(Citi) European Portfolio Strategist : Challenging Consensus: Is EM the Road-Map

Challenging Consensus: Is EM the Road-Map for Europe?

* From value trap to value trade — EM equities have been a 5-year bear trade, driven by slowing growth and high levels of macro risk (China, commodities, US$, deficits). Valuation did not provide support; a classic "value trap". But, EM equities have enjoyed a resurgence YTD. Markus Rosgen, Citi's EM Equity Strategist, remains positive and we raised EM to Overweight in our global regional allocation in February. EM equities have moved from "value trap" to "value trade" as risks have fallen and growth prospects have improved.

* Falling risks — There have been four key EM risks over the last five years: 1) China, 2) commodities, 3) US$, and 4) deficits. We see signs of greater stability in both commodity and US$ markets. Current account deficits have also reversed across EM; in aggregate, from big deficit to small surplus over the last 2-3 years. China remains a risk with slowing growth and rising private sector debt, but authorities have shown that they still have tools to manage risks. Overall, the risk environment across EM has improved.

* Improving growth — We also see an improving growth backdrop for EM after five years of GDP and EPS downgrades and disappointments. Citi economists expect 2017 to be the first year of "positive GDP growth delta" in over five years driven by Russia and Brazil. We agree. EM is the first region to see EPS stabilise in the last 3 years above 0%, instead of falling from c10% to 0%. EM EPS growth expectations for 2016E have stablised around 6-7%.

* Returns, re-rating, leadership — A falling risk and improving growth mix has been positive for EM equities this year, which have returned c11% YTD and have also been re-rated. Better performance has been accompanied by new leadership, ie Brazil, Russia, risk, value, commodities, Financials. Previous winners have become laggards and sources of funds for this new leadership group.

* Does Europe follow EM's lead? — We think that EM's experience will echo across Europe over the next 12-18 months with reducing risk and improving growth. Reducing risk could come from: 1) unrealised political risk, eg Renzi still in power, no Le Pen government, 2) improving external environment, eg move from "mixed" to "synchronised" global GDP growth (in US$ terms), 3) further strengthening, restructuring, consolidation in European banks. Unless PMIs in Europe and the US fall to the mid-40s or unless there is a big EPS recession in a single (and big) European sector, we think it is likely that EPS growth in 17E is able to reach 5-10%.

* Challenging the consensus — This outlook presents a challenge to many investors in Europe and around the world. A combination of central bank actions and high levels of macro, including political, risk has reduced most financial market participants to "data dependent" status. We see our base case as plausible, reasonable and likely. The implications for European Equities (upside risk) and leadership reversal is not how many investors are positioned. We stick to five conclusions: 

1) Overweight EM, 2) Overweight commodities, 3) don't Underweight Banks, 4) Overweight de-equitisation, 5) hedge political risk.

(Kepler- Cheuvreux) Deutsche Bank - Keep Calm

After the close in Frankfurt but in the middle of trading in New York, another damaging “internal bank document” was leaked to Bloomberg. In it, we learn that “a number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender.” We note that only ten out of 200+ derivatives-clearing clients have made these changes, but the damage was large enough for the stock price to lose another 6.67% in NY. We can only reiterate what we wrote in our Q&A report “Is Deutsche Bank going bust?” yesterday about the liquidity of the bank and the main features of its derivatives portfolio. We reiterate our Buy rating with a Target Price of EUR13.92, but we note that the harrowing pressure faced by the bank has essentially been produced by two press leaks: one presumably from the DOJ and the other one (on Thursday) from an “internal bank document”. We are very far away from fundamental analysis…

(BofA-ML) The flow Show - Inflow Inequality

Since 2002, there have been $1.4tn inflows to passive ETFs vs $1.0tn redemptions from active mutual funds.

>>> Asset Class Flows
- Equities: $5.6bn inflows (largest in 7 weeks) ($4.2bn mutual fund outflows vs $9.9bn ETF inflows)
- Bonds: $9.3bn inflows (largest in 7 weeks) (inflows in 12 of past 13 weeks)
- Precious metals: $0.7bn inflows (largest in 7 weeks)
- Money-markets: $5.7bn outflows

>>> Equity Flows
- Japan: strong $2.2bn inflows (largest 3w inflows in 8 months)
- EM: $1.0bn inflows (inflows in 12 of past 13 weeks)
- Europe: $1.9bn outflows (record 34 straight weeks of outflows)
- US: $4.2bn inflows (largest in 7 weeks)
- By sector: largest healthcare inflows ($0.5bn) in 11 months; chunky $1.0bn inflows to REITs

