(MS) European Equity Strategy

* Pharma is the most oversold sector, trading 3SD below the 12M average relative price, both the breadth of outperformance and relative PEs are at 5Y lows, while relative earnings estimates have been stable.

* Banks’ relative PE is lower than at any point during the GFC and the relative PBV is close to all-time lows.

* Capital Goods appears overbought with an RSI of 74, but earnings revisions have been strong.

* 88% of Energy stocks have outperformed in the last 3M and relative price trends have significantly outperformed relative earnings.

* Telecomms have only been more expensive 4% of the time in the last 10Y.

(GS) Strategy Matters - Why does the stock market diverge from the economy?

Why does the stock market diverge from the economy?

Last year, while Stoxx Europe 600 earnings dropped c.2%, Euro area GDP grew a decent 1.5% (above trend). We investigate the dichotomy between the European equity market and the economy and find three key areas of substantial divergence: (1) sector and country composition, (2) international exposure, and (3) sector deflationary forces. We believe that a change in the deflationary narrative (a stabilisation in the oil price) and improvement in Financials would narrow the gap between the two spheres.

Heightened dichotomy between equities and the economy
2016 EPS estimates have been revised down 8% year-to-date and marketimplied EPS growth by our DDM is negative. In the meantime, our economists expect 1.4% GDP growth in the Euro area in 2016 – this figure is above trend, and comes after a reasonably good outturn last year too.

1. A different sector and country composition
Should the composition of the equity market be equivalent to that of the economy, SXXP earnings would have grown c.5% in 2015 rather than actually declining 2%. Financials is four times larger in the equity market, Oil & Gas represents 5% of the equity market vs. 1% of the economy, and UK equities are almost twice the size of German equities.

2. A different exposure to the international
While the equity market has 40% international sales exposure (6% to China), the Euro area economy is mainly domestic, with only 1% exposure to China (% of GDP).

3. Different deflationary forces
Our reconstructed price index, reflecting the sector composition of the European equity market, is much more subdued than actual Euro area CPI.

(HSBC) French Telcos - Consolidation talks are off, price pressure risk is on

Consolidation talks are off, price pressure risk is on

* Orange ends talks with Bouygues, marking the end of a consolidation process that would have benefited all operators
* Back to square 1: subscale players may pursue low price strategies and put pressure on all participants’ free cash flows
* We cut TPs for all French operators we cover based on lower2016-17 ARPU forecasts; our ratings are unchanged

(BofA-ML) French telcos: a gap too large to bridge

French telcos: a gap too large to bridge
• No Orange/BTel deal - M&A likely off the table for now. Obligation to cohabit could reduce promos
• Social and execution risk angles known, valuation /state position likely hurdles. Next trigger: Bouygues fails to restructure
• Recent gains likely to vanish, Orange to be less hit due to weaker stock perf, lack of dilutive deal and solid fundamentals

* Orange / Bouygues Tel talks collapse opens new era
Despite opportunities, we believe France is set to remain on the side lines of the consolidation wave hitting most of Europe. The current market equilibrium will likely remain precarious with Orange regaining momentum but not properly monetizing high speeds, Bouygues and Iliad so far not generating much FCF, and NUM-SFR underperforming operationally. Some of the “tactical” promotions may not be renewed as all four operators need to improve their economics on the current market structure, but this is by no means guaranteed, and in our view will determine to a degree the outlook for French telco stocks in the remainder of 2016. We expect broad based price pressure on Monday with Orange somewhat less impacted. Going forward we continue to like Buy rated Orange and Iliad vs Neutral-rated NUM and Bouygues.

* Reasons for failure: State + valuation likely main hurdle
Despite some concerns in the market, Orange has not compromised, and in our view has walked away from a deal that would not have created sufficient shareholder value. Bouygues claims some of its core criteria could not be met and cited 1) employee protection, 2) the level of Bouygues’ stake in Orange and related governance, 3) execution
risk, and 4) B-Tel’s valuation. We believe issue (1) was manageable by Orange, while (3) was known by Bouygues to a degree before engaging with Orange. This leaves the stake, governance and price as the main hurdles, in addition to execution risk linked to clauses imposed by some parties. The press (Les Echos) relayed Economy's minister Macron's efforts to limit Bouygues' influence on Orange by increasing Orange's valuation in the deal (up to €19), preventing Bouygues from increasing its stake for seven years and cancelling Bouygues’ double voting rights for ten years, even if sold to a third party.

