LCM Dawn Patrol – 30.09.13 – JPM EU and Global Strategy, GS on Europe, some recommendations changes and more…

Ciao,

Markets to open down as the Italian government is in turmoil and investors fear the US government shutdown. Also the Chinese PMI was slightly disappoointing.
Last week was rather boring with the S&P down more than 1% and the SX5E flat. Tapering is still in strategists pieces but it seems that the impasse in Washington regarding the debt ceiling and the government shutdown is more alarming. I don’t know about you, but to me it feels like we’ve had this again and again over the past few years. Investors are looking for the newt big bad news and in the end not much happens… Last week volumes were quite low and we’ve seen people buying protection.

This week, we’ll have a lot of data and political news. On the economic front: PMIs (US an Europe), auto sales (US) and US jobs (175ke). We’ll listen to Mr Draghi again on Wednesday (no change). On the political front Italy (Berlusconi) and Washington (govt shutdown) should be making the headlines.

Hope you enjoyed your week end. Winter is coming, take you vitamins (D).

NEWS

China Sept. PMI Rises Less Than Analysts Forecast reaching 50.2 vs 51.2e
Europe’s Jobless Rate at Record Seen Resisting Recovery for Now
First U.S. Shutdown Since 1996 a Day Away
Weidmann Calls for More Flexible German Jobs: Welt am Sonntag
German SPD Backs Merkel Talks in Step Toward Government Alliance
IPOs in Europe Leapfrog U.S. as Valuations Draw Investors
Letta Defies Berlusconi as Italian Govt Nears Collapse

Etisalat Extends Talks With Vivendi on Maroc Telecom Offer
Siemens CEO Kaeser Cuts 15,000 Jobs to Catch Up With GE, ABB
Telecom Italia CEO Bernabe Is Said to Plan Resignation Next Week
Lufthansa CEO Calls Ryanair Staff Conditions ‘Unacceptable:’ NZZ
Roche’s Kadcyla Beats Herceptin in Delaying Cancer Progression
Axa PE Plans Spin Off of Insurer, FT Says
Intesa Appoints Messina CEO as Cucchiani Resigns Amid Clash

CURRENT STUFF

Parts of the US government may shut down at midnight on Monday for the first time since 1996 if Congress and the White House can’t find a way out of their latest stand-off on fiscal policy – analysis shows that automatic US government spending cuts which took effect in March are causing the most damage in regions that weathered the recession better than the rest of the country. (Financial Times)

Italian Prime Minister Letta’s government teeters on the verge of collapse after allies of former premier Berlusconi, led by Deputy Premier Alfano, said on Sept. 28 they tendered resignation from cabinet. Letta will ask for a confidence vote in parliament to be held Oct. 2, he said on RAI 3 television, noting that Berlusconi’s PDL is showing strain and that he hopes some PDL lawmakers will support govt.

Barrons’ International Trader (Europe):Positive on German auto-makers including Volkswagen (VOW.GR), Daimler (DAI.GR) and BMW (BMW.GR) as Europe rebounds and investors remain positive on Germany under Chancellor Angela Merkel; positive mentions also for Continental (CON.GR), Peugeot (UG.FP) and Renault (RNO.FP).

“Twitter is planning to make public its secret filing for an initial public offering as soon as this week, people familiar with the matter said. That means the social media and microblogging company’s stock could begin trading by late October or early November, if the offering moves at full speed.” (WSJ)

Wall Street’s top five banks face $1bn earnings cut on growing fears of a sharp decline in trading revenues coupled with increased legal costs.Analysts reduced their expectation of net income by $210m for Citigroup, $128m at Bank of America, $123m at Goldman Sachs and $97m at Morgan Stanley, according to Bloomberg data. (Financial Times)

Italy’s PM seeks to shore up government: Enrico Letta is seeking urgently parliamentary support for a new government after centre-right leader Silvio Berlusconi pulled his ministers out of their five-month-old coalition, risking a financial market backlash. (Financial Times) Italian bonds and stocks are suffering. (Financial Times) (FT editorial)

Faltering Chinese factory growth adds to rebound fears: The purchasing managers’ index published by HSBC edged up to 50.2 in September from 50.1 in August. The preliminary result had fuelled optimism that China’s recovery was in full swing after a shaky first half of the year, but the final result suggests the recovery could easily falter. (Financial Times)

CLO issuance hits highest level since before financial crisis: A spurt in sales last week has helped push US issuance of so-called “collateralised loan obligations” so far this year to at least $55.41bn, according to S&P Capital IQ LCD – the highest since the $88.94bn sold in 2007, just before the financial crisis. (Financial Times)

STRATEGY

JPM (Loeys) The J.P. Morgan View
What is back and what is not?

Asset allocation –– We focus on what is back in markets, and what is gone and lost.
Economics –– No change. Lower oil prices and bond yields offset the impact of the lower tha n expected PMI.
Fixed Income –– Markets are focused on the US budget and debt ceiling, but few have a view on what it actually means for bonds.
Equities –– Keep European and EM equity overweights vs. US and Japan.
Credit –– Stay OW EM sovereign and US HY credits.
FX –– stay short USD/CNH and long NZD/USD; buy USD/CHF and sell GBP/USD
Commodities –– We stay OW base metals and energy.