>>> Fixed Income Flows
- Largest inflows to HY bond funds in 11 weeks ($2.9bn)
- 13 straight weeks of inflows to EM debt funds ($2.4bn)
- $3.2bn inflows to IG bond funds (inflows in 29 of past 30 weeks)
- 12 straight weeks of outflows from Govt/Tsy funds ($1.0bn)
- 54 straight weeks of inflows to Munis ($0.7bn)
- 16 straight weeks of TIPS inflows ($0.2bn)

FT : Outflows from European equity funds approach $100bn

Outflows from European equity funds approach $100bn
Redemptions from European equity funds have approached $100bn as investors race out of an asset class that has been rattled by the uncertain health of the continent’s financial sector.
Funds invested in European stocks suffered $1.9bn of withdrawals in the week to September 28, the 34th consecutive week of outflows, according to fund flows tracked by EPFR. The exodus since mid-February has reached $95bn, the data show.

Anxiety over the health of the European banking system, which recently culminated with a rise in short interest in Deutsche Bank, has persisted from the year’s start and weighed on the region’s nascent recovery.
The European Central Bank has unleashed a wave of stimulus in a bid to rekindle growth and inflation, but has been unable to shake investor concerns. Flight from European stocks has been fanned by a troubled Italian financial sector as well as the UK’s Brexit vote, which is seen as a weight on economic activity throughout the bloc.
Deutsche Bank was thrust to the fore after a report said German officials were drawing up contingency plans in the event it is unable to tap financial markets to meet regulatory requirements resulting from a US fine. The bank has emphasised its strong financial position, but that has not stopped some hedge funds from pulling part of their business from the German group.
“Deutsche Bank’s travails kept mutual fund investors on their toes during the final week of September,” said Cameron Brandt, director of research for EPFR. “Sentiment towards Europe took hits from the setting of a date for Italy’s constitutional referendum and the possibility of higher oil prices sapping regional consumer confidence.”
Gabriela Santos, a strategist with JPMorgan Asset Management, added that there was investor “frustration” over the poor performance in European stocks “driven by fears around financials”. Shares of European bank stocks have slid 28 per cent this year, compared with a 5 per cent fall by their US counterparts.
Investors instead turned to US equities in the latest week, with mutual funds and exchange traded funds invested in the asset class counting $4.2bn of inflows — the greatest weekly addition in more than a month.
The fragility of the European financial sector has been seen as an impediment to the Federal Reserve tightening policy, which has buoyed equity and bond markets, Mr Brandt noted. Overall, bond funds added $9.2bn in the latest week while stock funds took in $5.6bn, a five-week high.
Emerging market stock funds counted $1bn in new capital, lifting their haul since the start of July to nearly $19bn, while flows into EM bond funds hit a nine-week high. Developing market debt has attracted a flood of investor appetite as investors search for higher-yielding assets.
“There is this unrelenting drop in yields,” Ms Santos added. “But it is more than that. It is about the feeling that the worst is over for emerging markets.”

>>> What to look at today - 30th of September 2016

Dow -1.07% S&P -0.93% Nasdaq -0.93% Russell -1.43%
US Market closed lower pushed by DBK (-6.6% in NY). OPEC decision helped sentimeng but not enough to push th broader mkt much higher. DBK traded down almost 10% on news of HF reducing their exposure to Dbk. All eleven sectors finished in the red with utilities (-1.5%), financials (-1.5%), and health care (-1.8%) underperforming while energy (-0.1%) led to the upside. . NXP Semiconductor (NXPI 96.12, +13.88) rallied 16.9% after reports indicated that Qualcomm (QCOM 67.45, +4.00) could be looking to acquire the company.Volume were above average with 971mil shares . US After Hours COST +2% following earnings, MENT +6% on Elliot active stake news, WMT +0.5% with Costco/analyst initiation... CAMP -13% on earnings/guidance, THLD -70% discontinuing Tarloxotinib Program/cutting staff news. Sentiment in Asia is cautious with the focus shifting from rallying energy on OPEC output cut to financials as Deutsche Bank bears the brunt of liquidity concerns; Late in US session, equities swung sharply lower after reports that 10 hedge funds have reduced exposure to Deutsche Bank and clients have reduced collateral on trades; DB spokesperson confident that majority of trading clients understand group has stable financial position. China Caixin Manuf PMI in expansion for the 3rd straight month and in line with consensus. China markets will be closed until next Monday for Golden Week. Japan inflation data show continued deterioration despite the rebound in the energy market. BOJ summary of opinion for most recent meeting stresses flexibility - will inspect yield curve shape at every meeting and not attached to the current 10-yr JGB yield of near zero.

