WSJ : Emerging Market Ructions: Gone But Not Forgotten

Emerging Market Ructions: Gone But Not Forgotten
Concerns About China, U.S. Policy, and Economic Imbalances Promise Bumpy Ride

Rumors of the death of emerging markets look to have been greatly exaggerated. The wild swings seen early this year in foreign-exchange, bond and equity markets have subsided, and investment flows are on the turn. Investors should still expect a bumpy ride, however.

The breadth of the recovery in emerging markets is striking. After months of underperformance, the MSCI Emerging Markets Index has sharply outstripped its developed-market World Index counterpart in the past month, rising 3.7% versus a fall of 0.3%, respectively.

Bond markets have rallied, with the spread on J.P. Morgan's JPM -1.40% EMBI Global index over U.S. Treasurys narrowing around 0.8 percentage points from its peak. Beaten-up currencies have bounced back too. The Turkish lira, which had weakened to 2.40 against the dollar at the end of January, is now at 2.12, stronger than at the start of the year.

That may in part reflect shifts in fund flows. Retail investors pulled $17.2 billion from emerging-market bonds and a record $41.1 billion from emerging-market stocks in the first quarter, according to fund tracker EPFR Global. But at the end of March, flows into equities started to reverse, the firm says. Big institutions look to have moved earlier: data from the Institute of International Finance suggest flows turned in February.

Emerging markets are benefiting from an appetite for yield that is unlikely to be satisfied elsewhere. Emerging-market bonds offer juicy returns: the extra yield available on investment-grade sovereign bonds compared with U.S. Treasurys is twice the difference between triple-B-rated U.S. corporate bonds and U.S. government debt. Meanwhile, emerging-market stocks look reasonably priced, ending March on a forward price-earnings ratio of 10, versus 14.8 for developed-market stocks, according to MSCI.

A systemic emerging-market crisis always seemed unlikely earlier this year. But investors should still tread carefully. Some of the recent enthusiasm has been linked to the prospect of economic stimulus in China. But nerves about China's financial system and growth prospects may well persist. Geopolitical risk has also risen with Russia's effective annexation of the Crimea.

Further, a nascent debate about interest-rate rises in the U.S. may yet cause more volatility in foreign-exchange markets, which are a vital part of the outlook for emerging-market stocks and bonds. Some argue that emerging countries have had time to adjust to this process, but history suggests that higher U.S. rates will put renewed pressure on emerging markets.

Most important, the process of adjusting to slower growth that is less dependent on big flows of cheap credit has a long way to go. True, countries like Poland, Mexico and Korea could benefit from a recovery in developed markets. But with a heavy calendar of elections ahead, including in Indonesia, South Africa, India, Turkey and Brazil, the risk is that necessary reforms are delayed.

That suggests differentiation continues to be key. Investors navigating the bumps to come should be guided by the lesson of last year: not all emerging markets are the same.

FT : Former adviser attacks European Commission over austerity

Former adviser attacks European Commission over austerity

A former adviser to European Commission president José Manuel Barroso has accused the commission of embracing Germany’s austerity-focused response to the eurozone debt crisis in a “strategic” bid to enhance its own powers.
The adviser, Philippe Legrain, argued that the commission put aside a more balanced policy response, called for by some other member states, in part because it saw a more influential role for itself if Berlin’s emphasis on budget discipline prevailed.

“Rather than being sidelined, [the commission] chose to strategically align itself with Germany”, Mr Legrain told the FT.
As a consequence of siding with Germany, he said, the commission was contributing to a split of the 28-member bloc into opposing camps.
“The EU is now riven between creditors and debtors and the EU institutions have become an instrument for creditors to impose their will on debtors,” Mr Legrain said.
Mr Legrain, a London School of Economics-educated economist, served as Mr Barroso’s economic adviser and directed the commission’s in-house think-tank for three years until quitting last month.
Mr Legrain pointed to reforms that have given the commission a greater say over national budgetary and economic policies, known as the European semester, the six-pack, and the two-pack.
The commission “has done quite well [in increasing its influence] in a technical sense,” he said. But “in a political sense it is weaker than ever”, he added.
“It’s been a follower in the crisis rather than a leader.”
The commission has dismissed Mr Legrain’s criticism in sharp terms.

Mr O’Connor added: “The economic strategy espoused by the commission is not aligned with the view of any one member state but reflects an approach also supported by the Ecofin Council of EU finance ministers, the European Central Bank and the International Monetary Fund and which is now delivering a strengthening economic recovery in Europe.”
The EU’s crisis policy, which pushed for fiscal consolidation in all member states and deep structural reforms in the most crisis-hit countries, has been controversial, with critics arguing it excessively restrained demand in many European economies.
These remarks reflect the views of a former temporary staff member who sadly chose not to contribute any useful or practicable input to the crisis response
- Simon O’Connor, Commission spokesman
Even the IMF, which signed off on rescue loans for eurozone economies as part of the so-called “troika” together with the commission and the ECB, has warned Europe against exaggerating the pace of fiscal consolidation.
The commission has more recently relaxed its insistence on austerity, and last year gave countries such as France and Spain more time to meet EU-mandated deficit targets.
In a speech launching the Greek presidency of the European Council in January, Mr Barroso said “the adjustment programmes [for eurozone countries that needed rescue loans] do work” and that Europe had put the worst behind it.
His former adviser, in contrast, said “we’ve gone from an acute crisis to a chronic crisis” and claimed that commission policies often made things worse. Mr Legrain claimed that because many commission staff “had drunk the Kool-Aid” of an incorrect analysis of the crisis, its policies were often counterproductive.

