European markets indicated slightly down before the open. Please read below Tristan’s new strategy piece. We still like European banks, and all the domestic (European) plays; in the US, we play growth, we like tech and software and are increasingly cautious on the consumer.
US equities finished lower in a fairly quiet trading session on Monday. The impasse in Washington remains the key catalyst, however little changed in the CR/debt ceiling debate today or over the weekend and, as evidenced by light volumes and modest moves lower, markets currently seem willing to wait for an expected resolution. The Fed’s plan to taper has not been forgotten and many believe that the shutdown could further delay implementation. The minutes from the mid-September meeting, which resulted in a surprise decision not to taper, will be released on Wednesday and will be evaluated for more detail regarding that delay as well as any sign of concern about the current political climate in Washington. Most sectors lower with consumer discretionary (1.40%) the biggest decliner; telecomm +0.62% the only sector higher.
Newsflow in Asian markets continued to be slow as the Chinese market re-opens after its week long National Day holiday. The region started the trading day posting falls but has been rebounding throughout the morning
Today, we’ll check the German Factory orders and Alcoa kicks off earnings season after the close. We’ll also try to guess when this shutdown will stop… It’s been a week already.
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U.K. House-Price Index Rises to Highest in More Than a Decade.
IMF to publish World Economic Outlook, 3pm CET.
U.K. Manufacturing Improves as Jobs Outlook Brightens: BCC.
Volatility at 9-Month High as Traders Focus Bets on VIX: Options.
HSBC Cuts U.S. Equities on Stretched Valuations; Upgrades Europe.
China’s service sector is expanding “substantially” below trend: The Markit/HSBC services PMI came in at 52.4 last month, indicating a deceleration from the 52.8 level in August. (FastFT)
Thales Close to EU4B Saudi Air Defense Contract, Tribune Says.
Alcatel-Lucent Said to Plan to Reduce Staff by 10,000 Worldwide.
Monte Paschi to Cut Extra 3,360 Jobs in $5.6b Rescue Plan.
Telecom Italia May Be Cut to Junk by S&P After CEO Bernabe Quits.
Vodafone Is Said to Decide Against Bid for Tim Participacoes.
Santander to Purchase 51% Stake in Corte Ingles Financing Unit.
Airbus Mulls Expansion of A350 Production, Handelsblatt Says.
Partech Ventures Raises EU160M, Les Echos Says.
Apple Said to Plan U.K. ITunes Radio Expansion Beating Pandora.
Oracle Shareholders Urged by Group to Reject Executive Pay Terms.
TSMC May Miss 3Q Guidance, UMC May Beat Sales View: Bernstein.
White House rejects demands to negotiate on shutdown: Obama will not back away from his refusal to negotiate with Republicans over America’s debt limit, his senior economic advisers said, but the administration has left open the door for a short-term increase in borrowings. (Financial Times) The partial shutdown of the federal government ended its first week on Monday without any bipartisan meetings held or planned. (NYT)
China and Japan warn US on default: “China and Japan ratcheted up pressure on the US to avoid an unprecedented US default on its debt as Democrats and Republicans continued their stand-off over the budget in the second week of a US government shutdown.” (Financial Times)
Penalties planned for banks receiving ECB aid: “EU regulators overseeing next year’s long-awaited stress tests of the region’s banks are preparing to penalise any lender that remains reliant on the European Central Bank’s landmark cheap funding scheme.” (Financial Times)
Japan’s current account surplus fell nearly 64 per cent in August, versus forecasts expecting an 18 per cent gain. (FastFT)
Hilsenrath: mixed signals from the Fed are a product of mixed views within (WSJ)
LCM Cross Assets (Abet) Overcoming the Demons
The reluctance of investors to buy domestic equities tells us that the trend is not over.
We discuss the valuation argument. We show the break of the positive correlation between stocks’ prices and earnings revisions and conclude that fundamental analysis is useless in the current market cycle.
Stocks are expensive on a global basis and the small group of stocks that remain cheap from an historical perspective have a clear bias towards financials. For investors sensitive to the valuation argument, make it simple: buy financials.
The bias against domestic stocks persists. The weak fundamentals of these stocks prevent investors from favouring them. This is classic on equity markets and reinforces our positive view on these names. As long as the reluctance of investors to buy domestic assets persists, the investment case for these stocks remains attractive.
We go further into the analysis and rank the members of the EuroStoxx50 index according to the share of their turnover realised in Europe. We demonstrate that the most domestic oriented stocks exhibit better investment characteristics. Implied volatility is still high compared to less domestic oriented stocks and they remain unloved by analysts.
We summarise our recommendations on financial markets but do not make real adjustments.
Trade recommendation summary
Buy Growth Stocks in the US
The outperformance of growth style investing in the US should continue.
Go Long Tech/Software Short Retail
We play here again the growth leadership in the US equity market. Software stocks are lagging while the Retails sector skyrocketed to incomprehensible levels.
Buy Implied Volatility on Equities, Currencies and Commodities, but not on Bonds
The current regime of implied volatility of most asset classes is no consistent with the level of economic uncertainty around the world.
MS (Global) Global Asset Managers
Great Rotation? Probably Not.
Rotational flow from bonds to equities will be more subdued than many expect. Our bottom-up analysis of $89 trillion of globalAuM suggests there are major structural headwinds to the ‘great rotation’ story. Reallocations by Institutional investors (~60% of global AuM) will be neutral for equities, at best. Defined Benefit Pension schemes are likely to reduce equity allocations as they de-risk to better match assets and liabilities, and Solvency ll regulations for Insurers will confine re-risking to non-equity assets.