Nikkei -1.47% Hang Seng -1.42% CSI +0.32% Shanghai +0.16%

Eur$ 1.1217 CNH 6.6796 CNY 6.67 JPY 101.06 GBP 1.2959 CHF 0.9660 RUB$ 63.1197 WTI$ 47.49 (-0.71%)

S&P -0.39% EuroStoxx -1.60% Dax -1.55% FTSE -0.94% SMI -0.98%

Macro :
- MSCI Continues to Monitor Development in China A Shares Market
- U.S. Seeks Joint Settlement of Banks’ Mortgage Claims, FT Says

Keep an eye on :
- ABBN VX : ABB Completes Share Buyback Program, Bought ~$3.5b of Shares
- AIR FP : Airbus Group Likely to Merge With Main Planemaking Unit: Reuters
- AIR FP : Boeing Said Near Widebody Jet Sale to Qatar Air After F-15 Deal
- AAPL US : Apple Pay to Start Working in Russia in October, Vedomosti Says
- AREVA FP : Areva Won Several Contracts Valued at More Than EU5b
- BPM IM : BPM May Not Pay Back Shrs Subject to Withdrawal Rights: Radiocor
- DBK GY : Deutsche Bank Liquidity Stable, Bolstered by ECB, Goldman Says
- DBK GY : Deutsche Bank Says Prime Brokerage ‘Still Very Profitable’: CNBC
- DBK GY : Deutsche Bank Dec. $8 Puts Most Active vs Shares at $11.48
- DBK GY : Some Deutsche Bank Clients Want ‘Triparty’ Credit Deals: CNBC
- ERICB SS : Sweden Wants Ericsson to Clarify Plans for Sweden, DI Reports
- ERF FP : Eurofins Buys Megalab in Spain for About EU40m
- GLEN LN : Glencore’s Chemoil to Retire $71m+ in Renewable Energy Credits
- INGA NA : ING Said to Cut Thousands of Jobs, Financieele Dagblad Reports
- DEC FP : JCDecaux Unit Gets 20-Yr Tokyo Advertising Bus Shelter Contracts
- KER FP : Kering Names Beretta Chief Client, Marketing Officer
- RBI AV : Raiffeisen May Want to Extend Deadline in Polish Unit Sale:Rp.pl
- RNO FP : Ghosn: Renault to Sell Well Over 3M Cars This Year: Echos
- REP SM : Sacyr Hedges 20m Repsol Shares Through Derivatives Contract
- SFL US : Ship Finance to Offer $200m in Convertible Notes
- GLE FP : SocGen Deputy CEO Not Afraid of Adjustments Banks May Need
- TKA AV : America Movil Won’t Restructure Telekom Austria for Now: Presse
- TKWY NA : Takeaway.Com Sets IPO Price at EU23/Share; Trading Starts Friday
- TEF SM : Telefonica Calls Off Telxius IPO Due to Market Valuation
- VIV FP : Vivendi Says Would Like to Be Represented on Ubisoft Board

>>> Europe : Brokers Upgrades & Downgrades - 30th of September 2016

>>> Up
*BASF RAISED FROM SELL TO HOLD AT BAADER, PT RAISED FROM €55 to €80 {NSN OEAZ5R6KLVR9 <GO>}
*BURBERRY RAISED TO SECTOR PERFORM AT RBC CAPITAL
*CAPITA RAISED TO NEUTRAL VS SELL AT GOLDMAN {NSN OEAZ5S6TTDSH <GO>}
*FAGRON RAISED TO BUY FROM HOLD AT ING; PT RAISED TO EU11.50
*JRP GROUP RAISED TO OVERWEIGHT VS EQUAL WEIGHT AT BARCLAYS

>>> Down
*AUSTRIAN POST CUT TO UNDERWEIGHT VS EQUAL WEIGHT AT BARCLAYS
*CEWE STIFTUNG CUT TO HOLD VS BUY AT BERENBERG
*COMMERZBANK CUT TO HOLD VS BUY AT HSBC
*DNB ASA CUT TO SELL AT NORDEA
*EDF CUT TO SELL VS REDUCE AT ALPHAVALUE
*ELIS CUT TO HOLD VS BUY AT DEUTSCHE BANK
*HEXAGON CUT TO HOLD AT NORDEA
*STANDARD CHARTERED CUT TO ADD VS BUY AT ALPHAVALUE

