Asian equity markets traded broadly lower to begin the week Monday morning. Reports did not attribute the pullback to any specific catalyst. Chinese data was in focus today as Q4 GDP, along with home prices over the weekend. The data was not a directional driver, coming broadly in line with expectations. Nintendo followed its ADR shares lower after forecasting a surprise FY loss. Despite inflation data out of Korea and Australia, neither market seemed to have much direction this morning.
US Markets are closed today for Martin Luther King Day.
The January Flash PMIs for Germany, France, the Eurozone, US and China on Thursday will be the main macro-economic focus. In the UK, particular attention will be given to Wednesdays Labour data, especially as the unemployment rate is fast approaching the BoE’s 7% “way station” level.
Central bankers will be quiet with no Fed speakers scheduled as they enter blackout period ahead of the 28th January meeting. From the ECB only Mr Nowotny is scheduled to speak (on Tuesday). The Bank of Japan announces a policy decision on Wednesday but the market is not expecting anything (we think they extend QE in April, although there has been speculation it could come earlier.) We also receive minutes from this month’s BoE MPC meeting on Wednesday.
Today: China FAI, GDP Q4, IP Dec and retail sales.
Peugeot: Following the approved capital increase, the French state, Dong Feng and the Peugeot Family would hold roughly equal staakes.
China’s Q4 GDP grows 7.7%; in line with consensus expectations (WSJ)
French Ministers Say PSA Peugeot Citroen Will Remain French
London House-Price Growth Slows After Strongest Year Since 2006
Ukraine Street Violence Erupts as Protesters Defy New Law
reland Regains Investment Grade Rating From Moody’s
AB InBev to Pay $5.8 Billion to Reacquire Oriental Brewery
Deutsche Bank posts surprise quarterly loss on legal costs
Amplats Union Votes for Platinum Strike as It Calls Gold Walkout
Deutsche Telekom Says T-Mobile Value Returns to AT&T Deal Levels
Statoil Says Snorre A Oil Production Running Normally
Sacyr Wants Agreement to Finish Panama Canal Work by June 2015
Hochtief Gets Bids for Stake in Aurelis Property Unit: Reuters
The economic chasm between London and the rest of the UK is likely to persist even as recovery takes hold in the regions, economists warn. The capital’s share of national output has been on a steadily rising trend since 2006, reaching 22.4 per cent in 2012, according to official data. The southeast is in second place with 14.6 per cent, followed by the northwest at 9.4 per cent. (Financial Times)
CVC Capital Partners, the European private equity house, has the biggest pile of cash to spend on leveraged buyouts, topping US rivals Apollo Global Management and Carlyle Group, as the industry prepares for an acceleration of deals this year. The Luxembourg-headquartered fund manager, whose main office is in London, has an estimated $20bn of “dry powder” – unspent commitments from investors – according to data compiled by Preqin, the research company, in its annual report. (Financial Times)
JPM (Loeys) The JPMorgan View
What Can go Wrong?
Asset allocation –– Risks around modal views are important for asset allocation as they induce us to underweight sectors and regions at risk. It keeps us UW USTs and long USD. Main risks come from early Fed hikes; a Chinese credit crisis; and falling euro inflation.
Economics –– Japan Q1 growth is raised to 4.5%, while 2014 is raised to 1.6%. US Q4 raised from 2.8% to 3.1%.
Fixed Income –– Retain shorts in US Treasuries and UK gilts vs. German bunds, and remain long Euro area periphery vs. core.
Equities –– The reporting season supports our OW position in US equities.
Credit –– Improved US pension deficits should lead some to immunize, increasing demand long-duration corporates, thus flattening the curve.
FX –– Fundamentals continue to support a strong dollar view.
Commodities –– A weather induced rally in oil should be temporary.
JPM (JPM, Matejka, CFA) Europe Equity Strategy
Not running out of positive catalysts – Corporate activity is next to show an improvement
There is a concern that the equity backdrop is “as good as it gets”. Most of the positive drivers of stocks are seen to be largely behind us. With P/Es trading at the top of their 10-year ranges the question is: are we really running out of positive catalysts? We do not think so, as there is a large participant in the economy that is still behaving very cautiously – the corporates. Eurozone capex share of GDP is at record lows and consolidation activity is depressed. A change here could go a long way in delivering the next upleg in market sentiment. We expect the corporates to turn the corner as the two key leading indicators of their activity – earnings and credit availability conditions – are showing an improvement. In addition, corporate balance sheets are strong, with net debt/equity ratios at their best levels in 20 years. With respect to what is implied in equity market valuations, relative to volatility and credit spreads metrics which are both at record lows, we think that equities are far from being priced for perfection.
SAP (GS, Moawalla) Buy: A manageable transition to the cloud; reiterate CL Buy
We believe SAP can manage the ongoing cloud transition with its multi-product portfolio, geo diversity and large installed base. We cut FY14-17E PF EPS by 6%-7% but raise our target P/E to 21x for re-rating benefits from cloud; 12m PT still €90; CL Buy.
Royal Dutch Shell plc (A) (GS, Della Vigna) Buy: Poor 4Q largely driven by one-off; improving capital efficiency is key
Royal Dutch Shell pre-announced 4Q13 results due January 30, with adjusted net income of $2.9bn, 28% below Reuters consensus. These results are distorted by several one-off factors. Reiterate Buy rating.
Schneider Electric (JPM, Willi) Reinstate coverage with Overweight – focus on execution and FCF yield to drive outperformance
We resume coverage of Schneider with an OW rating and a Dec 2014 price target of €69, following a period where under applicable rules and JPM policy we have been unable to publish a rating. A focus on execution over M&A should reduce market fears, allowing a ~20% discount on P/E and FCF to peers to narrow (but not close) while top line growth should be ahead of European Electrical peers. Invensys, in a best case, covers cost of capital by 2016E; strategically sound but likely to create limited value in the medium term. We would use potential pullbacks after most recent outperformance to add to positions as we would want to own Schneider on a 12 months view.
European Software and IT Services (JPM, Pollard) Positioning for 2014; we upgrade Aveva to Overweight and Indra to Neutral
2013 was a year of repositioning for many companies, and 2014 will be a year of proof. SAP spoke of cloud leadership, Amadeus of new verticals, and Hexagon of Smart Solutions – evidence should come in 2014, for these and other trends. In this note, we consider our positioning across the sector for 2014; we are OW Amadeus, Dassault and Hexagon. We upgrade Aveva to OW from N and Indra to N from UW.
Dassault Systèmes (JPM, Pollard) Addressing wider markets and new industries; Initiating at Overweight
We are initiating on Dassault Systèmes with an OW rating and a PT of €110. Dassault Systèmes is actively expanding its addressable market and we expect to see increased revenue growth driven by penetration of more applications, more industries, and more users within existing customers. We are modeling a 10% EPS CAGR 2013-2016e, which we expect to be supplemented by accretive acquisitions to drive total earnings growth into the teens.