note attached
Fed: a case of “travel and arrive” - tactically closing our bearish commodities view – upgrading Mining
* The eagerly awaited Fed meeting is upon us. Regardless of the actual decision,
we suggest that the market impact could end up being positive. If the Fed
does raise rates, but at the same time reassures the market that this will be a
gradual process, it would be received well. If, on the other hand, the Fed delays
the move, this could be interpreted as a signal that the Fed is aware of and is
responding to recent market concerns. A delay could dampen the link between
the DXY and commodity prices.
* Even though inaction might be seen as prolonging market anxiety, the key in
our view is that investors get to know what the new Fed’s reaction function is.
One of the main current investor concerns is over the lack of clarity from
central banks. We believe that the policymakers are still on the side of the
risky assets and will act supportively; the ECB opening the doors to QE2 is a
case in point.
* We have been cautious on commodity equities for a while, but are now advising
to tactically add exposure – upgrading Mining to OW and upgrading Energy
to Neutral.
* Specifically for Mining, we highlight the following:
1) Risk-reward is improving as the sector is by far the worst performer ytd,
down almost 30% in absolute terms.
2) Iron ore price has picked up since July, now up 30%+ from lows. From
current spot levels, JPM projections are for broadly range-bound commodity
prices next year. EPS downgrades have already been severe, with the Mining
EPS integer down 80% from highs. Unless commodity prices fall significantly
further, downside is likely limited from here.
3) Bearishness on China is omnipresent these days, but we note some improving
datapoints: Auto sales were up 12% mom for August; steel PMI is up from 37
at the lows to 45 currently; infrastructure orders appear to be bottoming out to
meet annual budget plans; and property transactions are stabilizing.
4) The Fed event could act as a positive catalyst, offering clarity. A case of
"travel and arrive".
5) The sector is clearly doing self-help. Major Miners’ capex spend has
halved over the past three years. Companies are working to improve their
balance sheet health.
6) Mining valuations have improved, with P/B relative at its lowest since 2001.
* We reiterate our call from 1st September that recent market weakness is
unlikely to be a start of a prolonged fall, but a correction which one should
use to add exposure. Regionally, we remain OW Japan and Eurozone, and stay
UW the US. We are bullish on Eurozone recovery plays – Banks, Construction
Materials, Travel & Leisure, Media and Retail. We find global consumer plays,
such as Autos, as attractive. In addition to our Mining upgrade, we close the
Energy short as the sector has performed poorly and valuations are improving.
We fund the move into commodities by downgrading Capital Goods to Neutral.
Capital Goods have held up surprisingly well ytd, to be 2% above the market.
The sector valuations are unexciting, and global capex concerns remain.
Valuation, synergies and capital return attractive; onto CL-Buy
Nokia has underperformed our EU tech coverage by 18% ytd. In our view this reflects an overly bearish outlook for the wireless market, caution on the proposed ALU deal, and fears of large patent delays. By contrast, we see scope for margin improvement given industry consolidation, while Nokia should have a competitive advantage vs. Ericsson given its converged portfolio. Moreover, Nokia’s management has a strong track record in cost control, underpinning our confidence in its synergy target. Finally, we see scope for sizeable capital returns following the deal. In this context, we view the current PF 9x 2018E EPS (6x ex-cash) as attractive; remain Buy, onto CL.
We expect the proposed offer period with Alcatel to open in late 2015 (pending Chinese approval), and close in early 2016, allowing Nokia to bring forward its capital return plan. Moreover, we continue to expect Nokia to reach a 9.7% EBIT margin in Networks in 2015, and see longer-term improvement potential given industry consolidation, more rational pricing, and continued effective cost control. Finally, we expect one of Nokia’s patent arbitrations to be resolved in the coming months (as per company), and continue to see longer-term upside from improved patent monetization.
Our 12-month PT falls to €8.7 from €9.0 (ADR $9.5, from $9.8) based on a core value/sh of €8.4, reflecting a lower patents DCF value (we cut Patents revenues by 5%-10% in 2015-19 given lower handset estimates), but a higher Networks multiple of 8x (from 7x) given our view that industry profitability is improving. Our M&A value/sh of €9.1 is based on a pro-forma SOTP, valuing Nokia/Alcatel Networks at 8x pro-forma 2016E EBITDA (in line with Ericsson’s historical median multiple). Pending regulatory approval in China, we continue to give the M&A scenario a 50% weighting.