>>> PT Change


>>> Initiation
*ORIGIN ENTERPRISES INITIATED AT BUY AT LIBERUM, PT EU7.5

>>> Call

>>> Asian Update

Asia Mid-Session Market Update: China Caixin manufacturing PMI holds in expansion; Deutsche Bank uncertainty grips market sentiment

***Asia Notes/Observations***
- Sentiment in Asia is cautious with the focus shifting from rallying energy on OPEC output cut to financials as Deutsche Bank bears the brunt of liquidity concerns; Late in US session, equities swung sharply lower after reports that 10 hedge funds have reduced exposure to Deutsche Bank and clients have reduced collateral on trades; DB spokesperson confident that majority of trading clients understand group has stable financial position.
- China Caixin Manuf PMI in expansion for the 3rd straight month and in line with consensus; New Orders and Inventories improved; Manufacturing employment deteriorated for the 9th straight month; Economist warns that slowing rate of fiscal income suggests insufficient momentum to drive future economic growth.
- China markets will be closed until next Monday for Golden Week.
- Japan inflation data show continued deterioration despite the rebound in the energy market; AUG National AUG CPI down for 6th month at 3-year lows; SEPT Tokyo core-core CPI turns negative for the first time since 2013; Japan industrial output is the silver lining in data set with a 2-year high rate of y/y growth.
- BOJ summary of opinion for most recent meeting stresses flexibility - will inspect yield curve shape at every meeting and not attached to the current 10-yr JGB yield of near zero.

***Top US session headlines***
- (US) Q2 FINAL GDP ANNUALIZED Q/Q: 1.4% V 1.3%E; PERSONAL CONSUMPTION: 4.3% V 4.4%E
- (US) Fed's George (hawk, dissenting voter): job market is showing continued momentum - CNBC interview
- (US) Fed's Powell (moderate, FOMC voter): Fed can continue to be patient; supports gradual path for rate increases
- DBK.DE: Reportedly 10 hedge funds have reduced exposure to Deutsche Bank, hedge fund clients have reduced collateral on trades - press

***US markets on close: Dow -1.1%, S&P500 -0.9%, Nasdaq -0.9%***
- Best Sector in S&P500: Basic Materials
- Worst Sector in S&P500: Healthcare / Financials
- Biggest gainers: CAG +7.2%, QCOM +6.3%, RIG +6.1%, MUR +4.9%, MRO +4.7%
- Biggest losers: CHK -9.3%, MPC -6.8%, TSO -6.4%, ENDP -6.4%, VLO -6.2%

***VIX 14.02 (+1.6pts); Treasuries: 2-yr 0.73% (-2bp), 10-yr 1.56% (-1bp), 30-yr 2.28% (-1bp)***

***US movers afterhours***
- MENT +5.3%; Elliott Associates, L.P. discloses 8.1% stake; have initiated dialogue with management - 13D filing
- CEMP +4.1%; Announced interim results showing anti-NASH effects in the first six nonalcoholic steatohepatitis (NASH) patients dosed with solithromycin in a Phase 2 study
- COST +1.7%; Reports Q4 $1.77 v $1.73e, R$36.6B (total) v $36.6Be
- ABUS -10.2%; Reports interim multi-dose results from Phase II clinical trial of ARB-1467 in patients with Chronic HBV Infection
- CAMP -13.7%; Reports Q2 $0.27 v $0.28e, R$90.5M v $92.1Me; Guides Q3 $0.24-0.30 v $0.32e, R$81-87M v $93.7Me

***Equity Futures (23:30ET): S&P e-mini -0.3%, Dax -0.3%, FTSE100 -0.4%***

***FX / Commodities ranges (23:30ET):***
- EUR 1.1205-1.1225; JPY 100.90-101.75; AUD 0.7615-0.7635, NZD 0.7230-0.7260
- Gold -0.1% at 1,325/oz; Oil -0.5% at $47.56/brl; Copper -0.3% at $2.18/lb

