LCM Dawn Patrol – 02.12.13 – Black Friday, Chinese PMI, MS and JPM 2014 Strategies, JPM View, Spanish Utilities, Capital Goods.

Bonjour,

Asian markets are generally trading lower this morning. The focus in China was the announcement of IPO reforms which are expected to allow 50 companies to list or be ready to do so by Jan 2014. The HSBC China October manufacturing PMI of 50.8 was ahead of the 50.4 flash. In a report the NDRC said that they expect Chinese inflation at the low end of the 3-5% range in 2014. A smaller than expected drop in Australian building approvals gave the market hope that low interest rates are making a positive impact. Trade data from South Korea surprised to the downside, showing that export growth remains weak. The productivity of investments was under question after Indian Q3 GDP came in under the 5% mark.

In Europe, Greece upgraded by Moody’s, Mittal & Nippon JV buy Thyssen Steel US and Thyssen will sell 29.9% holding in Outokumpu, Spanish government may cancel its contribution to tariff deficit, European Mining Sector raised to Overweight at UBS and MS prefer China over Europe

ZUMARIKA

As you may know, Zumarika is an association we created with friends to help fight the ALS (Lou Gehrig’s disease) and to help people with this saloperie. We recently created T_Shirts and Sweatshirts. And on this morning’s “L’Equipe’s cover, Julien Lizeroux (Amazing Skier, even more amazing person) is wearing the Sweat Shirt!
www.zumarika.com

NEWS

• Greece Raised to Caa3 by Moody’s on Fiscal Progress, Economy
• Ukraine Clashes Escalate as Opposition Calls for National Strike
• Russia Lures Ukraine With Cheaper Gas to Join Moscow-Led Pact
• Cameron Arrives in Beijing Pushing EU-China Trade Accord
• Osborne Pledges Reduction in British Consumers’ Energy Bills
• London Recruiter Says Job Vacancies Climbed to Seven-Month High
• French Ministry to Discuss SFR-Bouygues Network Sharing: JDD
• Biggest Bank in Norway Dismisses Hard Landing in Real Estate Bet

Repsol’s Minority Shareholders Reject YPF Accord, Mundo Reports
Deutsche Tel’s T-Systems May Cut 6,000 Jobs: Handelsblatt
KPN Holders to Vote on Cancelling Foundation Stake in Jan
L’Oreal to Buy Back as Much as EU500m of Shrs
TDC’s Dilling Joins Phone Execs Calling for Nordic Mergers
Telecom Italia Denies It’s Pursuing Sale of Tim Brazil
Telenor May Raise Stake in India Venture, Sibal Says: ET
ThyssenKrupp Plans to Boost Capital, Agrees to Sell U.S. Plant (indicated down 7%)
Vivo, Tim May Consider Merger in Brazil: Il Messaggero
Smiths News, Trinity Mirror Extend Wholesale Deal to 2019

CURRENT STUFF

In an article summarizing the National Retail Federation’s Thanksgiving weekend sales numbers, the WSJ highlights the sales spike on Thanksgiving day came at the expense of Black Friday sales, noting that total sales for the weekend fell for the first time in seven years.

US retail sales are likely to be down on last year in the four days from Thanksgiving to Sunday despite the early opening of stores and a surge in online spending, according to initial estimates. The National Retail Federation said on Sunday that it expected total spending over the long holiday weekend – when some stores opened earlier than ever on Thanksgiving night – to drop to $57.4bn from $59bn last year. (Financial Times)

“Japanese government bonds held by the country’s large banks decreased by 3.7 trillion yen ($36.2 billion) at the end of October to 81.3 trillion yen, falling to the lowest since February 2010, Bank of Japan data showed on Monday.” (Reuters)

Australian Inflation: This could put some pressure on Australia’s central bank. Australian consumer price inflation was 0.2 per cent in November, up from 0.1 per cent the previous month, according to a survey by TD Securities. And that could mean the Aussie central bank changes in stance on further interest rate cuts. To counter a slowdown in mining investment, the Reserve Bank of Australia has cut the interest rate to a record low 2.5 per cent and suggested it may lower the rate further. Inflation, however, is generally a reason central banks hold back from increasing liquidity. Year-on-year, Australia’s November CPI rose 2.4 per cent, against 2.1 per cent in October.

