TheChek News Flow

- Says AIIB has 57 founding members and could rise to 100 (has 30-40 countries looking to join the development bank)

case, we use scenario analysis around PE and EPS assumptions to

quantify potential further downside risks to European equities. On

today's N12M PE of 13.6, we estimate the market is pricing in a 2-

year EPS CAGR of c. 4%.

Recent macro newsflow has been more bear case than base case.

Although we argued that 2016 would be a tough year for European equities in

our year ahead report, we did not expect such a bad start to the year. Over the

last couple of months, the macro newsflow has broadly followed our bear case

scenario, especially around EM deterioration and FX tension. The lack of an

identifiable bull case is encouraging greater short activity in equities and

commodities.

12% downside before absolute valuations become appealing in their

own right

Absolute equity valuations are not yet low enough to warrant buying the

market on valuation alone, with MSCI Europe's N12M PE at its long-run

average. We calculate that the market would need to fall a further 12% to take

the average of 17 different absolute valuation metrics back to their long-run

median level.

Scenario analysis - we estimate market is pricing in 4% 2Y EPS CAGR at

N12M PE of 13.6.

The market is currently midway between our base case and bear case 12m

price targets, although equity valuations are now at our bear case PE

assumption of 13.6. At a N12M PE of 13.6 we estimate that the market is

currently pricing in a 2Y EPS CAGR of about 4%, while a move down to an EPS

CAGR of 0% would equate to a further 7% drop in equity prices. We estimate

33% downside under a full-blown recession scenario of a 20% drop in EPS and

a N12M PE of 12.

Key factors to watch - Earnings, China, EM, Fed.

The key factors likely to influence market performance in the coming weeks

and months are: i) Earnings season; ii) China & EM macro newsflow (especially

FX related); iii) USD and Fed commentary; iv) Industrial & commodity

performance; v) any signs of weakening in European macro newsflow.

Sector strategy - between a rock and a hard place

We have been too bullish on commodities and too bearish on defensives over

the last four months. With European quality stocks trading at a record high to

their US peers, coupled with a high degree of consensus positioning, we don’t

want to make a wholesale U-turn; however, we recognise the need to be

pragmatic. Consequently, we downgrade Energy to neutral and Div Fins to

underweight, while upgrading Telecoms to overweight and Healthcare to

neutral.

* Equities: $3.5bn outflows (3-week outflows = $24bn) (note $5.1bn mutual fund outflows offset by $1.7bn ETF inflows)

* Bonds: $2.8bn outflows (largest in 4 weeks)

* Commodities: $0.8bn inflows (inflows in 6 of past 7 weeks)

* EM: $2.3bn outflows (largest in 19 weeks) (12 straight weeks of outflows)

* US: $4.3bn outflows (all via mutual funds)

* Europe: $0.6bn inflows (inflows in 15 of past 16 weeks)

* Japan: $3.0bn inflows (largest in 18 weeks)

* Equity sector flows do question market leadership: funds covering tech, financials, & consumer sectors all record largest weekly outflows in 21 weeks ($3.1bn outflows combined); healthcare also sees largest outflows in 14 weeks.

* Big $4.9 outflows from HY bond funds (2nd largest outflows in 12 months)

* Chunky $2.3bn outflows from EM debt funds (largest in 20 weeks) (outflows in 23 of 26 weeks)

* 12 straight weeks of outflows from bank loan funds ($0.7bn) (outflows in 24 of past 25 weeks)

* IG bond funds also succumb to $1.0bn outflows

* Huge $5.1bn inflows to Govt/Tsy funds (largest in almost 12 months) 18 straight weeks of inflows to Munis ($0.5bn)

--> Bond flows recessionary: largest inflows to government bond funds in 12 months ($5bn), 2nd largest outflow from HY funds in 12 months ($4.9bn - HY outflows over past 7 weeks = 5% AUM = capitulation), and chunky outflows from EM debt ($2.3bn).

--> Equity flows not recessionary: modest weekly equity redemptions of $3.5bn; equity outflows past 3 weeks = $24bn outflows (= 0.3% AUM)…this pales in comparison to $36bn during Aug'15 sell-off, $90bn during Aug'11 debt ceiling sell-off, $85bn during '08 GFC; flows mirror Jan FMS findings…positioning yet to reveal Full Capitulation.