***Asian Equity Markets (23:30ET)***
- Nikkei -1.6%, Hang Seng -1.3%, ASX -0.6%, Shanghai +0.1%, Kospi -0.9%

***Key economic data:***
- (CN) CHINA SEPT CAIXIN PMI MANUFACTURING: 50.1 V 50.1E; 3rd straight month of expansion
- (JP) JAPAN AUG JOBLESS RATE: 3.1% V 3.0%E; First rise since Feb 2016
- (JP) JAPAN AUG PRELIMINARY INDUSTRIAL PRODUCTION M/M: 1.5% V +0.5%E; Y/Y: 4.6% (2-year high) V 3.4%E
- (JP) JAPAN AUG NATIONAL CPI Y/Y: -0.5% (biggest decline in 3 years; 6th straight decline) V -0.5%E; CPI EX FRESH FOOD (CORE) Y/Y: -0.5% V -0.4%E; CPI Ex Food and Energy (core-core) Y/Y: 0.2% v 0.2%e; 3-year low
- (JP) JAPAN AUG OVERALL HOUSEHOLD SPENDING Y/Y: -4.6% V -2.1%E; 5th straight decline and biggest decline in 5 months
- (JP) JAPAN SEPT TOKYO CPI Y/Y: -0.5% V -0.5%E; CPI EX-FRESH FOOD Y/Y: -0.5% V -0.4%E
- (AU) AUSTRALIA AUG PRIVATE SECTOR CREDIT M/M: 0.4% V 0.5%E; Y/Y: 5.8% V 5.9%E
- (AU) AUSTRALIA AUG HIA NEW HOME SALES M/M: +6.1% V -9.7% PRIOR
- (NZ) NEW ZEALAND AUG BUILDING PERMITS M/M: -1.0% V -8.1% PRIOR (2nd consecutive month of decline)
- (NZ) NEW ZEALAND SEPT ANZ ACTIVITY OUTLOOK: 42.4 (2-year high) V 33.7 PRIOR; BUSINESS CONFIDENCE: 27.9 V 15.5 PRIOR
- (KR) SOUTH KOREA AUG INDUSTRIAL PRODUCTION M/M: -2.4% V -0.6%E; Y/Y: 2.3% V 1.6%E
- (KR) SOUTH KOREA SEPT PMI MANUFACTURING: 47.6 V 48.6 PRIOR
- (KR) South Korea OCT Business Manufacturing Survey: 75 v 74 prior; Non-Manufacturing Survey: 75 v 75 prior
- (UK) SEPT GFK CONSUMER CONFIDENCE: -1 V -5E; 3-month high

***Speakers / Press / Fixed Income***
China:
- (CN) CBA economist: Latest China PMI number lower the hurdle for a Fed rate hike this year; Suggests greater stability in global economy - financial press
- (CN) Bank of China (BOC): China GDP estimated around 6.7% in Q4; Major economic indicators point to stabilization - China Daily
- (CN) According to one survey, PBoC may switch its policy stance to one of broad monetary tightening as soon as 2017 - financial press
- Treasury Sec Lew: inclusion of yuan in currency basket this year is still quite a ways away from yuan being considered reserve currency

Japan:
- (JP) BOJ Summary of Opinions for Sep 22nd (most recent) meeting: Felt it was imperative to ensure sustainability of policy; Uncertain if pace of JGB buys will slow down under YCC; Will examine appropriate yield curve shape at every meeting; Should adjust framework, be flexible to meet price goal.
- (JP) BOJ Gov Kuroda: Central banks today faced with number of challenges
- (JP) BOJ offers to buy ¥410B (down from ¥430B prior) in 5-10yr JGBs, ¥200B in 10-25yr JGBs, ¥120B in JGBs with maturity over 25yrs, and ¥1.75T in T-Bills

Australia:
- (AU) Australia MoF (AOFM) sells A$0.9B in 3.25% 2025 Bonds; avg yield: 1.888%; bid-to-cover: 1.66x

***Asia movers***
- Medibank MPL.AU +2.5%; Macquarie Raised to Outperform
- Woolworths WOW.AU -0.1%; Caltex said to be in final stages of talks to buy Woolworths petrol stations - press
- Worlepyparsons WOR.AU -1.1%; UBS lowers stake to 8.0% from 9.0%
- Beach Energy BPT.AU -1.5%; Shell said to sell its 2.4% stake in Beach Energy - Australian press
- Hyundai Heavy 009540.KR -1.8%%; UBS Cuts 009540.KR to Sell from Neutral
- China Everbright Internationa; 257.hk -5.4%; Cut at Daiwa
- Southern Cross Media SXL.AU -14.22%; Nine Entertainment NEC.AU +5.1%; Nine sells 9.99% stake