LCM Dawn Patrol – 27.01.14 – EM: looking ugly now. JPM Asset allocation, GS key themes, look at the chart…


Asian equity markets broadly sold off Monday morning as the flight to safety theme seemed to play out across the region. Factors behind the sell-off that began late last week seemed continue to be catalysts for todays trading. Investors piled into safe-haven currencies, strengthening the yen. The currency remained a headwind for the Nikkei as the usual large-caps sold off. The Japanese Ministry of Finance also released its trade balance data for December; the deficit widened unexpectedly and was a drag on trading.
In Europe,  stocks are seen falling on Monday, resuming last week’s sell-off and tracking sharp losses in Asia as mounting worries over emerging economies continue to spook investors.

In case you spent your week-end in a cave, Daft Punk wins Grammy for album of the year, SoundCloud raises $60mio at a $700mio valuations, Wawrinka wins Australian Open final & “les Indestructibles” clinched its third European championship title after defeating hosts Denmark (41-32).

This week, the Focus will remain on EM, and it’s interesting to read JPM Adrian Mowat’s piece on EM published last week where he advocates that i twill soon be time to look at these EM again (see below). In Europe, the  noteworthy headlines will be the inflation on Tuesday, M3 on Wednesday, ECB lending survey on Thursday and consumer confidence during the week. In the US the main focus will be the FOMC on Wednesday where we could see another cut in its amount of monthly purchases.
Have a great week, and my piece of advice: don’t try to show a seven year old how to skate down a ramp. It hurts and he can do it better…


ECB Confronted by Banks Testing Exit in Threat to Frail Recovery

• U.K. Imports Seen by HSBC as Key to Export, Business Expansion

• U.K.’s Best Growth Since 2007 Seen as Carney Readies Phase Two

• U.K. Consumer Confidence Weakens 1st Time in a Yr, Deloitte Says

• Half of U.K. Homeowners Say House Value To Rise in Next Yr: Poll

• Emerging Markets Volatility Rises Most Since 2011 as Shares Drop Worldwide

• Asian Stocks Drop as Emerging Rout Fuels Yen

• Argentina May Import Goods to Keep Prices Low After Devaluation

• France’s Rating Affirmed by Moody’s; Retains Negative Outlook
Banco Popolare Approves Up to EU1.5 Billion Stock Sale Amid Loss

Popolare di Milano Ex-Chairman’s Holding Co. Sells Entire Stake

Roche: CHMP Gives Positive Opinion on MabThera New Formulation

ICAP Losing Grip on Setting U.S. Swaps Rate at Center of Inquiry

Warburg Pincus Hires ArcelorMittal Former Mining CEO: FT

Lanxess Names Former CFO Zachert as CEO to Replace Heitmann

• Alpine Firm Fearing End to Cheap French Power Eyes Quebec Move

SAP Joins Atos to Target Government Cloud Deals Amid Spy Threats


Chart of the day (maybe the month).

This is nuts. When’s the crash?

FOMC Preview:
The January FOMC should be fairly uneventful, following significant policy changes made at the prior meeting.   We anticipate a further $10bn reduction in the monthly rate of asset purchases to be announced—split equally between Treasuries and MBS—and no changes to the forward guidance. Although the 6.5% threshold mentioned in the statement is fast approaching, the Committee has probably already enhanced the forward guidance as much as it is willing to in the near term.


JPM (Loeys) The J.P. Morgan View
Investing by risk bias

•   Asset allocation –– Our modal forecasts frequently do not differ much from
consensus, but we believe we still find good trades, by OW-ing assets with an upside risk bias against those with a downside skew.
•  Economics  ––  Weaker  PMIs  reduce  somewhat  the  upside  risk  they signalled for global growth, but are far from signalling a downside risk bias.
•  Fixed  Income  ––  Cross  market,  stay  short  US  and  UK  duration  vs. Germany, and long Euro area periphery vs. core.
•  Equities –– Exit OW in Cyclical sectors due to weak PMIs. Flow, earnings and price momentum remain very negative for EM equities.
•  Credit  ––  Hedging  long  credit  exposure  using  CDX  options  looks  less expensive than normal currently.
•  FX –– Take profit on yen shorts but stay long USD overall.
•   Commodities –– Stay short agriculture.