--> Price action shows policy impotence & Quantitative Failure: since Japan expanded ETF purchases Dec 18th the Yen is +2.9%, Nikkei -16.6%; since ECB cut rates Dec 3rd the Euro is -1.1%, Euro Stoxx 600 -11.6%; and since Fed hiked on Dec 16th the S&P is -9.4%, 2yr yields are -18bps, 10yr yields -29bps. 3P’s say…: lacking true Positioning shake-out, lacking catalysts for Profit turnaround & lacking visible Policy panic, we remain “sellers into strength” of risk assets.

for the first time in 18 months, and with financial risk now likely

receding, our Underweight call has run its course – we move EW.

more or less fair value. We forecast EPS of €2.89 in 2015 (consensus €3.22)

and €3.44 in 2016 (consensus €3.62) – including the €0.42 dilutive impact of

Casino's two perpetual bonds, but excluding the €0.37 dilutive impact of

Monoprix's convertible. This implies that the shares are trading on a P/E of

12.3x in 2015 and 10.3x in 2016. A potential disposal of operations in Asia

could lead to pro forma EPS dilution of €0.55-0.60 in 2016 (~17%), we

estimate, such that at the current share price of ~€35.2, Casino would trade on

a 2016 P/E of ~12.4x. In our marked-to-market SOTP, we get to €38.0 per

share, valuing the French operations on 7.7x underlying 2016 EBITDA (€768m),

in line with the European food retail average.

Why aren't we more constructive? 1) Casino shares are trading at a small

discount to their SOTP-derived value. This is fair, in our view, given the Group's

increased complexity (particularly post the GPA/Exito share transfer in 2015),

limited disclosure (e.g. on real estate capital gains), tax leakage and the need to

upstream cash flow to Casino's parent, Rallye. 2) We see earnings/FX risk for

Casino's subsidiary in Brazil. 3) The proceeds from a disposal of Casino's Asia

operations may be lower than the market anticipates, as there are reportedly

very few bidders and the only official bidder so far (the Chirathivat family)

already has a ~25% stake in Big C (which could deter other potential bidders).

4) While Casino and Rallye's liquidity profiles look fine, we think Casino's

ability to deleverage (ex. M&A) will remain limited for the forseeable future

(FCF at the HoldCo of ~€100m in 2016e), and its loan-to-value ratio will

remain decently high (close to 50% post disposal of operations in Asia).

What could we be missing on the upside? 1) M&A may well remain a

feature. We would view positively Casino transferring its remaining shares in

Grupo Pão de Açúcar (GPA) to Exito as this would simplify the Group's

structure. 2) Another positive would be a rapid and meaningful decline of

Cnova's operating losses (~18% potential EPS accretion in 2016e). 3) Casino

would benefit from a more favourable FX and macro environment in LatAm

(we calculate a ~17% potential impact on Casino's SOTP if COP and BRL revert

to their rate vs EUR on 1st January 2013).

case, we use scenario analysis around PE and EPS assumptions to

quantify potential further downside risks to European equities. On

today's N12M PE of 13.6, we estimate the market is pricing in a 2-

year EPS CAGR of c. 4%.

Recent macro newsflow has been more bear case than base case.

Although we argued that 2016 would be a tough year for European equities in

our year ahead report, we did not expect such a bad start to the year. Over the

last couple of months, the macro newsflow has broadly followed our bear case

scenario, especially around EM deterioration and FX tension. The lack of an

identifiable bull case is encouraging greater short activity in equities and

commodities.

12% downside before absolute valuations become appealing in their

own right

Absolute equity valuations are not yet low enough to warrant buying the

market on valuation alone, with MSCI Europe's N12M PE at its long-run

average. We calculate that the market would need to fall a further 12% to take

the average of 17 different absolute valuation metrics back to their long-run

median level.

Scenario analysis - we estimate market is pricing in 4% 2Y EPS CAGR at

N12M PE of 13.6.

The market is currently midway between our base case and bear case 12m

price targets, although equity valuations are now at our bear case PE

assumption of 13.6. At a N12M PE of 13.6 we estimate that the market is

currently pricing in a 2Y EPS CAGR of about 4%, while a move down to an EPS

CAGR of 0% would equate to a further 7% drop in equity prices. We estimate

33% downside under a full-blown recession scenario of a 20% drop in EPS and

a N12M PE of 12.

Key factors to watch - Earnings, China, EM, Fed.

The key factors likely to influence market performance in the coming weeks

and months are: i) Earnings season; ii) China & EM macro newsflow (especially

FX related); iii) USD and Fed commentary; iv) Industrial & commodity

performance; v) any signs of weakening in European macro newsflow.

Sector strategy - between a rock and a hard place

We have been too bullish on commodities and too bearish on defensives over

the last four months. With European quality stocks trading at a record high to

their US peers, coupled with a high degree of consensus positioning, we don’t

want to make a wholesale U-turn; however, we recognise the need to be

pragmatic. Consequently, we downgrade Energy to neutral and Div Fins to

underweight, while upgrading Telecoms to overweight and Healthcare to

neutral.