(GS) EUROPEAN TACTICAL RESEARCH - EARNINGS MOMENTUM

Earnings Momentum Strategies Dominate in Europe…

With >50% of European stocks seeing positive earnings revisions YTD, we review the efficacy of investing in consensus earnings momentum (EM) strategies relative to price momentum (PM) strategies. We adapt a method

employed by Chordia and Shivakumar (2006) to show that in Europe over the past decade, the excess returns generated by PM strategies are subsumed by earnings momentum. The reverse is not true. Effectively

therefore, “an investor who wants to trade momentum would lose nothing by completely ignoring price momentum” (Novy-Marx, 2015).

 

…But Be Aware of Embedded Sector Tilts

There are clear sector biases in an unconstrained earnings revisions strategy. At its most extreme, we observe that up to 60% of the long leg of the 1m FY2 earnings revisions strategy has been comprised of just three sectors. We find that both GS’ Eurozone Current Activity Indicator & the performance of GS Commodity index are strong lead indicators for sector skews in our preferred EM strategy (based on 1m FY2 consensus revisions).

 

Boosting Price Momentum Performance using Earnings Revisions

Over the past decade, buying stocks that combine strong 12m-1m price momentum (our preferred PM strategy) and strong 1m FY2 consensus earnings revisions has delivered higher annualized returns than a 12m-1m PM strategy. We find that the information ratio of the PM strategy is also boosted by adding a 1m FY2 revisions overlay, albeit with higher turnover.

(BFW) Akzo Upgraded at ABN Amro, PPG May Raise Offer to EU100/Share

Akzo Nobel raised to buy vs hold, PT EU84 vs EU77 at ABN Amro as brokerage sees value in the shares whether co. is acquired or stays alone.
  • Brokerage says PPG’s offer of EU90/share undervalues Akzo; expects PPG will remain friendly and raise its offer
    • PPG could pay EU100/share, which would increase the multiple to 9.2x, a very attractive multiple for PPG shareholders
  • Management under pressure to create value for investors; ABN Amro expects cost savings program of at least EU200m
  • Estimates proceeds of EU8.5b from pending separation of Specialty Chemicals, could be used for acquisitions in Coatings
  • ABN Amro also raises Solvay to hold vs sell, PT EU115 vs EU110
    • Expects co. will increase its exposure to specialty chemicals; M&A strategy not creating value yet
  • Says favors Akzo Nobel, DSM, Tessenderlo, Umicore among chemicals; has neutral view on BASF, Brenntag, IMCD, Solvay

>>> CJ Group hires Deutsche Bank for The Body Shop bid; LG H&G not interested

CJ Group hires Deutsche Bank for The Body Shop bid; LG H&G not interested
03 APR 2017
CJ Group, a South Korea-based conglomerate, has hired Deutsche Bank to prepare a potential bid for The Body Shop, UK-based cosmetic business of French beauty major L’Oreal [EPA:OR], two sources briefed on the matter said.

The news service had earlier reported that the CJ Group was seeking proposals in early March to hire financial advisors for The Body Shop bid.

While CJ Corp [KRX:001040], which supervises the core M&A of the group as a holding company, is likely to lead the deal, the specific bidding entity may be finalized at a later stage, one of the sources said.
The Body Shop could fit with CJ’s retail operations, pointing to CJ Olive Young, which distributes beauty, personal care, and a wide range of lifestyle products and operates more than 500 stores in South Korea and five stores in China as of 2016, as reported by this news service. CJ Corp owns a 100% stake in CJ Olive Young.
CJ Corp had cash and cash equivalents of KRW 1.17tn (USD 1.1bn) in 2016.
CJ declined to comment. Deutsche Bank declined to comment.

Separately, LG Household & Healthcare (LG H&H) [KRX: 051900], is not interested in acquiring The Body Shop, a company spokesperson told this news service.

The company was reviewing the target, but did not find the target a strategic fit, two sector advisors said. It also prefers a smaller deal size.

LG H&H was mentioned as a potential buyer of The Body Shop in local media reports in February.
L’Oreal hired Lazard as it financial advisor. Indicative bids are around mid-April.

The Body Shop has drawn several financial investors including Bain Capital, Advent International, Clayton Dubilier & Rice (CD&R) and KKR [NYSE:KKR]. Apax, Carlyle [NASDAQ:CG], CVC Capital Partners, BC Partners, PAI Partners and American retail store operator Bed Bath & Beyond also have been mentioned as potential buyers.

L’Oreal expects EUR 1bn (USD 753m) for the deal, but its potential bidders value the deal approximately EUR 700m given the potential turnaround work required, as reported.
L’Oreal acquired The Body Shop for EUR 941.9m in March 2006.

