ARIA/WOOF quotes resume 8:25am et, trading resumes 8:30am
31% Premium $93 vs 70.77
Election rally: What’s priced in?
Since the election, our coverage is up 23% vs. the S&P 500 +6%. We believe that the rally reflects higher interest rates, a steeper yield curve and some probability of changes to regulatory and tax policies. Overall, we believe about 42% of a “blue sky” scenario is currently priced in. Our top picks remain Buy-rated BAC (on CL) and WFC.
Earnings: Building an upside case
The most important drivers to our upside earnings scenario are changes in rate expectations (~17% vs cons.), potential for corporate tax reform (14%) and increased probability of greater capital returns (13%). Normalization of credit costs could reduce earnings estimates by 9%.
Preferred stocks for 2017: Our preferred stocks drawn from the universe of 33 stocks covered by the UK Small and Mid Caps team are:
o Best for growth: BCA Marketplace
o Best for quality: BBA Aviation, DS Smith, Inchcape
o Best defensive plays: Biffa, Cineworld, Go-Ahead
o Best for value: FirstGroup
Least preferred stocks. Within our sectoral orders of preference, our least preferred stocks are Stagecoach (Bus and Cail), Carillion (Construction), The Restaurant Group and Mitchells & Butlers (Pubs and Cestaurants). We are also Underweight on HSS Hire.
Turning defensive in Q1: Upgrade to OW Michelin, Nokian & Stabilus, downgrade Conti (N), Schaeffler (UW) and Hella (N)
We are turning defensive in our European Autos coverage forecasting limited global growth, challenging pricing environments, rising raw material headwinds and technological shift as reflected by our JPMC “EV Tax”.
Downgrade Schaeffler to UW, upgrade Michelin and Nokian to OW and downgrade Conti and Hella to Neutral.
As a result of implementing our EV tax we cannot recommend simply going OW suppliers vs OEMs. It becomes a stock by stock strategy where on the OEM front we would favor restructuring stories like VW or best in class execution such us Daimler and PSA. On the supplier front we have turned defensive owning tire stocks even with rising raw materials as well as growth and margin re-rating stocks like Valeo and Faurecia. We are downgrading Continental to Neutral (mainly on valuation grounds), Hella to Neutral (as we wait for clarity on reducing R&D expenditure), Schaeffler to UW and upgrading Michelin, Nokian and Stabilus to OW. We remain OW on Faurecia, Valeo (AFL), Volkswagen (AFL), PSA and Daimler. Neutral on FCA, Leoni, BMW and Renault. Remain Underweight on Volvo and ElringKlinger.
UK factory bosses see worse economy but better sales in 2017 - EEF
British factory bosses are downbeat about the outlook for the economy after last year's Brexit vote even though they expect their sales both at home and abroad to improve in 2017, an industry survey showed on Monday.
An annual survey by manufacturing association EEF showed 47 percent of executives in the sector predicted a decline in Britain's economic fortunes this year, up from 28 percent in the same survey in 2016.
Only 25 percent said they expected to see an improvement.
Still, manufacturers were confident they would perform well in the face of uncertainty around Brexit, with half expecting to increase their sales at home and more than 40 percent anticipating improved export sales.
British manufacturing had a mixed performance in 2016, with economic growth driven mostly by the much larger services sector and consumer spending.
A separate survey from credit card company Visa Europe showed consumer spending expanded at an annual rate of 2.8 percent in the fourth quarter - more than double the pace of the previous two quarters.
However, consumer spending power looks likely to wilt in the face of rising inflation following the pound's post-Brexit vote drop - something that two-thirds of manufacturers in the EEF survey cited as a big risk.
Last week a record number of manufacturers in a British Chambers of Commerce survey - the largest of its kind - said they expected to hike selling prices in the coming months.
"Global political upheaval means that 2017 looks set to be another bumpy ride, with manufacturers forced to navigate uncertainty, unpredictable economic conditions and a number of risks that have been amplified by Brexit," said Terry Scuoler, chief executive of EEF.
Britain's economy looks on track to have expanded by more than 2 percent in 2016 - faster than almost all other big advanced economies except perhaps the United States.
UK house price growth picks up speed again - Halifax
Growth in British house prices picked up speed for the second month in a row in December and a shortage of homes on the market is expected to support prices in 2017, mortgage lender Halifax said on Monday.
In the three months to December, house prices were 6.5 percent higher compared with the same period a year earlier, up from growth of 6.0 percent in the three months to November, Halifax said.
A Reuters poll of economists had expected an increase of 5.8 percent.
In monthly terms, house prices jumped by 1.7 percent in December, the strongest increase since March.
Martin Ellis, an economist with Halifax, said yearly price growth was expected to slow to between 1 and 4 percent by the end of 2017.
"The relatively wide range for the forecast reflects the higher than normal degree of uncertainty regarding the prospects for the UK economy this year," he said in a statement.