(BFW) Sopra, Steria in Merger Talks, Boursier.com Says

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Sopra, Steria in Merger Talks, Boursier.com Says 2014-04-07 08:43:19.252 GMT

By James Ludden April 7 (Bloomberg) -- Parties in talks to create “merger of equals,” report says, without citing sources. * NOTE: Shares of both companies suspended

For Related News and Information: First Word scrolling panel: FIRST<GO> First Word newswire: NH BFW<GO>

To contact the reporter on this story: James Ludden in London at +44-20-7673-2645 or jludden@bloomberg.net To contact the editors responsible for this story: Andrew Rummer at +44-20-7073-3722 or arummer@bloomberg.net James Ludden

(Citi) Sanofi - Sensible Capital Allocation Drives EPS and PT Upgrades

* What’s changed? - i) associate income from Regeneron to be booked from Q2, ii)
probability of success raised for key pipeline assets alirocumab (anti-PCSK9 –
cholesterol lowerer) and dupilumab (asthma/atopic dermatitis), and iii) higher
buybacks. These positives are partially offset by stronger FX headwinds. The net
result is 2014-20e EPS upgrades of up to 8% (1-4% 2014-16e), and a new PT of €80
(from €73). Preferred plays remain Roche, Novo Nordisk, Novartis, BMS & Pfizer.

* Regeneron value now better reflected - Sanofi’s most promising pipeline assets
come from its antibody partnership with Regeneron (covered by Yaron Werber).
Sanofi pays for R&D upfront, with Regeneron contributing 20% of Ph III, and paying
back its 50% of R&D costs over time. Sanofi will payaway 50% of US profits, and 35-
45% of ex-US profits, on partnered products (our model assumes blended 45%
payaway and €800m R&D costs paid back). Sanofi recently crossed 20% ownership
and, last Friday, announced it had successfully nominated a member onto
Regeneron’s board. Our model now assumes Regeneron associate income; we
assume a 25% ownership by year end, and 30% in 2015 (stand-still agreement in
place limiting Sanofi to 30% until 2017). This drives 3-5% EPS upgrades.

* Pipeline forecasts raised – We maintain a €2.5bn peak sales forecast for
alirocumab, but increase the probability of success from 55% to 70%, given
incremental Ph III data: risk adjusted sales +30% to €1.7bn. Our views on PCSK9
can be found on "It’s more than just about LDL-C lowering" and "so far so good but
needs to be huge to move the Sanofi needle". We increase risk-adjusted peak sales
for dupilumab from €0.4bn to €0.8bn to reflect the initiation of Ph III studies

* Other considerations – Buybacks revised to reflect recent commentary (€3bn for
2014, but raised from €1.5bn to €2bn thereafter – drives 1-3% EPS upgrades). Our
FX model now points to a -3-4% sales headwind, versus -2-3% previously.
Confidence in the Lantus franchise post biosimilars required to turn more positive
on the shares: 40% of EBIT and 50% contribution to 2013-17 sales growth.

(BofA-NL) Lafarge & Holcim : Merger

* Lafarge and Holcim in talks for a potential merger of equals
Lafarge and Holcim announced on Friday afternoon that they are in “advanced
discussions regarding a possible combination”. We think this potential “merger of
equals” would create a mega cement company with a geographic reach not seen
before in the cement world. We estimate the new entity would control more than
400Mt of cement capacity, with combined sales of more than €30bn and EBITDA of
€6.7bn (2014 pro forma). We believe at this stage that this potential merger is more
likely than not to happen and we continue to hold a Buy rating for both stocks.

* The upside: large synergies potential: 20% to 30% upside
Combining the two largest cement companies in the world would generate
significant potential synergies, in our view, both on the cost and the revenue sides.
In a conservative scenario, based on previous large transactions in the sector, we
estimate potential synergies at €800m to €1bn per annum at EBITDA level,
equivalent to a post-tax present value of €7.2bn or c20% of the market value of the
combined entity (based on last Thursday closing price). Based on the scope and
scale of the potential merger, we however can’t exclude a much larger potential
synergy number. Applying a 50% to 60% premium to the base case, synergies
could amount up to €1.5bn per annum, equivalent to a post-tax present value of
€12bn or c32% of the market value of the combined entity. Lafarge would then be
valued above €80 and Holcim above CHF105. We think there could also be some
potential synergies on cost of debt, taxes and pensions liabilities, although they are
more complex to identify at this stage.

* The risk: significant issues with competition authorities
We think this potential merger would raise very significant issues with competition
authorities in many markets where Lafarge and Holcim are currently competing. We
identify six key countries that could be problematic in our view, and which might
prevent the merger from completing (or where the combined entity would likely be
forced to sell assets): the US, Canada, the UK, France, Romania and the
Philippines. We estimate that these markets together would account for about 35%
of sales of the new combined entity. We note that the press release however refers
to “advanced discussions” which we think could imply that the companies are
optimistic that these potential issues could be addressed in time.

* Many questions still to be answered
There are several other key questions raised by this potential merger: 1/ the
potential structure of the deal, 2/ the implications for the credit ratings, 3/ the
management of the combined entity, 4/ the support from the large shareholders and
5/ the political risks, especially in France. We believe that a “merger of equals”
would potentially imply some transfer of value from Holcim toward Lafarge.

* We keep our BUY ratings on both Lafarge and Holcim
We believe that the market could discount a large part of the potential synergies.
We increase our PO on Lafarge to €70 (from €60) and on Holcim to CHF95 (from
CHF84), accounting for 75% of the potential synergies of our base case scenario.