FT : Fidelity joins ETF rush with launch of two products

Fidelity joins ETF rush with launch of two products
New exchange traded funds will invest in companies that pay attractive dividends

Fidelity International will become the latest investment manager to try to break into the rapidly growing exchange traded funds industry with the launch of two income-focused ETFs today.

Fidelity already offers a range of 14 index-tracking mutual funds but the launch this week marks the ETF debut of the £224bn UK asset manager.

The two new ETFs have been designed as “quality income” funds that will invest in US and global companies with stable earnings and cash flows that also pay attractive dividends. Both ETFs will track proprietary Fidelity-branded indices instead of benchmarks created by established index providers such as S&P Dow Jones Indices or MSCI.

Nick King, head of ETFs, said this approach would allow Fidelity to use its active investment expertise to offer “something innovative” to investors looking for an income stream.

Mr King said Fidelity also planned to launch more “smart-beta” ETFs over the next 18 months, as it believed there was “significant scope” for growth for strategies that combine active and passive investment management techniques.

“Demand for smart-beta strategies such as quality income has been growing in recent years and is expected to accelerate as investors look for competitively priced products that provide a particular investment outcome,” said Mr King, who was hired from BlackRock in 2015 to build an ETF team for Fidelity.

Investors globally ploughed a record $57bn in new cash into smart-beta ETFs in 2016, according to ETFGI, a London based consultancy. Record investor inflows have led to a rush by asset managers to offer products. Around 230 smart-beta ETFs were launched last year, leading to downward pressure on fees.

Inigo Fraser-Jenkins, a strategist at Bernstein Research, the brokerage, said that smart beta had become one of the most popular investment searches on Investopedia and Google, the websites.

“The reason why smart-beta ETFs are growing in popularity so fast is not because they are revolutionary in some way but because they are cheap,” said Mr Fraser-Jenkins.

He added that the cheapest smart-beta ETFs were attracting the highest inflows and that fees would continue to decline in 2017.

The Fidelity US Quality Income ETF will carry an annual fund charge of 30 basis points, while the Global Quality Income ETF has been priced at 40bp. Both funds will start trading on the London Stock Exchange and Deutsche Börse today.

FT : RWE and CEZ worst prepared for move to low-carbon economy

RWE and CEZ worst prepared for move to low-carbon economy
Research warns big fossil fuel dependent utilities at risk of profit losses

RWE and CEZ are the worst prepared of Europe’s large utility companies for a shift to a greener economy, according to a ranking compiled for Norway’s $920bn oil fund and other big investors.

The research, used by investors with $100tn in collective assets under management, warned that many of Europe’s publicly listed utilities companies are heavily dependent on fossil fuels, putting them at risk of profit losses as governments worldwide look to tackle climate change.

RWE and Czech group CEZ, along with Germany’s EnBW and Spain’s Endesa, sit at the bottom of the ranking examining how ready 14 of Europe’s large utilities companies are for a transition to a low-carbon economy and a future in which natural resources such as water become increasingly scarce.

Almost 200 countries globally have agreed to limit global warming to less than 2 degrees centigrade a year as part of the 2015 Paris Agreement on climate.

Rick Stathers, head of investor initiatives at the Carbon Disclosure Project, the non-profit organisation that carried out the research, said: “We are still a long way off having a utilities sector that will meet the goal of a 2-degree future.”

According to CDP, the utilities industry is responsible for a quarter of global carbon emissions and must reduce these by more than two-thirds by 2030 to meet the goals of the Paris Agreement.

Almost half of Europe’s big utilities generate at least 20 per cent of their energy from coal, which is a significant source of carbon emissions.

Pelle Pedersen, head of responsible investments at PKA, the pension fund managing €33.6bn for 275,000 Danes, said: “It is difficult to argue why these [European utilities] companies should not pursue a sustainable business plan.

“The question for all of us should be: what is going to work? And using unrenewable resources is of course not going to work in the long term.”

There are concerns that as governments introduce policies to combat climate change, some businesses — particularly those that depend on fossil fuels, such as coal — could become stranded or suffer big losses.

Big investors, including PKA, Nordea Asset Management, the Nordic fund house, and Norway’s oil fund, the world’s largest sovereign wealth fund, have already made steps to divest from companies that generate large chunks of their revenue from fossil fuels such as coal.

Ben Caldecott, director of the sustainable finance programme at the University of Oxford, said: “Investors are increasingly developing capabilities to differentiate between utilities more or less exposed to environmental risks. Utilities heavily exposed to coal are particularly at risk.”

The Austrian company Verbund, Spain’s Iberdrola and Finland’s Fortum ranked among the best prepared for a low-carbon economy in the CDP list.

Verbund is aiming to generate 100 per cent of its energy through renewables by 2020 and is in the process of decommissioning remaining fossil fuel assets.

