the Eurozone on Friday. China data will be in focus from Wednesday when we get trade data and money supply ahead of 2Q GDP next week.

Today, we’ll watch the German IP at 12:00 and that’s about it in terms of economic data…

LE TOUR

And congrats to Andy Murray and Marion Bartoli.

NEWS

VIVENDI is exploring alternative moves to extract cash from its Activision Blizzard unit after failing to sell 61% (FT).

Kering completed a majority stake acquisition in Pomellato, the Italian jeweler.

GDF Suez Allies With Portugal’s EDP on Wind Energy: Les Echos

OSRAM start trading today (expect opening at 9:15 Paris time).

ThyssenKrupp seeks unit sale before considering capital raising

RBS put on review for downgrade by Moody’s on break-up talks

Deutsche Telekom Short-Lists Bidders for Scout24 Unit, FT Says

Citigroup Cuts China 2013 GDP Growth Forecast to 7.4%

Eiffage wins EU80m Turnkey Contract in Gabon acc Les Echos

EasyJet Investors said to support Airbus Jet Deal acc to Telegraph

Deutsche Post aims to increase operating profit to as much as EU3.6b by 2015 “even though this has become more difficult in the current economic environment,” CEO Frank Appel tells Welt am Sonntag.

CURRENT STUFF

Greece looks likely to get next bailout tranche: Some issues remained to be ironed out at today’s meeting of eurozone finance ministers, but Greek ministers and troika members said they had overcome differences on the most vexing problem – cutting the size of the public payroll. A political standoff over the cuts had threatened the IMF’s €1.8bn portion of the tranche due after the end of July. (Financial Times)

White House-Wall Street trade clash: “The Obama administration has set itself up for a fight with Wall Street after resisting European demands to include financial services regulation in transatlantic trade talks as the list of sticking points grows before negotiations begin this week.” (Financial Times)

Portugal’s political crisis has been smoothed over, as the prime minister promoted Paulo Portas, the minister whose resignation threatened to bring down the government last week, to deputy prime minister. Portas, who leads the junior party in the ruling coalition, will also oversee negotiations with the troika over the country’s bailout. (Financial Times)

About 117 ETFs closed in the first half of this year — a record number. (Financial Times)

STRATEGY

JPM (Loeys) The J.P. Morgan View

Long stocks vs bonds remains best trade.
Asset allocation –– Long equities to fixed income, both govies and spread product, remains our largest and most confident allocation.
Economics –– US tapering likely to start in Sep now, but still due to take 9 months to mid 2014. No change in our view that first Fed rate hike comes only in 2015H2. UK growth upgraded significantly to 1.6% and 2.7% for this year and next.
Fixed Income –– Europe’s central banks can only insulate the front end of their curves from the shift in Fed outlook.
Equities –– EM equities stopped underperforming over the past two weeks. The biggest threat to EM equity underweights is widespread negativity, which is also reflected in our mutual fund data.
Credit –– UST selloff remains the big negative to credit, both DM and EM. Value has been created in spreads, but there is probably still a lot of pent-up selling of search-for-yield holdings.
FX –– Add to USD longs by selling EUR and GBP on diverging monetary policies.
Commodities –– Stay OW energy versus base and precious metals.

GS (Kostin) US Equity Views
Second-half Strategies: Market, Sectors, Themes, and Stocks

Rising earnings coupled with stable margins should lift S&P 500 index by 8% to our year-end target of 1750. Equities trade close to fair value but the Fed Model implies additional upside. Improving US macro data supports continued Cyclicals outperformance led by Financials and Industrials. Our high Sharpe Ratio basket has generated superior risk-adjusted returns for more than a decade, beating S&P 500 and posting a better information ratio than most large-cap core mutual funds. We highlight 23 stocks that meet several of our selection criteria.

JPM (Matejka) European Equity Strategy
Is the two-year-long earnings downtrend coming to an end?

We reiterate our call that the recent correction should be used as an opportunity to add risk as we believe equities will get used to higher yields. The repricing of bonds might end up as a blessing in disguise as it is finally leading to outflows out of fixed income assets. This might not have happened otherwise – equities are a clear beneficiary. We have advised a rotation into Cyclicals on 24th June – upgrading Autos, Media, Travel & Leisure in particular. European EPS revisions might be bottoming out as the expectations have become more realistic and the PMIs are at an inflection point. Banks and Autos tended to have the highest sensitivity to PMIs. We remain concerned about EM leveraged plays which are still trading near record price relative highs and are projected to have new all time high margins next year – Chemicals, Capital Goods, Durables and Food & Beverages. In contrast, we think domestic European, as well as the US exposure, offer better prospects. Screens are in the report.