JPM (Mowat) Definitely a non-consensus bull
On the 26nd of Jan: This weekend’s financial press certainly confirms that our bullish view on EM is non-consensus. Much of what we have read made us more convinced on our thesis of declining tail-risk driving EM equity markets higher. Articles that extrapolate Argentina’s (not a member of MSCI EM) specific economic woes into other emerging markets are inappropriate. In a world of large EM-based sovereign wealth funds and the numerous EMs with current account surpluses it also is inappropriate to talk about developed market capital flows dwarfing emerging market flows. As was the case with tapering fears in the second half of 2013, these fears provide a buying opportunity, in our view.

JPM (Matejka) No need to bottom fish in EM just yet; We find Eurozone recovery theme still to be more interesting
Are there any opportunities emerging given the latest selloff in the EM? On the positive side: 1) EM has underperformed the DM by as much as 40% since ’11. 2) Relative valuations have improved. 3) The start of tapering is behind us, without EM fixed-income markets repeating last May’s selloff. 4) C/A deficits of EM countries that were most at risk appear to be stabilizing. 5) DM activity has picked up – historically EM was a beta to the DM growth. What is not changing? 1) Growth differential is not yet turning in favor of EM. EM CESIs appear to have bottomed out, but are not gaining ground relative to the DM. 2) Outflows remain a problem for EM equities and EM FX keeps falling. 3) Structural concerns are alive and kicking – for China credit in particular. 4) Stronger USD could lead to persistently weak EM, similar to 2nd half of 90-ies. We advise against rotation out of the DM and into EM exposure. We keep our structural Mining short – Chinese activity dataflow remains mixed, iron ore price is falling and speculative copper longs are elevated. Many indirect EM plays remain uncomfortably expensive – Chemicals, Luxury, Capital Goods and Staples are at peak margins. The one area that appears attractive is Construction Materials, which we upgrade to OW due to the depressed earnings base of cement stocks, no sole dependence on China and significant leverage to a rebound in DM activity. Eurozone recovery remains our preferred theme. Consumer sentiment is at a 3-year high. PMI uptrend is continuing, calling for 10%+ EPS growth.

GS Strategy Matters Portfolio: Key Themes and Pictures
In this Q&A we summarise our market views and use our equity baskets to identify key market themes and opportunities. We continue to believe equities are in a secular bull market, transitioning into a ‘growth’ phase of the cycle. But valuations no longer look cheap and short term risks are more elevated with theonset of the earnings season; while bullish on the market trend we recommend tactical hedges. Preferred themes remain focused on operational leverage to a DM recovery coupled with companies that can generate high total returns through dividend growth.


Barcap reiterates Buy on Accor and increases PT to 40e, likes SES and Informa, initiates Schibsted with UW rating, stays EW on Nokia.
GS reiterate Buy on Logitech, Conviction Buy reiterated on Publicis & Burberry IG Group down to Neutral.
MS see William Hill oversold and reiterate OW, stay OW on Shire and UW on Banco Popolare. UBS cut Erste Group to Neutral and upgrade Smith&Nephew to Buy.
JPM downgrade Pearson to Neutral, Jefferies downgrade Tele2 to Hold, SG cut Merck to Sell.

European Hardware Technology (JPM,  Deshpande) Data-point watch: Encouraging semi capex and telco capex outlook; mixed macro data & more
Company results last week were mixed with relatively positive semi capex and telco capex outlook, with smartphones weak. Chinese PMI falling below 50 is concerning. We discuss key sector data points from the past week below with additional interesting data points inside the note.

Pearson (JPM,  O’Donnell) We expect another challenging year in 2014; downgrade to N
While we continue to believe that Pearson will successfully transition its business model away from print to more digital, services and emerging markets exposure, we think 2014 may prove to be another tough year for trading. We downgrade Pearson from OW to N with little upside to our new Dec-14E Price Target (of 1,250p) post the company’s recent trading update. In the professional publishing space, we continue to prefer Reed Elsevier (OW), while our overall top large cap picks in Media remain WPP, Publicis, JCDecaux and Sky Deutschland (all OW)


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