FT : Chinese insurers under pressure to rein in overseas deals

Chinese insurers under pressure to rein in overseas deals
Regulators and concerns over leverage put squeeze on appetite for foreign assets

In mid-December, Chinese conglomerate Fosun International announced the sale of its casualty insurance unit Ironshore to Liberty Mutualfor nearly $3bn. That same week, a team of Anbang Insurancestaffers flew to Seoul from the group’s Fifth Avenue building in New York, in connection with its planned purchase of two insurance companies in South Korea.

These two insurers spent much of last year scouring the world for potential targets and were among the most aggressive purchasers. They provided rescue capital to troubled financial firms in Europe and scooped up real estate and other investments in the US and Asia. They were among the contributors to the $225bn in Chinese offshore acquisitions announced last year, according to data from Dealogic.

But a combination of strictures from mainland regulators and internal pressures from within for many firms, including Anbang and Fosun, may mean that China’s voracious appetite for overseas assets is about to be curbed.

Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.

The shift away from acquisitions is likely to be particularly pronounced among Chinese insurers, and that will have an impact beyond China. Not only have the country’s insurers been among the highest (or only) bidders for some global assets, they are also an important source of funds for major pools of money outside China.

In the past, for example, mainland insurance companies have written big cheques to private equity firms like Blackstone. They were attracted by promises of double digit returns because it is just as hard for insurers in China as elsewhere to earn the big returns their clients want.

Until recently, many analysts expected Chinese insurers to increase their offshore activity.

“More assets are expected to flow overseas as Chinese insurers see a growing need for better returns outside their domestic market,” Boston-based consultancy Cerulli Associatesnoted in a report just weeks ago.

“A fall in interest rates will inevitably have an impact on their investment income and will push insurers to deploy assets more efficiently by diversifying their sources of returns, including overseas. Investments in the ‘others’ category — which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate — rose from 23.7 per cent in 2014 to 34.2 per cent in June 2016.”

Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that “the insurers have shifted to investing in riskier assets to sustain investment yields. This makes their credit profiles more vulnerable to unfavourable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown”.

Fosun, which is listed in Hong Kong, is starting to respond to investor concerns that it has too much leverage. Moody’s analysts see the sale of Ironshore, which the company bought in 2015, as one clear example.

“Fosun slowed its pace of overseas expansion in 2016 and management has indicated its commitment to improve the company’s financial profile and focus on integrating previously acquired businesses,” the analysts noted. “The cash proceeds . . . will help improve its weak liquidity profile.”

Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US rating agencies suggested that it was likely to receive a non-investment grade rating.

Without easy access to offshore funds, and facing tighter rules at home, Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed. That in turn would crimp its ability to buy more.

In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued, and the US focused inward, it is not clear who will take their place.

Reuters - Credit Suisse, AstraZeneca among top BofA-ML's top European picks for

Credit Suisse, AstraZeneca among top BofA-ML's top European picks for Q1 - Reuters News

LONDON, Jan 3 (Reuters) - Credit Suisse and AstraZeneca are among Bank of America-Merrill Lynch's top picks for the first quarter of 2017, as the market is overly pessimistic on both stocks, according to analysts at the bank.
BofA-ML picked out six key "buy" calls and 4 "underperforms" as their top ideas in EMEA for the first quarter.
The analysts highlighted Swiss bank Credit Suisse CSGN.S as a candidate to outperform, saying that the markets division was set to beat expectations and lead to positive surprises.
"After years of watching the gradual erosion of Markets revenue forecasts, we now believe consensus estimates are far too bearish for 2017," analysts at BofA-ML said in a note.
The bank said its 2018 pre-tax profit forecasts for Credit Suisse were 10 percent above consensus, but still 10 percent below company targets.
AstraZeneca AZN.L is favoured as the firm has an "under-appreciated pipeline which offers potential for premium growth" compared to sector peers, the analysts say.
The company has five drugs with a combined potential $18 billion in peak sales due to see final stage results in the U.S. over the next 12-18 months, BofA-ML analysts note.
The other "buys" are British American Tobacco BATS.L, Telecom Italia TLIT.MI, payments processor Worldpay WPG.L and media group ProSieben PSMGn.DE.
Among stocks expected to underperform are Italian luxury stock Luxottica LUX.MI and Airbus AIR.PA.
The bank says that greater competition and waning brand momentum make it harder for Luxottica to justify a 30 percent premium valuation, while Airbus also looks expensive given its own headwinds, including slowing order momentum.
Dutch coatings and paints maker Akzo Nobel AKZO.AS and Sweden's Sandvik SAN.ST are highlighted as the other two key "underperform" ideas.

