LCM Dawn Patrol – 12.02.14 – Earnings: SocGen (Ok), Telenor, Norsk, ING, Kuka…. Barclays back on EM, Yellen and more…


US equities finished sharply higher on Tuesday. The market seems happy with the new Fed Chair Yellen testimony as they were no sursprises. In addition, a number of the other dynamics are positive for stocks, including oversold conditions, position and sentiment resets, the impact of weather on US recovery momentum and favorable Q4 earnings season metrics.
Elsewhere, the precious metals extended their recent run-up despite the broader risk-on trade. Treasuries were mostly weaker, though short-term paper seemed to benefit from the developments out of Washington.
Asian markets are positive in trade again today. Especially strong trade data from China had little impact on the market. Japanese core machinery orders came in much lower than expected, and despite this the Japanese market was one of the strongest in the region as it played catch-up after returning from a public holiday yesterday. Australian resource stocks led that market following as they were boosted by data showing strong Australian exports to China.

Risk is back on… From the few pieces I have been reading this morning. Some are even inclined to look back at EM (see below). Today, we’ll look at the MBA mortgage apps and the monthly budget statement. In Europe, there isn’t much except some key earnings: SocGen (ok), Total and Reckitt.  We also get a raft of key US earnings releases including the Q1s: AMAT, NTAP, NVDA and CSCO (Q2).


• MSCI Index review results scheduled to be announced
Tages Capital, La Francaise to Merge Hedge Fund Units: FT

Imerys to acquire Amcol International for $1.6bn (at $41 vs $36.7).
Airbus Gets Order From Amedeo Worth $8.3b
OZ Minerals Gets Approaches on $2.7 Billion Copper Project
Danone Buys Shares in China’s Mengniu, Raising Stake to 9.9%
ONO Board Said to Approve IPO of Spanish Cable Company
Daimler Considering Additional Factory Outside Europe: CEO
Etihad Eyes Latin America Partnerships to Extend Global Reach
• Panama Canal Says Negotiations With Sacyr-Led Group Continue
Lloyds, UKFI Said to Reach Deal on GBP395m Bonuses: Sky
Bayer Says There’s Evidence Naproxen Has Low CV Thrombotic Risks
Actelion’s Opsumit May Face Study Comparing Gilead’s Letairis
Barclays Bank Placing 25.1m Crest Nicholson Shares
Vivarte Halts Payments to Creditors, Starts Debt Talks: Figaro
Drillisch FY Ebitda EU70.8m; Est. EU70.3m


• 2013 Oper Profit Ex-Items EU2.94b, Est. EU2.96b
• Telenor 4Q Revenues Nk27.6b vs Est Nk27.2b
Norsk Hydro 4Q Net Misses Ests. on Lower Hydropower Production
Societe Generale 4Q Net Income, Dividend Proposal Beat Estimates
ING 4Q Net Income Beats Ests; Insurance Preax Loss on Japan
Kuka 2013 Ebit Beats Estimates, Ebit Margin Exceeds Forecast

SocGen 4Q net income EU322m; est.
EU163m (loss EU471m y/y); plans div. EU1/shr, BDVD est. EU0.78.
• 4Q adjusted net income EU928m vs EU526m
• Basel 3 CET1 ratio 10%, above guidance
• Reiterates ROE target 10% by end 2015
• 4Q operating income EU252m vs loss EU315m
• CEO Frederic Oudea says “structural transformation of balance sheet is complete,” well positioned for 2014
• 4Q French retail banking net income EU281m vs EU254m
• 4Q International retail banking net income EU208m vs EU183m
• 4Q Financial services to corporates operating income EU155m vs EU100m
• 4Q Global Banking & Investor Solutions net loss EU53m vs loss EU55m
• 4Q CIB loss EU29m vs profit EU245m after EU446m charge for EU antitrust fine


GS: No surprises from Chair Yellen’s Q&A. There were no notable surprises from the Q&A session of Fed Chair Yellen’s first semiannual monetary policy testimony. Her remarks suggested that she has not significantly changed her view on the near-term trajectory of the economy in light of recent data, and that she views the labor market as having a considerable amount of remaining cyclical slack. On the overall monetary policy framework, Yellen closely mirrored remarks made by Chairman Bernanke in the past, suggesting a high degree of policy continuity.

Janet Yellen has turned a cold shoulder to the pleas of emerging markets by signalling that only a domestic slowdown will influence US monetary policy, in comments that suggest there will be no relief for those countries being battered by the Fed’s reduction of its asset purchases. In her first appearance before Congress as Federal Reserve chairwoman, Ms Yellen noted emerging market turmoil for the first time, saying that the Fed was “watching closely the recent volatility”. However, she showed no sympathy for complaints that the Fed has failed to co-ordinate its policy with other countries. (Financial Times)

Chinese exports and imports rose sharply in January, confounding expectations for a weak start to the year. Exports increased 10.6 per cent from a year earlier, while imports were up 10 per cent. Suggestions that over-invoicing are behind the chasm between the reported reality and the more sluggish expectations. (Financial Times) Copper imports reached an all time high (Bloomberg)

“Australia is readying a plan to sell 130 billion Australian dollars (US$117.49 billion) in assets ranging from health insurers to electricity poles, hoping to set an example to cash-strapped governments around the world that need new funds to boost their economies… Mr. Hockey [Treasurer] said money raised would be plowed into infrastructure projects to boost jobs and growth in the world’s 12th-largest economy.” (WSJ)



Is it time to buy EM equities?