But RWE, which suffered losses of €5.7bn in 2016 and scrapped its dividend for the second consecutive year, is reliant on coal for more than 50 per cent of its power generation, the CDP report said.

RWE said the company had “a clear commitment to support the national and European climate protection goals for 2050”.

“RWE will also continue to make further efforts to reduce CO2 significantly.”

EnBW said it was “fully committed to the Paris climate agreement and we are committed to contribute our share to its implementation”.

CEZ and Endesa did not respond to a request for comment.

>>> Europe : Brokers Upgrades & Downgrades - 3rd of April 2017

>>> Up
*Norsk Hydro Raised to Hold at DNB Markets, PT NOK50

>>> Down
*Balder Cut to Sell at DNB Markets, PT SEK175
*Castellum Cut to Sell at DNB Markets, PT SEK110
*ElringKlinger Cut to Neutral at Macquarie, PT EU19
*Fabege Cut to Sell at DNB Markets, PT SEK130
*Hufvudstaden Cut to Sell at DNB Markets, PT SEK120
*Klovern Cut to Hold at DNB Markets, PT SEK9
*Kuka Cut to Reduce at HSBC, PT EU78
*Kungsleden Cut to Hold at DNB Markets, PT SEK56
*Wihlborgs Cut to Hold at DNB Markets, PT SEK175

>>> Initiation
*Atea New Buy at SpareBank, PT NOK110

>>> Call

>>> What to look at today - 3rd of April 2017

Asian equity markets are trading mixed, tracking underwhelming US Friday session where PCE inflation data were in line with consensus, Chicago PMI numbers saw decent growth, but personal spending data missed expectations. Oil prices have remained supported above the $50/brl level, while US Treasuries were bid somewhat higher within their recent range. FX market volatility was also somewhat dulled by the start of a holiday break in China - USD majors saw little change with the exception of AUD/USD, which slid some 40pips from the highs toward $0.76 on the release of weaker than expected Retail Sales. Over the weekend, China March Caixin manufacturing PMI missed expectations at 51.2 V 51.7E. Caixin economists noted continued downward trend in employment, weakest new export sales this year, and further slowdown in the rate of input price inflation, even though the overall figure was in expansion territory for the 9th straight month. Also of note in China, BoC released its FY16 results that saw a miss on the bottom line, a 200bp drop in ROE and 30bp slide in NIMs. The bank warned domestic and international picture will remain "complicated this year" amid China's economic transition as its shares fell over 2% in Hong Kong.

Nikkei +0.81% Hang Seng +0.29% CSI +0.56% Shanghai +0.38%

Eur$ 1.0677 CNH 6.8745 CNY 6.8872 JPY 111.38 GBP 1.2547 CHF 1.001 RUB 56.25 WTI$ 50.53 -0.14%

S&P +0.03% EuroStoxx Dax SMI

Macro :
- U.K.’s Johnson Sees Difficult Talks Ahead for Brexit: Figaro
- Bond Traders Are No Fools, Dismissing Bluster of Four Rate Hikes