WSJ : Earnings, Not Donald Trump, Are Stocks’ Best Friend in 2017

Earnings, Not Donald Trump, Are Stocks’ Best Friend in 2017
Continued rebound in corporate profits should prop up share prices regardless of Washington policies

Here’s one simple thing set to help sustain stocks’ march in 2017: corporate earnings.

While Donald Trump’s election supercharged investors’ hopes for business-friendly policies, corporate earnings quietly climbed out of a five-quarter slump.

It’s a long-awaited improvement. Stock performance was tepid in 2015 and early 2016, with many investors and analysts citing the lack of earnings growth as a main culprit. The S&P 500 gained 1.9% from the end of 2014 through the first half of 2016.

The 6.7% rally since then, much of it since Election Day, has largely been attributed to the potential for tax cuts, looser regulation and fiscal spending under the president-elect. But the rise has also coincided with a fundamental improvement: U.S. companies’ return to earnings growth.

“It’s earnings growth that drives stocks over the long term,” said Tom Cassidy, chief investment officer at Univest Wealth Management Division. While “we won’t know if any of these policies will actually be implemented until later next year,” a continued rebound in earnings should nevertheless prop up stocks for additional gains, Mr. Cassidy said.

Earnings for companies in the S&P 500 grew 3.1% in the third quarter from a year earlier, according to FactSet, entering positive territory for the first time since the first quarter of 2015, when they grew 0.5%. Analysts polled by FactSet expect the rebound to continue, and are estimating a 3.2% growth rate in the fourth quarter of 2016.

An end to the longest earnings slump since the financial crisis also comes against a backdrop of improving economic data. U.S. gross domestic product, a broad measure of the goods and services produced across the economy, posted its strongest quarterly pace of growth in two years in the third quarter, according to data released by the Commerce Department in December.

The S&P 500 climbed 9.5% in 2016, its biggest gain since 2014.

While it’s only one quarter of earnings data, the return to growth is giving investors more reason to believe the stock market will keep climbing in 2017.

The improved outlook for financial companies also bodes well. The S&P 500 financials sector was up 20% in 2016 and was responsible for nearly half of the total earnings growth for the S&P 500 in the third quarter, according to FactSet data.

Financials posted 8% year-over-year earnings growth, according to FactSet. J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley all beat analysts’ estimates on an earnings-per-share basis.


Several lenders, including J.P. Morgan, the largest U.S. bank by assets, reported a rebound in their trading businesses. While low interest rates have for years cut into banks’ net interest margins--a key measure of lending profitability--events like the U.K.’s surprise vote to leave the European Union or uncertainty around the Fed’s next steps on interest rates have helped boost trading revenues, some of the banks said.

Many of the banks expect trading gains to continue. Executives at Citigroup, Bank of America and J.P. Morgan said at a banking conference in early December that they expect key fourth-quarter trading metrics to grow by double-digit percentages from the year-earlier period.

ENLARGE
But risks remain.

Industrials—which have helped lead the recent stock-market rally with a 7% gain in the S&P 500 since Election Day—are expected to report an earnings decline of more than 8% in the fourth quarter from the year-earlier period, according to analysts polled by FactSet.

Caterpillar is projected to be among the biggest drags on the sector’s earnings in the fourth quarter. Shares of the maker of construction and mining equipment—whose results are closely watched as a barometer for global manufacturing activity—gained 36% in 2016. But for the fourth quarter, the company is expected to report earnings of 66 cents a share, down from $1.02 a share at the start of the quarter, according to FactSet estimates. The company said in October that it could report a loss for the year, and it predicted another tough year for 2017.

A strengthening U.S. dollar could also hamper the earnings of multinational companies. While a stronger dollar increases U.S. buyers’ purchasing power abroad, it also makes U.S. exports more expensive to foreign buyers, putting pressure on the bottom lines of companies that receive a significant chunk of their revenue from abroad. Roughly 31% of S&P 500 revenues come from outside the U.S., according to FactSet estimates.

The dollar has rallied since Election Day on prospects of a higher-growth, higher-rate environment, which makes it more attractive to yield-seeking investors. The WSJ Dollar Index, which measures the dollar against a basket of 16 other currencies, gained about 3% in 2016.

The prolonged S&P 500 earnings slump has also helped make stocks more expensive than their historical averages. The S&P 500 was trading at around 21 times its past 12 months of earnings last week, according to FactSet. Its 10-year price/earnings average is 16.

“People are very inclined to ignore P/E values going up,” said Bret Chesney, senior portfolio manager at Alpine Global, who added that he thinks stocks are too expensive relative to how companies have performed over the past several quarters. “I wouldn’t be too gung-ho to invest at these levels.”