Alrosa and Kristall may merge
Kristall, the Russian diamond-cutting group, could be merged with Alrosa, the state-owned Russian diamond concern, Vedomosti reported. The merger was being discussed by the Russian government, the Russian-language daily cited Maxim Shkadkov, the CEO of Kristall, as saying.
The item cited Shkadkov as supporting the move, saying everyone would benefit from the merger.
Various options were being examined to carry out the merger including a recapitalisation of Alrosa by transferring the company capital of Kristall to the diamond group, the report continued citing Shkadkov as saying.
An alternative would be to transfer the diamond processing operations of Alrosa to the capital of Kristall, the item added.
The report cited a source close to Rosimushchestvo, the Russian property agency, who said that the operation had been under discussion in the agency for over a year.
Kristall has a turnover of RUB 11.9bn (USD 176m) and a net profit of RUB 15m, the report noted. At the end of 2014, Kristall estimated its capitalisation at RUB 6.3bn, the item added.
Vedomosti
NRJ attracts interest but prefers to go alone (translated)
Listed French media group NRJ Group has attracted a lot of interest from potential buyers, French daily Le Figaro reported, citing head of main shareholder Jean-Paul Baudecroux.
He claimed that being “small” and “independent” was a strength for the group, adding that numerous potential buyers contacted the company. Though he did not discuss further with the suitors, he said that he was “pragmatic”.
Le Figaro
Markets in China and across the Asia region were generally higher at the open but quickly reversed those initial gains. After rising 0.7%, Shanghai Composite subsequently entered midday break at its worst level, down by over 3%. Economic data released over the weekend reflects continued headwinds for China economy. Industrial output rebounded from July but still missed expectations and urban asset investment growth hit multi-year lows, although retail sales were a welcome surprise. Inside the industrial output components, China power generation actually rose 1% - the biggest gain in 5 months. After the release, NBS economist said downward pressure on industrial production is still big amid soft market demand at home and abroad. Also of note over the weekend, China State Council unveiled much anticipated SOE (state-owned enterprises) reform, dividing enterprises into Commercially-Oriented and Not-for-Profit ones. Additionally, the govt called for more private sector investment in SOE as part of its continued push toward mixed-ownership economy. Ahead of tomorrow's BOJ policy decision, a financial press report speculated that while Gov Kuroda has the necessary support to ease monetary policy again if needed, no easing would be announced since the benefits of more QE are put in question. Analysts cited in the report also noted politicians are against excessive JPY weakness. Separately, the CIO of Japan's main pension fund GPIF said this is the "moment of truth" for Abenomics. In Australia, Oil Search walked away from A$11.6B offer from Woodside Petroleum, potentially holding out for a higher bid, and analysts anticipate WPL to improve its offer. In the US : SLH: Confirms to be acquired by Vista Equity Partners for $55.85/shr or $6.5B
Nikkei -1.32% Hang Seng +0.19% Shanghai -2.91%
Eur$ 1.1340 CNY 6.3681 JPY 120.37 GBP 1.5447 EURCHF 1.0983 RUB $67.7972 WTI $44.52 (-0.25%)
S&P +0.12% EuroStoxx +0.38% Dax +0.31% SMI +0.27%
Macro :
- Nine Weekly Reversals Show S&P 500 Traders Have No Clue on Fed