* Stock implications: back the solid fundamental stories
We expect heavy turbulence on Monday with all four French telco stocks having outperformed the sector significantly since early December when news of talks first came out. Post the end of week adjustments, NUM had outperformed the sector by 23.7%, Iliad 17.5%, Bouygues 13.5% and Orange 9.6%. We believe positioning in the deal will play a key role, and would expect the stocks to give up most of this outperformance in the absence of significant change in fundamentals. Orange should be somewhat more immune, with the company avoiding a potentially value dilutive deal, and valuation providing solid support at current levels.

(CS) Rolls-Royce - Too early to play Rolls-Royce 2.0

* Rating cut to Underperform: The improved disclosure will allow investors to determine if and when an earnings recovery story will be ready to unfold. We adhere to the idea that the strong increase in installed base will drive
aftermarket growth in the future, but it appears too early still to determine how strong this drive will be (with many moving parts still not stabilised). In the meanwhile, it highlights the short term pressure coming from various
areas of the group (bizjet and regional jet engines, widebody OE, Marine, Defence Aerospace). We believe that the current price levels are anticipating too much of the possible improvement at the end of the decade, with an
unbalanced risk / reward. We cut our rating to Underperform (vs Neutral)

* Earnings changes: As a result of our model reconstruction to reflect the new disclosure elements, we have revised our operating income expectations by -5%, -14% and +2% for 2016-18. This results from cuts in Defence and Marine, with some adjustments up to Civil Aerospace. We are respectively 1%, 9% and 8% below company-provided consensus. We have also reduced our FCF forecasts by GBP180m on average over the period.

* Catalysts: H1 results in July 2016, AGM on May 5.

* Valuation: We revise our target price to 540p (vs 530p), indicating 21% downside potential. It is based on a 2018 SOTP. On this basis, the stock would trade on EV/EBIT of 10.6x and 7.8x 2018E and 2019E, vs a 2004- 2015 average of 9.9x. Using a 2020 SOTP (assuming that nothing new goes wrong) would yield a valuation of 750p, offering a too-limited upside of 10%, in our view.

>>> Sika shareholder J. Stern & Co says Saint-Gobain should make same offer to a

Sika shareholder J. Stern & Co says Saint-Gobain should make same offer to all shareholders 

Sika shareholder J. Stern & Co has criticized the takeover by French chemicals group Saint-Gobain, Tagesanzeiger reported. The Swiss daily cited Jérôme Stern, chief of the Geneva/London based investor, who told French language Sunday newspaper that Le Matin Dimanche Saint-Gobain will buy the best assets in favourable conditions and take them to France. Stern said the sale should not be allowed unless Saint-Gobain makes the same offer to all shareholders and not just to the founding Burkard family.

Stern noted that the Saint-Gobain's share has barely moved since 2000, while the Sika share has gained 15.7% annually, the report stated.

Stern has held shares in the Swiss chemicals group since 2005, the report noted.

Tagesanzeiger

>>> What to look at today - 4th of April 2016

Asian equity markets are modestly higher with limited participation, as China/Hong Kong indices are closed for holiday. Investors are digesting a fairly solid US jobs report on Friday that saw the change in non-farm payrolls beat, hourly wages recover from prior month's poor showing, and unemployment to tick up on a slight expansion in labor force. In Japan, more data from the BOJ's Tankan survey revealed corporates reducing their expectations for inflation with a 1-year time horizon to just 0.8% from 1.0%. Later in the session, PM Abe was reportedly preparing to outline the specifics of frontloading FY16 budget at a cabinet meeting tomorrow. Among notable developments in the M&A landscape, Sharp was up nearly 5% headed toward close after reports late on Friday that it reached an agreement with banks on loan terms as part of the Hon Hai bailout.

