Asian equity markets traded higher on Tuesday morning. Overnight newsflow was quiet as US markets remained closed. The PBoC eased liquidity concerns and injected CNY255B ahead of the Lunar New Year holiday. Benchmark lending rates spiked near 6.5% yesterday, but were down in morning trade. Japanese markets rebounded after three consecutive days of trading down, bolstered by a weaker yen. Newsflow was relatively quiet elsewhere, with no major data releases scheduled for today investors were watching the corporate calendar.
Dollar rises against most major peers as signs of U.S. economic growth back the case for the Fed to pare stimulus. Alstom disappoints, Remy Cointreau looks ugly but confirms forecasts and SAP reports 2014 profit below exp. Watch RIO as Iron ore fell 2% overnight. Otherwise, JPM upgrade BNP to OW & GS like Norsk Hydro. Moncler is too expensive for JPM and GS (and for me).
Today: Germany’s ZEW investor sentiment rises to highest since Feb. 2006, a survey shows; BOE’s Haldane speaks in Frankfurt and ECB’s Nowotny speaks in Vienna
Jaeger-Le-Coultre’s latest performance watch comes from their Master Compressor line and is a 46mm, ceramic encased chronograph that features a day/night indicator, secondary-timezone, and their automatic Jaeger-LeCoultre Calibre 757 with a 65 hour power reserve. Limited to 300 pieces.
(I don’t always test the gear….)
• Peugeot Plans $4.1 Billion Capital Increase to Boost Financing
• Vivendi Is Said to Explore Sale of SFR Unit to Numericable Owner
• Expro Said to Draw Schlumberger, Halliburton, GE Amid Arle Sale
• ONO Is Said to Consider Picking JPMorgan, Deutsche Bank for IPO
• UniCredit Transfers Some Default Risk to Mariner Investment: FT
• Elliott Mgmt raises Celesio stake to 32%, said to avoid mandatory-offer trigger
• Riksbank’s Floden Signals Rate Cut Next Month Unlikely to Happen
• OECD Says Denmark Ignores Debt at Own Risk as Higher Rates Loom
SAP sees 2014 non-IFRS operating
profit just below analyst ests., delays 2015 non-IFRS operating
margin target by 2 yrs.
Proposals for a tax crackdown on digital companies such as Google and Amazon are to be dropped, as governments push ahead with measures affecting the global economy. Designing special tax rules for internet companies would not be viable, given the growing digital presence in large parts of the economy, an OECD-led international task force has concluded. (Financial Times)
LCM (Abet) The Profitability of Banks
We try to assess what kind of profit recovery we can expect for European Banks.
– Contrary to what we can see in Japan or in the US, there is a significant cyclical bias in the sector hierarchy of European equity markets in 2014. Alpha and Beta are positively correlated in a similar way to May 2013.
– European banks have done well on the expectations that profits will recover. We examine their profitability by decomposing the RoE metrics into an operating profitability (RoA) and a financial leverage (capital ratio). While the RoE of European banks was around 17% in the previous cycle (2002-2007) we think it should average 10% in this cycle, preventing their price-to-book from exceeding 1.0.
– The aim of the ECB was to fight market fragmentation by helping the recovery of European banks. The job is almost done now, and the ECB won.
– We cannot say the same for monetary authorities in the EM world who continue to struggle to stabilise the financial risk and the economic risk. Their fight is far from being won as there is no sign of stability. The wishful thinking of the financial community must be seen as a market risk.
Trade recommendation summary
– Short Russia (currency and equities)
– Long Korean Equities (Kospi) Short Australian Equities (AS51)
– Long European Energy Stocks Short US Peers (or Short European Mining Stocks)
MS (Carr) European Equity Strategy
Sellers’ Compendium: Share of Multiple Appearances from high beta sectors close to prior highs
Share of Multiple Appearances for high beta sectors approaching prior highs. The split of our Multiple Appearances screen by the major sector groupings indicates a widening divergence along beta lines. Higher beta sectors (Financials, Materials, Consumer Discretionary, Industrials and IT) account for 79% of the Multiple Appearances, representing the 84th percentile of the historical range. The lower beta sectors’ 21% share represents the 16th percentile (and is the lowest since October 2010). The high / low beta split is approaching historical extremes – high beta stocks accounted for 83% of the list in July 2007 and 80-81% of the list between April and October 2010. The former coincided with the end of the mid- 2000s bull market. In the latter period, MSCI Europe did experience a sizable tactical correction in April/May 2010 but then went on to deliver strong returns in 2H10 before peaking in February 2011. Hence, we view the message from today’s sell screens as a potential warning sign but acknowledge that momentum and sentiment can become stretched for extended periods in bull market phases.
Kuehne + Nagel (MS, Buthcer) A rising tide lifts all ships – upgrade to EW
UW to EW, PT SFr95 to SFr113
Valuation remains a key concern at Kuehne + Nagel. However, with macro sentiment improving, we believe that Kuehne could benefit from a volume recovery, and upgrade to EW. Although volume growth may pick up, this will be tempered by pressure on GP per unit, limiting earnings upside.
Aerospace & Defence (MS, Vig) 2014: 4 stocks to own, 4 key questions and 4 catalysts
Finmeccanica: UW to EW, PT €4.25 to €6 | Positive RTI
MTU Aero Engines: EW to UW, PT €66 to €70 | Positive RTI
We expect another positive year for Civil Aerospace in 2014 but prefer names with either cheap valuation (Airbus) or strongest earning momentum (Safran). In defence, budget clarity should help but we remain most positive on self help (Thales). We also move MTU to UW and upgrade Finmeccanica to EW.
BNP Paribas (JPM, Lee) ‘Self-help’ potential – Upgrade to OW on expectation of share buyback and accretive bolt-on acquisitions
We upgrade BNP Paribas to OW as we expect higher capital return and a sensible external strategy to unlock value. The stock underperformed French peers by 15% in 2013, and has also lagged the SX7E rally by 9% over the past 6 months. In our view, while the group’s strong capital position and the optionality it provides is well understood, the market underestimates: 1) the likelihood of higher shareholder return materializing via a €3.5bn share buyback and 6% dividend yield on 50% payout as of 2015e, and 2) the upside from small bolt-on acquisitions. Our new numbers account for the “self-help” potential; BNP’s valuation looks attractive at 8.9x PE, 1.0x NAV for RoNAV 11.7% in 2015e vs. sector on 11.0x PE, 1.2x NAV for RoNAV 11.4%, on JPMe.
Norsk Hydro (GS, Scarrott) Buy: Aluminium to trough in 2014; recover thereafter – upgrade to Buy
We upgrade to Buy, with our new 12m price target implying +28%. We believe 2014 will mark the cyclical trough in aluminium pricing and earnings, and a recovery in aluminium pricing in 2015E+ will result in a strong recovery in Norsk Hydro’s earnings.
Moncler (JPM, Battistini) Rich outlook at a premium. Initiating at Neutral
Moncler S.p.A (GS, Hutchings): A brand on the up with the down; initiate as Neutral