We think yes. While the risks to EM equities are numerous, today’s crisis-level valuations seem to indicate that the worst may already be priced in.

  • Throughout history, the current levels of valuations have proven to be the bottom for EM equities. In fact, the current magnitude of the earnings yield gap between EM and DM equities has never seen EM underperform over the subsequent 12 months.
  • Today EM equities look to be pricing in a contraction in earnings and correspondingly, exports, and perhaps even global GDP. This is at odds with our economists’ forecasts for global growth to accelerate in 2014.
  • Our model indicates that earnings growth for EM could be as high as 10% in 2014 and 13% in 2015, contrary to the decline in earnings that seems to be currently priced in. Better earnings numbers could be the catalyst for outperformance.
  • We find little signs of Fed-induced exuberance within EM equities. Moreover, we think that growth, not Fed policy, has been the key driver of EM underperformance.
  • While retail outflows have been strong, institutional flows have been resilient. Moreover, in the past, periods of strong outflows were good times to buy EM.
  • We find compelling value in Korea, Taiwan, China, India and Russia, and within sectors, in Financials, Energy, IT and Materials. To reflect this, we increase our overweight in emerging markets in our Global Recommended Portfolio by adding China Shipping Development Co. Ltd., Gazprom and Sberbank.


Aerospace & Defence (MS, Vig): All About Engines
MTU Aero Engines: UW, PT €70 to €68
Our bottom-up analysis of every major engine in service highlights Safran as being the best positioned against the backdrop of rising retirements. Rolls-Royce has the most visibility but RB211 is a key headwind. MTU appears to be most at risk given exposure to several ageing platforms.

European Autos (MS, Lembke) German Dealers Discount Less & Feel Upbeat on 2014
January data shows a notable improvement in business conditions at German car dealers, reaching from lower discounts and shorter used car standing times to improving channel mix and business confidence. German OEMs, especially VW (OW), are the biggest beneficiaries, in our view.

Volkswagen (MS, Lembke)  Guidance Games – What to Expect Next Friday…

VW may report prelim results on Feb 21st. Whilst Q4 ’13 itself should be strong, there is widespread investor concern about potentially cautious FY ’14 guidance. We think the outlook under new ‘DRS20’ rules may cater for both bulls & bears

Daimler AG (JPM, Asumendi) Overweight: upgrading PT €80 – possible special dividend in FY16
Daimler remains on our Analyst Focus List; we reiterate our Overweight rating and increase our Dec-14 SoTP PT to €80 (€70). We continue to see Daimler profiting from the following trends in FY14: a) strong product momentum; b) incremental cost savings peaking first in FY15; c) stronger pricing power; d) earnings re rating potential across its key divisions autos and trucks; and e) substantially improved free cash generation easily covering the dividend payment, possibly triggering a special dividend payment in FY16.

Oil industry 3-minute read (JPM,  Lucas) Big Oil’s asset expansion options – the industry’s failing fall-back or a route to raise low portfolio returns
Weak earnings and poorly productive capital are conspiring to drive the industry’s ROACE to fresh lows which for many companies sit below WACC in 2013 e.g. Shell 9.5%, BP 8.9%. Big Oil is blighted by projects which cost more than expected, take longer than expected and do not perform as well as expected. As we have written, we believe inadequate project risking has been the industry’s Achilles heel leading to capital misallocation. We flag another issue: the failure of valuable project expansion options to raise investment returns, either because they are late or simply never occur. We believe that some project sponsors rely too heavily on (or under-risk) embedded expansion options in order to justify marginal first phase returns. We encourage investors to consider names with portfolio exposure to expansion options in high value provinces.



Asian markets
Hang Seng up +209.53 (+0.95%) at 22,173
ASX 200 up +55.60 (+1.06%) at 5,310

US markets
S&P 500 up +19.91 (+1.11%) at 1,820
DJIA up +192.98 (+1.22%) at 15,995
Nasdaq unchanged 0.00 (0.00%) at 4,191

European markets
Eurofirst 300 up +16.21 (+1.25%) at 1,317
FTSE100 up +81.11 (+1.23%) at 6,673
CAC 40 unchanged 0.00 (0.00%) at 4,283
Dax up +188.91 (+2.03%) at 9,479

€/$ 1.36 (1.36)
$/¥ 102.56 (102.63)
£/$ 1.64 (1.64)
€/£ 0.8283 (0.8288)

Commodities ($)
Brent Crude (ICE) up +0.10 at 108.78
Light Crude (Nymex) up +0.50 at 100.44
100 Oz Gold (Comex) down -4.60 at 1,286
Copper (Comex) at 3.27

10-year government bond yields (%)
US 2.72%
UK 2.75%
Germany 1.69%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.08bps at 54.04bp
Markit iTraxx Europe -2.64bps at 74bp
Markit iTraxx Xover -9.21bps at 279.44bp
Markit CDX IG -2.24bps at 65.5bp

Sources: FT, Bloomberg, Markit


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