- Brazil’s Junk Relapse Makes Its Bonds Even Riskier Than Russia
- EU Weighs Transaction Tax as France Pushes for Wider Base
- China’s Aug. Crude Steel Output Falls 3.5% to 66.94 Mln Tons
- China Alumina Output Rises 6.1% to 4.88 Mln Mt in August
- China Fixed-Asset Investment Tumbles to Lowest Since 2000
- Brevan Howard’s Last Stock Manager Tellvik Is Said to Leave Firm
- Shiller Sees ‘Bubble’ in Value of U.S. Shares: FT
Keep an eye on :
- ABBN VX : ABB CEO Says Eyeing Acquisitions in Mid-Size Range: FuW
- ABBN VX : ABB May Relocate Some Swiss Workers to Dubai, U.S., NZZ Reports
- ABBN VX : ABB Won’t Separate Power, Automation Businesses, Voser Tells SZ
- AGA LN : Whirlpool Says It Doesn’t Plan to Make an Offer to Buy AGA
- AIR FP : Eurofighter Confirms 28-Fighter Jet Order With Kuwait Government
- AIR FP : Airbus Says Assembly of A320 Cheaper in U.S. Than Germany: Welt
- AIR FP : Airasia X CEO Says in Talks With Airbus to Delay More Planes
- CABK SM : Caixabank to Pay Extra Dividends If Capital Target Met: Cinco
- CSGN VX : Credit Suisse Plans October Strategy Announcement: SamS,
- GOOGL US : Schaeuble Poised to Close Tax Loopholes Used by Google: Bild
- ML FP : Michelin to Reorganize Engineering, Administration, Echos Says
- ORA FP : French Internet Operators Want to See Govt on New Tax: Echos
- RNO FP : Renault Seeks to Overtake Ford in Europe, Ghosn Tells JDD
- RHK GY : Rhoen-Klinikum Preparing to Make Acquisitions, CFO Tells BZ
- SAN FP : Sanofi Says LixiLan Meets Main Goal in Second Phase 3 Trial
- SIE GY : Siemens Sells Wind-Power JV Stakes to Partner Shanghai Electric
- UL FP : Unibail Preparing to Offer Paris Office Buildings for Sale
- PAH3 GY : Porsche Chief Mueller Mulls Electric Version of All Models: AMS
- SHP LN : Shire May Add Cash to All-Stock Offer for Baxalta: WSJ
- UHR VX : Swatch CEO Hayek Says SNB Board Should Resign: SamS
- VOD LN : Vodafone to Continue Offering Netflix Free to Some Customers
- VWS DC : Vestas Receives 200MW Order for Wind Turbines From Xcel Energy
>>> Up
*ALROSA RAISED TO HOLD VS SELL AT RENAISSANCE
*ANGLO AMERICAN RAISED TO SECTOR PERFORM VS UNDERPERFORM AT RBC
*BHP BILLITON RAISED TO BUY VS HOLD AT JEFFERIES
*IMPALA PLATINUM RAISED TO HOLD VS SELL AT RENAISSANCE
*JULIUS BAER UPGRADED TO BUY FROM NEUTRAL AT UBS
*NORNICKEL RAISED TO BUY VS HOLD AT RENAISSANCE
>>> Down
*ANTOFAGASTA CUT TO HOLD VS BUY AT JEFFERIES
*BOSKALIS CUT TO HOLD VS BUY AT ING; PT LOWERED TO EU45 VS EU49
*ERAMET CUT TO UNDERPERFORM VS NEUTRAL AT BOFA
*FERREXPO CUT TO HOLD VS BUY AT RENAISSANCE
*GEMALTO CUT TO SELL FROM NEUTRAL AT GOLDMAN SACHS
*KAZ MINERALS CUT TO UNDERPERFORM VS SECTOR PERFORM AT RBC
*TELECOM ITALIA ORD., SAVERS CUT TO REDUCE AT NOMURA
*TDC CUT TO NEUTRAL VS BUY AT BOFA
*VEDANTA RESOURCES CUT TO UNDERPERFORM VS SECTOR PERFORM AT RBC
>>> PT Change
>>> Initiation
*CLOSE BROTHERS RATED NEW MARKET PERFORM AT KEEFE BRUYETTE
*PARAGON GROUP RATED NEW OUTPERFORM AT KEEFE BRUYETTE
*SEB RATED NEW HOLD AT KEPLER CHEUVREUX; PT EU85
>>> Call
>> Stock
*NOKIA ADDED TO GOLDMAN SACHS CONVICTION BUY LIST
>> Sector
*ENERGY SECTOR RAISED TO NEUTRAL AT JPMORGAN
*MINING SECTOR RAISED TO OVERWEIGHT AT JPMORGAN
*EUROPE AUTOS SECTOR CUT TO NEUTRAL AT HSBC
*EUROPE SEMICONDUCTORS SECTOR CUT TO UNDERWEIGHT AT HSBC (FULL NOTE ATTACHED)
*EUROPE TRANSPORT SECTOR RAISED TO OVERWEIGHT AT HSBC
*EUROPEAN TELECOM SERVICES CUT TO NEUTRAL VS BULLISH AT NOMURA
Fears grow over US stock market bubble
A growing number of investors believe that US stocks are overvalued, creating the risk of a significant bear market, according to research by Yale University market scholar Robert Shiller.