Nikkei -0.57% Hang Seng Closed Shanghai Closed

Eur$ 1.1391 CNH 6.4694 CNY 6.4818 JPY 111.40 GBP 1.4222 CHF 0.9589 RUB$ 68.2040 WTI$36.40(-1.10%)

S&P+0.12% EuroStoxx-0.25% Dax+0.20% SMI+0.15%

Macro :
Jobs Report Gives Yellen Only Half of What Fed Chair Wants
FT : IMF weighing exit from Greek bailout - http://on.ft.com/1Uzzqf7
Trump Sees U.S. Headed for ’Very Massive Recession’: Wash. Post
Copper Price Is Forecast to Weaken This Quarter, Barclays Says

Keep an eye on :
- ABI BB : S. African Regulator Seeks SAB/AB InBev Extension: Business Day
- ABG SM : Abengoa Sells Campo Palomas Wind Park in Uruguay
- ADP FP : Zurich Airport May Bid for Nice Airport: Schweiz am Sonntag
- AF FP : Servair sale sees Newrest emerge in poll - JDD
- ATLN VX : Actelion Says EMA Readopeted Positive Opinion on Uptravi in PAH
- AIR FP : Airbus Says U.K. Financing Requests Had Inaccuracies - FT : http://on.ft.com/1M89x3x
- AIR FP : Airbus Can’t Use Some U.K. Guarantees on ‘Inaccuracies’ (Friday)
- CRG IM : Apollo Targets Rescued Italian Banks With Carige Offer: Ansa
- EN FP : Orange Abandons Bid to Buy Bouygues’ Phone Unit
- EN FP : Bouygues Says Only Three Out of Four Players Wanted Deal: Figaro
- CNA LN : Centrica hires JPMorgan to advise on potential tie-up with Engie - Sunday Times
- FDSA LN : takeover target for US private equity house Advent International - FT
- DPW GY : Deutsche Post Plans 2,000 Streetscooter E-Cars in 2016: Focus
- ENGI FP : Centrica hires JPMorgan to advise on potential tie-up with Engie - Sunday Times
- ILD FP : Iliad Reiterates Targets as Orange Abandons Bouygues Bid
- KCR1V FH : Terex, Zoomlion Still in Active Talks: DealReporter
- LSE LN : Xavier Rolet: tie-up between LSE and Deutsche Boerse is best deal on the table http://bit.ly/1UB0DOL
- MS IM : Vivendi Said Near Deal to Buy Mediaset Premium Controlling Stake
- NG/ LN : National Grid accused of energy ‘panic’ over coal deals - FT
- ORA FP : French Telecom Regulator Sees Four Phone Operators for Some Time
- PHIA NA : Melrose Said to Drop Out of Bidding for Philips Lighting
- PST IM : Italy May Sell Additional Stake in Poste Italiane, Corriere Says
- RNO FP : Renault, Spanish Unions Reach Deal on Pay Rise: Economista
- SAN SM : Santander Planning to Cut Senior U.K. Staff, Sunday Times Says
- SIKA VX : Sika Shareholder Stern Says Burkard Family Has Options: Le Matin
- HOT US : Chinese Phrase Adds Mystery to Anbang’s About-Face on Starwood - NYT - http://nyti.ms/1UKLUB3
- TSLA US : Elon Musk Says 276,000 Pre-Orders for Model 3 as of Sat. Night
- TLW LN : Tullow Oil Extends Jubilee Field Shutdown to April 9
- VA US : Virgin America Sale Could Come as Early as Monday: Fox Business
- VA US : Alaska Air nears deal to buy Virgin America for over $2 billion: sources - Reuters http://reut.rs/222hSrl
- CSS FP : Vivarte could take a look at Bata - JDD
- VOW3 GY : VW’s U.S. Dealers Form Panel to Lead Negotiations: Auto News
- VOW3 GY : VW Says It Remains ‘Fully Committed’ to U.S. Market
- YHOO US : Time Inc Said to Consider PE Partner for Yahoo Bid: Reuters