JPM (Matejka) European Equity Strategy
Value” rally gone too far? Short term headwind from messy politics, but fundamentals point to more upside
The rotation in styles and sectors was also significant – “low Quality” and “Value” stocks lead the market.
The valuation gap between Growth and Value parts of the market has barely started to close.
Current macro backdrop is consistent with further rotation into Value.
We see 3 broad ways to position for this change in leadership:
a) Periphery vs core – Spain and France vs Germ any, UK and Switzerland. Italy is also a clear “Value” market – we see weakness due to current political uncertainty as a buying opportunity.
b) Key “Value” area that we are OW are Banks. Our initial bullish view centered around cheap valuations (still the case at 0.9x P/TB) and falling cost of equity. Now ther e aresigns that earnings revisions are bottoming out. We focus on French, Spanish and Italian banks, where our analysts favour SOGN, CAI and UCG.
c) OW Value vs Growth, Low vs high Quality and Cyclicals vs Defensives. Within Value, we prefer those areas that have operating leverage to economy – Banks, Autos and Construction Materials. We do not see the r ecent Utilities & Telecoms bounce as sustainable though. JPDEUCOL <index> is our basket of stocks that are operationally sensitive to economic activity & look attractively priced.

GS (Bell) Strategy Matters
Portfolio Strategy Research

Stocking up: European investors move back into equities
We believe that there is a strong fundamental case for European equities, driven by improving economic growth, high operational gearing and reasonable valuation. We also see several sources of demand; US funds have bought back into European equities and Europe funds are net buyers of shares (although mainly international ones so far). We expect this to persist as growth continues to improve and as risks moderate. Issuance has picked up and net equity supply in Europe is positive (unlike the US) but not sufficiently so in our view to present a danger to performance.

UPS&DOWNS

Global: Communication Services (GS) Top 10 Key Themes from our Communacopia conference
We highlight key themes from the 2013 Communacopia conference, including M&A implications from leverage capacity, wireless competition, convergence, emerging content platforms, cable consolidation, and connected devices, among others

Shire (JPM, Gordon) Upgrading to OW and setting £30 PT
Pipeline newsflow and cost cutting to drive performance

Raising PT to £30, upgrading to OW on upcoming pipeline newsflow and cost savings. Late stage pipeline newsflow approaches, with 3 Phase III trials reporting Q1’14 (high prob. of success). Phase III data could add c.$2bn sales, or +40% to current top-line, greatest ‘optionality’ in the mid-cap sector. Cost savings announcements, likely at Q3 results (Oct 24th) offer further upside. We raise EPS 4-5% 2013-15, +10-13% 2016-17, reflecting trimmed OpEx and higher pipeline probabilities for Vyvanse Binge Eating and Lifitegrast (50%->70% prob.). We set a £30 PT, 17x ‘15 PE, justified by a 13% ‘15-18 EPS CAGR. With our PT offering 22% potential upside, we upgrade to OW.

European Capital Goods (JPM, Willi) European Construction Recovery – a closer look at the data and ways to play it
We follow up on the recent Equity Strategy Report on the recovery of European Fixed Asset Investment (FAI). We focus on Construction, accounting for 60% of FAI which is 19% below the 07/08 peak. We expect the pick up over the next 12-18 months to be driven by residential and refurbishment and not new structures which benefits electrical product suppliers over construction equipment or construction firms. In non-residential, similar to the US, a recovery could then pause given structural drags. Country level analysis highlights the importance of a recovery in the periphery to an overall European improvement. We recommend the following stocks to play this theme: Rexel, Assa Abloy, Legrand, Pyrsmian and Electrolux

AFRICAN RAINBOW CUT TO NEUTRAL VS BUY AT BOFAML
ALLIANCE OIL CUT TO EQUALWEIGHT AT MORGAN STANLEY
BARRATT RAISED TO OVERWEIGHT AT JPMORGAN
BOVIS CUT TO UNDERWEIGHT AT JPMORGAN
KEMIRA CUT TO NEUTRAL VS BUY AT BOFAML
MICHAEL PAGE RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SU…
PERSIMMON RAISED TO OVERWEIGHT
PERSIMMON RAISED TO OVERWEIGHT AT JPMORGAN
QIWI RATED NEW EQUALWEIGHT AT MORGAN STANLEY, PT $30
RANDSTAD RAISED TO BUY FROM HOLD AT ING
SCHNEIDER ELECTRIC CUT TO SELL VS NEUTRAL AT UBS
SHELL RAISED TO BUY VS SELL AT GOLDMAN
SHIRE RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
STHREE ADDED TO CREDIT SUISSE’S SMID FOCUS LIST
STORA ENSO CUT TO SELL VS NEUTRAL AT UBS
SYNGENTA CUT TO NEUTRAL VS BUY AT CITI
TELIASONERA CUT TO NEUTRAL VS BUY AT SWEDBANK

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -164.42 (-1.11%) at 14,596
Topix down -14.89 (-1.22%) at 1,203
Hang Seng down -255.58 (-1.10%) at 22,951

US markets
S&P 500 down -6.92 (-0.41%) at 1,692
DJIA down -70.06 (-0.46%) at 15,258
Nasdaq down -5.83 (-0.15%) at 3,782

European markets
Eurofirst 300 down -2.94 (-0.23%) at 1,255
FTSE100 down -52.93 (-0.81%) at 6,513
CAC 40 up +0.05 (0.00%) at 4,187
Dax down -2.59 (-0.03%) at 8,662

Currencies
€/$ 1.35 (1.35)
$/¥ 97.94 (98.24)
£/$ 1.62 (1.61)

Commodities ($)
Brent Crude (ICE) down -0.83 at 107.80
Light Crude (Nymex) down -1.25 at 101.62
100 Oz Gold (Comex) down -0.20 at 1,338
Copper (Comex) down -0.02 at 3.31

10-year government bond yields (%)
US 2.59%
UK 2.73%
Germany 1.78%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.25bps at 87.24bp
Markit iTraxx Europe +2.94bps at 102.44bp
Markit iTraxx Xover +5.71bps at 400.5bp

Sources: FT, Bloomberg, Markit

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