The Nobel economics laureate told the Financial Times that his valuation confidence indices, based on investor surveys, showed greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000.
“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.
However, he made clear that it remained impossible to time any fall in the market, and cast doubt on whether stocks would drop should the Federal Reserve raise rates later this week.
“I’m not looking for any big effect,” he said. “It’s been talked about for so long, everyone knows that it’s coming. It’s just not much of a big deal.”
Prof Shiller added there was no historical evidence for a link between interest rates and share prices. “You would think that when interest rates are higher people would sell stocks, but the financial world just isn’t that simple.”
He defended his now famous measure of valuation, often referred to as the Cape (for cyclically adjusted price/earnings multiple), which compares share prices to average earnings over the previous 10 years. This adjusts for the cyclicality of earnings.
The indicator showed stocks were seriously overvalued before the market peaks of 2000 and 2007 — but it has also suggested stocks have been overpriced for the past several years, while prices have continued to rise. That prompted several attacks on the Cape, saying it did not take account of changing accounting and tax rules over time, and it was distorted by the sharp fall in earnings that followed the Lehman Brothers bankruptcy in 2008.
Mr Shiller pointed out the fall in earnings in 2008 came as part of a severe recession. “Companies like to take write-offs right away during a recession. Then their earnings can recover from there. If I average over 10 years I don’t see that as a problem. The average includes the actual losses that companies have made.”
He said changing accounting standards could create difficulties for his model but added: “I think we’re better off with changed accounting standards than if we ignored all the changes that happened since 1871.”
He said the recent bout of volatility “shows that people are thinking something, worried thoughts. It suggests to me that many people are re-evaluating their exposure to the stock market. I’m not being very helpful about market timing but I can easily see aftershocks coming”.
Asian Mid-session Update: China markets retreat after disappointing output and investment data despite unveiled SOE reform
***Economic Data***
- (CN) CHINA AUG INDUSTRIAL PRODUCTION Y/Y: 6.1% V 6.4%E; Power generation: +1.0% y/y v -2.0% prior; 5-month high
- (CN) CHINA AUG YTD FIXED URBAN ASSETS Y/Y: 10.9% V 11.1%E (multi-year low)
- (CN) CHINA AUG RETAIL SALES Y/Y: 10.8% V 10.5%E; 7-month high
- (NZ) NEW ZEALAND AUG PERFORMANCE SERVICES INDEX: 58.2 V 56.5 PRIOR; highest since July 2014
***Index Snapshot (as of 02:30 GMT)***
- Nikkei225 -0.5%, S&P/ASX +0.1%, Kospi -0.4%, Shanghai Composite -1.6%, Hang Seng +0.1%, Dec S&P500 +0.3% at 1,954
***Commodities/Fixed Income***
- Dec gold +0.4% at $1,107/oz, Oct crude oil -0.4% at $44.44/brl, Dec copper -0.6% at $2.44/lb
- (CN) China MoF sells 2-year bonds at 2.65%
- (KR) South Korea sells 10-yr bonds at 2.29%
***Market Focal Points/FX***
- Markets in China and across the Asia region were generally higher at the open but quickly reversed those initial gains. After rising 0.7%, Shanghai Composite subsequently entered midday break at its worst level, down by over 3%. Economic data released over the weekend reflects continued headwinds for China economy. Industrial output rebounded from July but still missed expectations and urban asset investment growth hit multi-year lows, although retail sales were a welcome surprise. Inside the industrial output components, China power generation actually rose 1% - the biggest gain in 5 months. After the release, NBS economist said downward pressure on industrial production is still big amid soft market demand at home and abroad. Separately, economists with ANZ noted the data reinforces that 2015 GDP target is at risk, while ING pointed to interruptions related to Tianjin explosion and Sept 3rd parade in Beijing as factors in disappointing output.