STRATEGY

MS (Secker) European Strategy
2014 Outlook – Wish Fulfillment?
With valuation and sentiment having risen significantly, expectations are higher than they have been for some time. 2014 should be the year when we find out whether we get ‘wish fulfillment’ or whether the region remains condemned to a long and hard slog. We are optimistic on European equities for next year, although a probable inflection point in monetary policy provides for heightened uncertainty along the way.
Index targets imply 9-10% upside for UK and Europe. We have raised our base case 12m PE target to 13.6. Applying this to our EPS forecasts produces an index target of 1480 for MSCI Europe (10% upside). Our FTSE10 target is 7220 (9% upside).
Our key recommendations for 2014 include:
– OW Germany vs UW France; OW Spain vs UW Italy
– Stay OW Financials – e.g. Insurers and Banks
– UW bond proxies – e.g. Energy and Utilities
– Sell EU exposure; Add to US/China exposure
– Value and Growth – OW Value sectors with growth (Financials) and Growth sectors with attractive valuations (Healthcare, Software)
– Expect a solid pickup in corporate activity

JPM (Matejka) European Equity Strategy
Year Ahead 2014 – Stay the course – upside for equities far from exhausted
Despite strong performance, substantial P/E rerating and finally a generally positive sentiment towards equities, we believe it would be premature to look for the end of their run. The continued bullish case revolves around: 1) Supportive global growth backdrop, at 2.9%trend pace in ‘14. Within this, Eurozone is projected to show one of the largest positive deltas, 2) Euro earnings are poised to grow for the first year in four, 3) JPM is looking for peripheral spreads to compress by another 65bp and 4) Inflows could support equities for a while as the asset class remains attractively priced vs fixed income. Key positioning: 1. Stay OW equities vs most other assets; 2. Keep preference for DM over EM for the 3rd year in a row, despite EM lagging by 40%; 3. OW Eurozone vs UK and periphery vs core; 4. Look for the rotation into Value style; 5. Key sector OW Financials on continuedfalls in cost of equity, peaking NPLs and attractive valuations. Stay UW EM, commodities and Growth style.

JPM (Loeys) The J.P. Morgan view
Asset allocation –– Positive feedback between price action and the economy should make momentum in equities and credit longer lasting than
in bonds, FX, and commodities, where negative feedback keeps momentum short lived, prone to reversals, and requiring a much shorter investment
horizon.
Economics –– Strong surveys suggest modest upside on our 2.8% call on Q4 global growth.
Fixed Income –– Favor Bunds and JGBs over USTs and Gilts into 2014. Within the Euro area favor peripheral bonds.
Equities –– The policy and macro backdrop is improving for Japanese equities. We expect further EM equity underperform ance into 2014.
Credit –– US HG and HY spreads are expected to tighten to 130bp and 425bp by year-end 2014, respectively.
FX –– We expect modest USD appreciation in 2014.
Commodities –– WTI continues to underperform Brent.

UPS&DOWNS

MS on Spanish Utilities: The end of the deficit is becoming less likely
The Senate proposed the removal of €3.6bn of government funding from the electric tariff in 13 and recognised there will be a tariff deficit this year. This is negative for integrated utilities as: 1) it increases their workingcapital needs and reduces EPS by 0.6/2.3%; and 2) increases the uncertaintyover the energy’s reform final impact to utilities. The stocks affected are ELE (and Enel), IBE, GAS and EDP.

JPM European Capital Goods – 2014 Outlook and Sector Handbook (Andreas Willi)
Dancing close to the door and with a discerning eye
In the absence of a market re-rating we see 2014 as a year where the Sector needs to grow into the multiple with only 4% upside to our Dec 2014 target prices. Valuation is more an absolute than relative headwind for the Sector. After disappointing in 2013, IP and corporate capex should catch up to the pace of final demand and manufacturing PMIs could improve modestly, supportive for the relative Sector valuation. The longer term outlook for the sector, however, appears more challenging. We still see a number of interesting stocks with double digit upside potential for 2014, including Electrolux, GKN, IMI, Philips, Rexel and Wärtsilä. We remain cautious on China capex.