Still, many analysts believe there is reason to be optimistic about the coming year.

Corporate earnings are projected to grow by double digits through 2017. Analysts polled by FactSet expect earnings to grow 11% in the first quarter, 11% in the second quarter, 9.1% in the third quarter and 14% in the fourth.

“There’s some meat to the rally,” said Karyn Cavanaugh, senior market strategist at Voya investment Management. “I think 2017 is shaping up to be a good year.”

WSJ : Peak Auto Sales Make 2017 a Waiting Game for Investors

Peak Auto Sales Make 2017 a Waiting Game for Investors
Low valuations suggest an earnings downturn is on its way

Peak Car?

In cyclical industries, the best of times for manufacturers tend to be the worst of times for investors.
The auto sector is a case in point. Car sales are running ahead of their precrisis peak in the U.S., but earnings multiples, even after a postelection bounce, are meager by historical standards. Investors should probably interpret low valuations as a warning flag rather than a discount sticker: A downturn in earnings is surely on its way.
The cycle is most mature in U.S. light-vehicle sales, which doubled over the seven years through November 2015 to an annualized peak of 18.1 million units. In 2016, following the first increase in the federal-funds rate since the recovery started, sales stalled. Now the Federal Reserve is signaling a faster pace of rate increases. More than seven in 10 new cars sold in the U.S. are financed with debt, according to research group IHS, which expects 17.4 million light-vehicle sales in 2017.

As the period running into the 2007 credit crunch showed, the problem with even flattish sales is that it encourages manufacturers to sacrifice their profits in a fight for market share. There are early warning signs that this is happening again: Industry inventories have been rising, and rebates with them. Of the Detroit Three, Ford may be best placed to deal with this more difficult market environment, having called an end to the boom in July and announced production cuts in October—earlier than its peers.
The picture is slightly brighter in Europe, if only because the eurozone crisis delayed the recovery by a few years in parts of the continent. Across the European Union, car registrations for the year through November were up 7.1% from the previous year.
With U.K. sales already running well ahead of the 2007 peak, growth is being driven by pent-up demand in Southern Europe. HSBC said it expects Italian consumers to buy about 1.9 million cars this year, roughly a fifth more than last year but still far below the 2.5 million vehicles sold in 2007. This suggests there is gas left in the tank, which is a boon to local market leader Fiat Chrysler in particular. The not insignificant risk is that consumer sentiment is thrown off course by a political or banking crisis in Italy, or a renewal of the eurozone crisis more generally.

Yet growth hopes are pinned above all on China. After a weak patch in the summer of 2015, a cut in sales tax was spectacularly successful in reviving the world’s largest car market. This incentive has been scaled back for 2017, which is likely to weigh on demand for smaller engines. But the bigger problem for Western car makers is more likely to be supply than demand: Production capacity is rising fast, including by increasingly sophisticated local manufacturers. Whatever its growth path, the Chinese market will become more competitive in 2017.
The year ahead could be a waiting game. Better buying opportunities are likely to emerge when times get a bit worse for car manufacturers.

(ZH) Yuan Dumps, Bitcoin Jumps As China Researchers Suggest "One-Off Devaluation

Yuan Dumps, Bitcoin Jumps As China Researchers Suggest "One-Off Devaluation" & Capital Controls

As we have detailed numerous times recently, the recent move in Bitcoin has been strongly suggesting increasing fears of capital controls and/or expectations of a looming (and quite notable) devaluation of the Yuan against the US Dollar. Tonight saw China's largest nationalist tabloid suggesting that China should consider one-off yuan devaluation to keep the currency stable at equilibrium level. Offshore Yuan is tumbling - to new record lows.
As we noted earlier, a quick look at the uncanny correlation between the decline in the Yuan and the rise in the bitcoin, confirms that the digital currency has indeed been largely used to evade capital controls.
Based on this chart alone, the recent surge in Bitcoin would imply that a substantial devaluation of the yuan is looming. That, or even more aggressive capital controls.
And tonight, researchers with State Information Center led by Zhu Baoliang wrote in an article published on Shanghai Securities News, that China should consider one-off yuan devaluation to keep the currency stable at equilibrium level and suggest capital controls and as well as what seems like a reference to "virtual currency"...


...the effect of monetary policy continues to weaken. After repeatedly cut interest rates, lowering after registration, our short futures money market interest rates have dropped to about 2.2%, in the history of a relatively low level. Money supply growth rate far exceeds the rate of economic growth, social capital is abundant. But because of the lack of investment opportunities, more funds through the state-owned enterprises and financing platform to invest in less efficient infrastructure, or real estate, or idle in the virtual economy. Capital continues to off real to the virtual, will breed all kinds of asset bubbles, a huge impact on financial stability. At the same time, state-owned enterprises, financing platforms, real estate and other sectors and industries a large number of financing, but also pushed up the financing costs of financial markets, private enterprises and small and medium-sized enterprises to reduce the financing cost is not large, thus out of private investment.