Keep an eye on :
- A2A IM : A2A Signs Partnership MOU With Local Italian Utilities
- AIR FP : Airbus Said to Continue Experiencing A320neo Engine Issues: Wiwo
- AAPL US : Apple Seeks to Sell HBO, Showtime, Starz in TV Bundle: Recode
- BAB LN : Babcock International Said to Win GBP340m U.K. Navy Order: Sky
- BALN VX : Baloise Starts New Buy-Back Program, Plans to Cancel 1.2m Shares
- BAYN GY : Bayer’s Copanlisib Meets Main Goal in Mid-Stage Lymphoma Study
- BIIB US : Biogen Rises 2% on Patent Win; Mizuho Sees $5 Upside to Stock
- BRE IM : Brembo Aims Doubling Revenue in China in Two Years, Sole Says
- BT/A LN : BT Group Said to Be Preparing Italian Unit for Sale: Telegraph
- BWO NO : Signed an extension agreement for the lease and operation of the FPSO Abo with Nigerian Agip Exploration Ltd, a subsidiary of ENI S.p.A., until 31 March 2018 with options until 2023.
- CSGN VX : Minder Tells Credit Suisse Shareholders to Vote Against Pay: T-A
- EDF FP : U.K. Airports, Nuclear Plants Told to Boost Security: S. Times
- ENRO SS : Eniro Hasn’t Reached Pact With Bank Syndicate
- ENX FP : Euronext, Intercontinental Sign Derivatives Clearing Pact, Euronext Says Remains Willing Buyer of LCH.Clearnet
- FCA IM : German Transport Ministry to Complain to EU Over Fiat: Reuters
- FCA IM : Fiat Chrysler Says 500X Conforms to Applicable Emissions Rules
- FCT IM : Fincantieri Seeking to Conclude STX France Deal This Week : JDD
- GALN VX : Galenica Reduces IPO Price Range to CHF37-CHF39, Boosts Offering
- DEC FP : JCDecaux Says It Has Lost Paris Velib Bicycle Contract
- LDO IM : Leonardo Sees Growing Defense Markets in Brazil, Peru, Argentina
- LIN GY : Linde bosses confident of merger with Praxair - FT
- MAU FP : Reports FY16 Net loss €50M v loss €95M y/y, Op €25M v loss €17M y/y, Rev €317M v €317M prelim
- NOVN VX : Novartis’s Tafinlar, Mekinist Drug Combination Gets EU Approval
- NOVOB DC : Novo Nordisk Chairman Sees Opportunities in Obesity Drugs: DI
- UG FP : French March Car Registrations Rise 7.0% to 226,145
- POM FP : Plastic Omnium Sells Seven Sites in Europe to Flex-N-Gate
- QIA GY : Qiagen Licenses Prostate Cancer Test From Johns Hopkins
- RB/ LN : Reckitt Benckiser Said to Plan Sale of Food Division: S. Times
- REC BB : Recticel Issues 250,266 New Shares After Exercise of Warrants
- RNO FP : French March Car Registrations Rise 7.0% to 226,145
- ROG VX : Roche’s Phase III ALUR Study on Alecensa Meets Primary Endpoint
- RSA LN : RSA Said to Drop Dublin From EU Base Shortlist: Sunday Times
- SAN SM : BofA Says to Short Santander Consumer USA on Subprime Car Loans
- SRT3 GY : Sartorius Raises Forecast, Completes Essen BioScience Takeover
- SU FP : Schneider Electric Said Close to $1b Sale of DTN: WSJ
- SNAP US : Snap Debuts a New Search Tool, in First Major Product Since IPO
- SCMN VX : Price War Threatens Network Investment, Swisscom CEO Tells SZ
- TSCO LN : Tesco Deal With Booker May Force It to Sell Stores: Telegraph
- VOW3 GY : VW’s Poetsch Says Internal Investig. to Last Beyond 2017: FAZ
- YARA NO : Yara CEO Sees Further Revenue Growth in China: Finansavisen

FT : Linde bosses confident of merger with Praxair

Linde bosses confident of merger with Praxair

Chairman prepared to push through deal even if German workers vote against it

Both the chief executive and the chairman of German chemicals group Linde insist the planned $65bn merger with US rival Praxair is on track to be signed before the company’s shareholder meeting next month.

Despite opposition from group worker representatives, both chief executive Aldo Belloni and chairman Wolfgang Reitzle have expressed confidence the deal will go ahead before the May 10 meeting.

In the event that the workers’ side oppose the deal, Mr Reitzle has said he is willing to push the deal through by casting his double vote in favour of it. “Yes I’m willing to do that,” he said. 

The prospect of the deal going through was called into question last week when Linde’s European works council called the planned merger “a demolition which will destroy Linde’s brand essence”.

The council said it worried about “a significant number of job losses” and the fact that the new operational headquarters would be in Connecticut, where Praxair is based.

The merger must be approved by Linde’s supervisory board, which by German law is split equally between shareholder and worker representatives.

A potential deal between the two companies has collapsed once, in September, owing to internal disputes over personnel, the role of Linde’s Munich headquarters and other details.

The collapse led to the ouster of Linde’s top executive and its finance chief, as well as to a €370m cost-savings plan.

Talks resumed in November when Praxair chief executive Steve Angel pledged to give more support to German workers, leading to job guarantees through 2021.

When preliminary terms were signed in December, worker representatives unanimously supported it — a big win for Mr Belloni, 67, a 35-year Linde veteran who emerged from retirement to take the chief executive role in December.

Mr Belloni has since his expressed his annoyance at the newfound labour unrest, which has provoked questions from Praxair and forced him into cumbersome conversations about German co-determination laws that grant workers influence in dealmaking. But he rejected any idea that the merger was in doubt.

“[Workers] are expressing critical comments,” he told the FT on Friday. “I find it surprising because they were unanimously on board before Christmas. I assume there has been inspiration from the unions.”

Mr Belloni said there have been discussions about Praxair’s Mr Angel coming to Germany to hold a town hall-style meeting with workers just before a formal merger is drafted, but the hope is that this is not necessary.

He said he is in “constant” and “challenging” dialogue with employees, but that his role is to provide better communication to workers about the deal, not to grant further concessions. 

Linde employs 65,000 people in more than 100 countries, with just 11 per cent of them in Germany. Mr Belloni has previously said that while the deal seeks $1bn in synergies, the savings would not come at the “cost and detriment of the German workforce and locations”.

Linde’s supervisory board is scheduled to meet next Thursday, giving a chance for Mr Reitzle, who is set to retain his chairman role at the enlarged group, to smooth workers’ concerns.