ABERDEEN ASSET MANAGEMENT CUT TO NEUTRAL AT CREDIT SUISSE
BAE, COBHAM, SAAB, THALES, ULTRA RESUMED NEUTRAL AT GOLDMAN
BARRATT DEVELOPMENTS RAISED TO BUY VS NEUTRAL AT CITI
ESURE RATED NEW BUY AT CITI, PT 285P
EUROPEAN MINING SECTOR RAISED TO OVERWEIGHT AT UBS
HALFORDS CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
JUMBO GROUP RATED NEW OVERWEIGHT AT HSBC; PT EU14.5
KEMIRA CUT TO HOLD VS BUY AT DEUTSCHE BANK
LANXESS CUT TO HOLD VS BUY AT DEUTSCHE BANK
OPAP RATED NEW NEUTRAL AT HSBC; PT EU10.3
OUTOKUMPU RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML
PICK N PAY STORES RATED NEW OUTPERFORM AT CREDIT SUISSE; PT…
REDROW CUT TO NEUTRAL VS BUY AT CITI
SAIPEM CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
SHIRE CUT TO NEUTRAL VS BUY AT UBS
SHOPRITE HOLDINGS RATED NEW NEUTRAL AT CREDIT SUISSE; PT R185
STOCK SPIRITS RATED NEW BUY AT BERENBERG; PT 310P
STOCK SPIRITS RATED NEW OVERWEIGHT AT JPMORGAN; PT 280P
SWISSCOM RAISED TO BUY VS NEUTRAL AT NOMURA
SYMRISE RAISED TO BUY VS HOLD AT DEUTSCHE BANK
TELE2 RAISED TO NEUTRAL VS REDUCE AT NOMURA
TELECOMS CUT TO NEUTRAL VS OVERWEIGHT AT DEUTSCHE BANK
TELENOR CUT TO REDUCE VS BUY AT NOMURA
TESCO CUT TO UNDERWEIGHT VS NEUTRAL AT HSBC
TESSENDERLO CUT TO SELL VS HOLD AT DEUTSCHE BANK
THOMAS COOK CUT TO NEUTRAL VS BUY AT UBS
VIENNA INSURANCE CUT TO HOLD VS BUY AT BERENBERG
WOOLWORTHS HOLDINGS RATED NEW OUTPERFORM AT CREDIT SUISSE

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -21.83 (-0.14%) at 15,640
Topix down -0.51 (-0.04%) at 1,258
Hang Seng up +39.04 (+0.16%) at 23,920

US markets
S&P 500 down -1.42 (-0.08%) at 1,806
DJIA down -10.92 (-0.07%) at 16,086
Nasdaq up +15.14 (+0.37%) at 4,060

European markets
Eurofirst 300 up +0.05 (0.00%) at 1,305
FTSE100 down -3.90 (-0.06%) at 6,651
CAC 40 down -7.21 (-0.17%) at 4,295
Dax up +17.93 (+0.19%) at 9,405

Currencies
€/$ 1.36 (1.36)
$/¥ 102.33 (102.40)
£/$ 1.64 (1.64)
€/£ 0.8283 (0.8303)

Commodities ($)
Brent Crude (ICE) up +0.43 at 110.12
Light Crude (Nymex) up +0.46 at 93.18
100 Oz Gold (Comex) down -4.70 at 1,246
Copper (Comex) down -0.01 at 3.22

10-year government bond yields (%)
US 2.76%
UK 2.78%
Germany 1.70%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.11bps at 62.98bp
Markit iTraxx Europe +1.53bps at 79.05bp
Markit iTraxx Xover +6.98bps at 318.89bp
Markit CDX IG +0.62bps at 69.56bp

Sources: FT, Bloomberg, Markit

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