 


CITI (Esposito) European Portfolio Strategist
Head-to-Head: Value vs Quality

Value vs Quality — This has been a key battle within European equities over the past decade. Supported by leverage, value won out between 2003-07. Quality has been the clear winner since 2008, but the risk on/off trade has made it a bumpy ride. What next?
Cheap but…avoid value traps — European equities are cheap vs global equities. But EM equities are the stand-out value trade, on sub-10x P/E. In Europe, be selective in value since value ≠cheap. Financials & surplus FCF = value. Offensives ≠value.
Financials & surplus FCF — Financials = cheap, self/help, restructuring, improving capital/cashflow, +ve earnings trends, positive correlation to rising (US) bond yields. Surplus FCF, plus balance sheet optionality, = sectors such as Health Care.
Avoid the ‘Offensives’ — Stocks/sectors with structural challenges = big Oil, Utilities, Food Retail, Telecoms. Generally, low/no FCF/returns/growth, high capex, unhelpful legacy positions and, selectively, weak balance sheets & high European exposure.
Stick with quality — Quality (& Defensive Growth) are one-part of our barbell strategy. Quality winning YTD and over last few years. Two key risks to leadership: 1) strong global recovery, 2) broad re-leveraging surge. Both risks unlikely. Stick with quality.
Three quality strategies — 1) Quality Street = stocks with better than sector RoE & balance sheets with +ve earnings trends, eg Roche, Siemens, BT, Compass, Inditex, Ryanair, ITV; 2) QARP = stocks with highFCFY, high RoE and strong balance sheets, eg Ryanair, Novartis, BATs, Ahold, Next, Alstom; 3) QUARI = the new income strategy from Chris Montagu and our Quant team.

UPS&DOWNS

Oil & Gas (MS, Pulleyn) Norway Takeaways: Stay UW Seismic & OW Technip
Subsea 7: EW, PT Nkr 140 to Nkr 135

Stay cautious on Seismic: We expect lower capex growth for exploration and consequently slower growth in seismic vessel pricing and multi-client sales. We consider companies’ focus on vessel productivity, rather than pricing, as reflective of the less positive outlook. We stay UW CGG and TGS.
Stay OW Petrofac post trading update: We found explicit comments that the three largest legacy projects were nearing completion reassuring given market concerns over execution. We acknowledge that risks remain on the pace of onshore awards and the OEC margin in 2014, and we found new IES guidance slightly disappointing. However, we believe that at 8.6x 2014e PE the stock reflects these factors, the downside risk to consensus and negative sentiment on strategy.

Ericsson (JPM, Deshpande) Margin improvement should continue through ’13. LTE upgrades to drive revenue.
Add to Analyst Focus List.

The Ericsson investment case is hinged on margin improvement in networks. Recent data-points from Verizon, SK Telecom, KPN etc. indicate that business mix in networks should improve through ‘13 while dilutive ‘modernization’ projects roll off. Though Ericsson is not 1-quarter predictable, stock 1 year view is. We maintain OW rating adding the stock to the EMEA Analyst Focus List.

CHRISTIAN HANSEN CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
ELEMENTIS RAISED TO ADD VS HOLD AT NUMIS
EUROCASH CUT TO NEUTRAL VS BUY AT GOLDMAN
GOLAR LNG RAISED TO NEUTRAL VS SELL AT GOLDMAN SACHS
NYRSTAR PT CUT TO EU3.30 FROM EU4.00 AT ING; KEPT AT HOLD
PHOSAGRO RAISED TO BUY VS NEUTRAL AT UBS
POLYMETAL CUT TO SELL VS NEUTRAL AT GOLDMAN
SAFT GROUPE CUT TO NEUTRAL VS OVERWEIGHT AT HSBC
SAIPEM RAISED TO HOLD VS SELL AT SOCGEN

OVERNIGHT MARKETS: DOWN

Asian markets
Nikkei 225 up +29.37 (+0.21%) at 14,339
Topix down -3.82 (-0.32%) at 1,185
Hang Seng down -389.72 (-1.87%) at 20,465

US markets
S&P 500 up +16.48 (+1.02%) at 1,632
DJIA up +147.29 (+0.98%) at 15,136
Nasdaq up +35.71 (+1.04%) at 3,479

European markets
Eurofirst 300 down -15.44 (-1.31%) at 1,164
FTSE100 down -46.15 (-0.72%) at 6,376
CAC 40 down -55.46 (-1.46%) at 3,754
Dax down -188.31 (-2.36%) at 7,806

Currencies
€/$ 1.28 (1.28)
$/¥ 101.28 (101.18)
£/$ 1.49 (1.49)

Commodities ($)
Brent Crude (ICE) up +0.19 at 107.91
Light Crude (Nymex) up +0.37 at 103.59
100 Oz Gold (Comex) up +2.50 at 1,215
Copper (Comex) up +0.01 at 3.09

10-year government bond yields (%)
US 2.72%
UK 2.49%
Germany 1.72%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.43bps at 100.2bp
Markit iTraxx Europe +1.64bps at 113.57bp
Markit iTraxx Xover +9.58bps at 455.56bp
Markit CDX IG +1.12bps at 86.56bp

Sources: FT, Bloomberg, Markit

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