- Also of note over the weekend, China State Council unveiled much anticipated SOE (state-owned enterprises) reform, dividing enterprises into Commercially-Oriented and Not-for-Profit ones. Additionally, the govt called for more private sector investment in SOE as part of its continued push toward mixed-ownership economy. Furthermore, the management and executive compensation of SOEs would be more market driven to help boost performance. Skeptics of the announcement were quick to point out that the draft does not provide an update on prior speculation that China is considering merging a number of its biggest state firms and also does not address whether underperforming state firms will be allowed to fail.
- Ahead of tomorrow's BOJ policy decision, a financial press report speculated that while Gov Kuroda has the necessary support to ease monetary policy again if needed, no easing would be announced since the benefits of more QE are put in question. Analysts cited in the report also noted politicians are against excessive JPY weakness. Separately, the CIO of Japan's main pension fund GPIF said this is the "moment of truth" for Abenomics.
- In Australia, Oil Search walked away from A$11.6B offer from Woodside Petroleum, potentially holding out for a higher bid, and analysts anticipate WPL to improve its offer. Australia's Macquarie reaffirmed FY16 to be an improvement relative to FY15 in an investor presentation, with H2 also seen in line with H1. MQG shares were up over 3% in the morning hours.
- FX markets reflected initial optimism that gave way to risk off sentiment. USD/JPY tested above 120.80 before sliding below 120.30. AUD/USD and NZD/USD were up over 40 and 30 pips respectively above 0.7130 and 0.6340 before erasing those early gains to trade unchanged.
***Equities***
US equities / ADRs:
- SLH: Confirms to be acquired by Vista Equity Partners for $55.85/shr or $6.5B
Notable movers by sector:
- Consumer discretionary: Stockland SGP.AU -1.3% (speculation to spin off unit); AMA Group AMA.AU +18.3% (acquisition)
- Financials: Shimao Property 813.HK +0.9%(Aug result); Longfor Properties 960.HK +2.1% (Aug result); Macquarie Group MQG.AU +2.6% (guidance); Haitong Securities 600837.CN -7.1% (punishment)
- Industrials: Sany Heavy Equipment International 600031.CN +10.0% (cooperation agreement); China Communications Construction 1800.HK +3.1% (SOE reform); China Railway Construction Corp 1186.HK +3.3% (peer group restricting plan); China National Chemical Engineering 601117.CN +0.9% (YTD contract)
- Technology: Acer 2353.TW -0.7% (speculation to lower shipment target)
- Energy: Woodside Petroleum WPL.AU -1.5% (Oil Search has rejected the bid); Cofco Biochemical 000930.CN +1.1%, SDIC Xinji Energy 601918.CN +2.1% (SOE reform)
- Telecom: KDDI Corp 9433.JP -6.6%, Softbank 9984.JP -4.9%, NTT DoCoMo 9437.JP -9.0% (Abe calls for cutting cellphone fees)
Shredded GoPro Finally Looks Like a Deal
Struggles to sell its newest camera are already reflected in its stock
In consumer electronics, going smaller and simpler is typically a no-brainer. But at GoPro, it has caused a bit of head scratching.
Best known for its line of small, high-definition action cameras, GoPro tweaked its winning formula with the launch of the Hero4 Session in July. The $400 camera is about the size of an ice cube and features only one button. The idea: make an ultraportable camera easy to use at a moment’s notice.
But that selling point hasn’t proved an easy sale. At an investment conference last week, finance chief Jack Lazar said the Session has had a “difficult” time competing with GoPro’s more popular Hero4 Black and Silver cameras.
That could set up a more challenging fourth quarter, which typically accounts for more than 40% of GoPro’s annual sales. Mr. Lazar said the company plans to expend more on marketing the Session, which could lift operating expenses. GoPro also could cut its price. In addition, guidance earlier this month from GoPro’s main chip supplier, Ambarella, suggests there isn’t another major camera launch planned this year.
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Still, challenges selling a new device are hardly a death knell for a profitable company that has sold about 6.5 million cameras in the trailing 12-month period, up 64% year over year. Jeremy David of Citigroup estimates GoPro’s total addressable market is approaching $20 billion, more than 10 times its current run rate.
And while GoPro’s cameras may not be a bargain, its stock is suddenly looking like more of one after falling by half in a month. That puts its once lofty forward earnings multiple at a more respectable 16 times.
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At that level, it is easier to picture the shares in a portfolio.