Demographic trends are a strong offset. Retail and High Net Worth investors (combined ~40% of global AuM) may seek more equity exposure. Year to date, ~3% annualized net new money growth in mutual funds suggests some re-risking as confidence in the economic outlook has grown. But we think ageing demographics and lower risk appetite will focus investor demand on regular income, capital preservation and lower volatility of returns, limiting the strength of any rotation into core equities.
Product paradigm shifts away from traditional active equity. We expect demand to increase for ETF, multi-asset solutions, unconstrained fixed income and alternatives. Our stock picks reflect our forecast for double-digit growth in multi-asset solutions, benefits to players able to offer unconstrained/alternative credit product or servicing the lower-cost end of the barbell, and best-of-breed alternative providers. Globally, our top picks to play these themes are Blackstone, Apollo, Oaktree, BlackRock, and Schroders.
ABB (MS, Uglow) Revisiting our thesis – Move to Equal-weight
ABB has lagged a strong sector since releasing disappointing 2Q13 results. We see positive catalysts near term, including short-cycle pickup, more reasonable expectations, management transition and balanced risk-reward. Move to EW.
Autos & Auto-Related: Dealers (MS, Shanker) Debunking the P&S Bull-Case and More…
Investor interest in the dealers has been fervent in recent months, at least partly driven by anticipation of a P&S super cycle. We think the optimism is misplaced and do not see P&S inflecting until 2016. In the meanwhile, pressure on new/used gross margins, F&I and rising rates remain headwinds.
EDF(MS, Turpin) Higher Growth, Improving Risk, Valuation Upside – OW
Possibility for extension of the operating life of French nuclear plants indicates less risk to EDF’s equity story. We now incorporate a lower nuclear amortization charge, which drives an increase in our 2014e EPS, DPS forecasts. Implied 6.2% DY 2015e and a reduced risk profile support our OW.
Novartis (JPM, Vosser) Downgrade to Neutral; Upside from pipeline and improved capital allocation seems more limited
We downgrade to Neutral as we believe that a large proportion of the benefit from improved capital allocation is already reflected in the Novartis shares. Further, we see a continuing deterioration in the growth of recently launched products in Pharma and Vaccine & Diagnostics, which together with a slower recovery in Consumer leaves our EPS ests. 5-7% below consensus going forward. Finally, we believe the pipeline newsflow over the coming 18 mths is unlikely to drive substantial upgrades. With limited upside following our cuts, we lower our PT to SFr74 (SFr78) based on a target PE multiple of 14x, in line with the sector, on our 2015 estimates, which we believe is justified given a 13-16E core EPS CAGR of 6%, vs the Large Cap Sector of 6%.
ASOS plc (GS, Walding) Buy: £2 bn revenue by FY16E, valuation still attractive; Conviction List Buy
We reiterate our Conviction List Buy on ASOS and raise our 24-month price target to 7,400p following a very strong 4Q trading release.
Ocado Group PLC (GS, Walding) Buy: Expanding the potential for capital advantages; Buy
The deal with Morrisons is transformative for Ocado, providing funds that have recapitalised the business and an additional income stream from technology-related fees. We see significant upside to our 545p 24-month target price.
ABB RAISED TO EQUALWEIGHT AT MORGAN STANLEY ON SHORT-CYCLE TRADE
EURASIA DRILLING CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
HANDELSBANKEN UPPED TO MARKET PERFORM VS UNDERPERFORM AT…
HOME RETAIL CUT TO SELL VS HOLD AT SOCGEN
HUGO BOSS REINSTATED AT NEUTRAL AT BOFAML; PT 101
LADBROKES CUT TO HOLD VS BUY AT JEFFERIES
LUNDBECK CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
MARKS & SPENCER CUT TO UNDERPERFORM AT BERNSTEIN
NORTHGATE CUT TO HOLD VS BUY AT JEFFERIES
NOVARTIS CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
OCADO RATED BUY AT GOLDMAN; PT 545P
SABMILLER RATED NEW ’BUY’ AT STIFEL
Nikkei 225 up +33.98 (+0.25%) at 13,887
Topix up +0.35 (+0.03%) at 1,148
Hang Seng up +222.96 (+0.97%) at 23,197
S&P 500 down -14.38 (-0.85%) at 1,676
DJIA down -136.34 (-0.90%) at 14,936
Nasdaq down -37.38 (-0.98%) at 3,770
Eurofirst 300 down -2.65 (-0.21%) at 1,241
FTSE100 down -16.60 (-0.26%) at 6,437
CAC 40 up +1.33 (+0.03%) at 4,166
Dax down -31.39 (-0.36%) at 8,592
€/$ 1.36 (1.36)
$/¥ 96.93 (96.69)
£/$ 1.61 (1.61)
Brent Crude (ICE) down -0.28 at 109.40
Light Crude (Nymex) down -0.10 at 102.93
100 Oz Gold (Comex) unchanged 0.00 at 1,325
Copper (Comex) unchanged 0.00 at 3.29
10-year government bond yields (%)
CDS (closing levels)
Markit iTraxx SovX Western Europe -0.66bps at 82.06bp
Markit iTraxx Europe +0.8bps at 98.38bp
Markit iTraxx Xover +3.06bps at 391.28bp
Sources: FT, Bloomberg, Markit