...

It is suggested that the total social financing and broad money growth should be about 12%, and maintain a reasonable and reasonable liquidity scale. The second is to further improve the RMB exchange rate market-oriented level, and enhance the flexibility of the RMB exchange rate, or even a one-time devaluation of the renminbi, so as to maintain the stability of the RMB in the equilibrium level.

At the same time, the proper control of foreign exchange outflow, the state-owned enterprises in overseas real estate, antiques, teams and other non-substantive, non-technical M & A activities to be strictly limited. Third, closely tracking study American influence elected president's economic policies on China, the foreign exchange market volatility and prevent cross-border capital outflows triggered massive financial risk domestic bond market, the real estate market.
And for now the reaction is offshore Yuan selling to record lows...

And Bitcoin (in China) surging very close to record highs...

7,588 Yuan per Bitcoin in the record high and volume in this most recent surge is dramatically higher. But as we noted earlier, for those buying into bitcoin here on the momentum, most of which originates in China, we urge readers to be cautious as by now the PBOC has certainly noticed that the digital currency remains one of the final, and most successful, means of bypassing capital controls in China. Should Beijing mandate that bitcoin no longer be a means to illegally transfer capital offshore, there is risk of a dramatic, and sharp, drop in its price.

>>> Agent Provocateur attracts interest from wealthy individuals and sovereign w

Agent Provocateur attracts interest from wealthy individuals and sovereign wealth funds - report
03 JAN 2017
The potential sale of the UK-based lingerie retailer Agent Provocateur has attracted interest from wealthy individuals and sovereign wealth funds, according to a Financial Times report. The newspaper cited a person familiar with the potential sale for the information. The article did not name any potential bidders.
Agent Provocateur’s owner, the private equity firm 3i [LON:III], is thinking about selling the business, the item said. As previously reported, the restructuring specialist AlixPartners is advising 3i on options to improve Agent Provocateur’s performance. 3i is thinking about either an outright sale or securing new investment while retaining a minority interest in the retailer, the article added.
3i has hired investment bankers at Rothschild to work on a potential sale process for Agent Provocateur, the report continued.
Rothschild refused to comment on its involvement, while AlixPartners was not immediately available for comment, the article said.
Background:
A Sunday Times report on 1 January cited one retail source who estimated that Agent Provocateur might fetch as little as GBP 15m (EUR 17.6m) in a sale.
This news service reported on 10 April 215 that 3i had postponed a sale of Agent Provocateur following a strategic review conducted by the investment bank Goldman Sachs.

>>> Europe Pre-Market Indications

ML
INFINEON - Zeitung reporting that the company could be takeover target (17).+2%
TELENOR - ET reporting that Bharti Airtel is in talks to buy India biz (134)+1%
M6 - CEO says that he is confident for 2017; Les Echos reports (EUR17.95)...+1%
BVIC - Small acquisition of Belia Ischia (£54.5m). Earnings accretive (575).+1%
MORRISON - Kicks off supermarket price war; cuts prices on 800 skus (230).-0.5%
PGS - Vessel allocation for 4Q comes in at 52%, well down on 78% in 3Q (30).-1%
RYANAIR - We DOWNGRADE to Underperform on a threat of regulation (14.25)....-2%

CS
Accor +0.5% Negative article on short-term rentals for Airbnb
AMS -1% Negative article on Apple cutting production
Britvic +1-2% Proposed purchase of Bela Ischia, accretive year 1
D'ieteren +1% Belgian Car Registrations Rise 7.7% to 5-Year High
IHG +1% Negative article on short-term rentals for Airbnb
Imagine Tech -1% Negative article on Apple cutting production
Miners +1% Brent +0.50%, Iron Ore +1.25%, China +1.00%
Telenor M/P May Quit India Due to Narrow Spectrum

Shore
BRITVIC - agreement in principle to acquire Bela Ischia for £54.5m........+0.5%
XL MEDIA - acquires Canadian credit card comparison website.................UNCH
BBA AVIATION - JV with Gama Aviation to create leading aircraft charter co..+2%
CONSORT MEDICAL - Bats terminate all supply agreements......................-5%
BURFORD - sells 'several million $ of interests'relating to Perterson claims.MKT
RIGHTMOVE - starts £17m share buyback.....................................+0.5%
LSE - proposed sale of LCH SA for €510m to Euronext.........................+1%