- "The Euro has staged a remarkable comeback over the last month, recovering from below 1.20 to the dollar to nearly 1.30. What has been driving it? Will it strengthen further, consolidate, or reverse trend? And should its appreciation be welcomed? There are several factors at work. The first is a paradoxical situation where, while the recovery is clearly more robust in the US than in the eurozone, the Fed sounds more dovish and seems to be toying with the idea of a renewed wave of quantitative easing, whereas the ECB sounds cautiously more optimistic and short term market rates have tentatively begun to edge up. Moreover, investors are
gradually gaining a measure of confidence from the policy actions of individual eurozone governments: nothing earth-shattering so far, but enough to raise hopes that policymakers have perhaps accepted the need to launch long-overdue fiscal and structural reforms. Spain is probably the best example. Most encouragingly, it seems that Asian investors, having done their homework over the last nine months, now feel more comfortable in assessing and taking on individual sovereign credit risk within the eurozone: demand at recent Spanish auctions is a case in point, and if this trend is sustained it would mean that risks of a systemic regional
debt crisis have substantially diminished. The make-or-break challenge ahead is the release of the stress tests, which begins in a week’s time. We should not get our hopes too high, as the very fact that we will initially get only the aggregate results for individual countries rather than individual banks tells us the first best is already off the table. Hopefully, however, the exercise will be handled professionally enough to avoid a major accident, in which case EUR/USD will remain stable in the coming months, to the satisfaction of both parties involved."
Unicredit Market Sense 20100716
Pan-European:Under or Over - UK:Sector Changes
- Pan-European — Under or Over
• Recovery — Global GDP is above previous peaks. European earnings are not. Industrials and Staples have the most robust forecasts, all above trend.
• Believer or sceptic? — The market is backing sectors delivering earnings, even if above trend and de-rating those that fail to deliver. International over domestic.
- UK — Sector Changes
• Recovery biased — Our economists’ forecasts remain for an economic recovery. This should underpin earnings expectations and makes valuations supportive.
• Sector weightings — We downgrade Pharma to Underweight from Overweight and move Industrials up to Overweight. Mobile and Construction up to Neutral.
Citigroup European Portfolio Strategist 20100715
• Recovery — Global GDP is above previous peaks. European earnings are not. Industrials and Staples have the most robust forecasts, all above trend.
• Believer or sceptic? — The market is backing sectors delivering earnings, even if above trend and de-rating those that fail to deliver. International over domestic.
- UK — Sector Changes
• Recovery biased — Our economists’ forecasts remain for an economic recovery. This should underpin earnings expectations and makes valuations supportive.
• Sector weightings — We downgrade Pharma to Underweight from Overweight and move Industrials up to Overweight. Mobile and Construction up to Neutral.
Citigroup European Portfolio Strategist 20100715
The Japanese model cannot be exported to all countries
- "The Japanese economic and financial model has not been changed by the crisis:
• high corporate profitability, despite the weakness of household demand,
achieved via a squeezing of wages;
• weakness of household demand and negative inflation (deflation) due to the fall in wages;
• decent growth overall, thanks to exports and the related investments;
• low interest rates due to negative inflation, while savers accept these low interest rates, which therefore makes it easy to finance the high public debt caused by sluggish growth."
- "We can see this model trying to spread to many other countries in the wake of
the crisis. But it cannot be exported to all countries, as it requires:
• significant export capacity, in particular to countries enjoying rapid growth (only Germany and Japan);
• that the fall in wages and the distortion of income sharing be accepted;
• capacity to finance the economy with domestic savings;
• savers who accept very low returns on their capital."
- "Moreover, this model seems to be unfavourable for stock markets."
Natixis Flash Economics 357 20100713
• high corporate profitability, despite the weakness of household demand,
achieved via a squeezing of wages;
• weakness of household demand and negative inflation (deflation) due to the fall in wages;
• decent growth overall, thanks to exports and the related investments;
• low interest rates due to negative inflation, while savers accept these low interest rates, which therefore makes it easy to finance the high public debt caused by sluggish growth."
- "We can see this model trying to spread to many other countries in the wake of
the crisis. But it cannot be exported to all countries, as it requires:
• significant export capacity, in particular to countries enjoying rapid growth (only Germany and Japan);
• that the fall in wages and the distortion of income sharing be accepted;
• capacity to finance the economy with domestic savings;
• savers who accept very low returns on their capital."
- "Moreover, this model seems to be unfavourable for stock markets."
Natixis Flash Economics 357 20100713
UK impact from EMU break-up: Double dip or depression?
- "In our recent note, “EMU Break-up: Quantifying the Unthinkable, 7 July 2010”, we looked at the global impact of a break-up of the Eurozone. In this report we discuss the potential impact of such a scenario on the UK. Given the level of trade and financial linkages, a major adverse reaction is inevitable. Should complete break-up occur, the economic and financial impact will be far greater than seen in the recent recession. Output might fall by 8% relative to our base case within the first two years. Under this scenario, talk of depression could quickly reignite."
INGBank Financial Markets Research 20100715
INGBank Financial Markets Research 20100715
Declining US Activity and European Fiscal Risk Premia
- "Weaker US growth, reasonably solid Euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks, and have motivated another forecast change to reflect more broad USD weakness than before. We now project EUR/$ at 1.35 and 1.38 in 6 and 12 months to reflect the fundamental outlook. However, it is too early to sound the ‘all clear’ on the Euro in the near term as political stress could intensify again. Many European governments are still facing low approval ratings and the post-holiday period may be critical. We therefore keep the 3-month forecast at 1.22. Projected Yen strength is linked to US rate differentials and a reduced likelihood of Japanese interventions in light of the new managed $/CNY float. Our new $/JPY forecasts stand at 85, 83 and 90. We also discuss the impact of Renminbi appreciation in more detail. Lastly, developments in Europe and Switzerland suggest EUR/CHF can continue to depreciate, despite the move already seen. Our new forecasts see a temporary move below 1.30."
GoldmanSachs Global Viewpoint 20100714
GoldmanSachs Global Viewpoint 20100714
Banks: No stress... but no growth either
- Stress tests helpful but do not change the medium-term outlook "We remain Neutral on the Banks sector in Europe overall and continue to recommend a long position in our Global Retail Banks basket (GSSBBKGL). The upcoming Stress tests should increase clarity, especially for the nonlisted sector, and are also likely to move concern away from the large Spanish banks (which in our view are well financed). Furthermore discussions to soften regulation – pushing out the time to implement Basel III and softening the requirements – would also be supportive in our view."
- Expect slow loan growth in Europe "However, despite the crisis financials still make up 24% of the market cap in Europe; only fractionally below the long-term average of 25%. The large near-term uplift in expected earnings for banks is driven by provisioning rather than loan growth. Declining provisions is obviously helpful (and provides a high level of viability) but beyond this we see weak loan growth especially for banks with domestic exposure."
- Valuation case for Banks is not compelling "Banks trade at a P/E relative of 67% (2012E) compared with an historical average of 75% – a small discount to where it has typically traded. But given the risks to the sector, uncertainty regarding pending regulatory
reform and that Greek sovereign debt fears have not fallen away, the sector should arguably be on more of a discount. Furthermore, it is not yielding more than other low growth sectors such as telecoms or utilities."
- We are long Global Banks versus short Domestic Banks "We continue to prefer banks with global exposure. Our European Global Retail Banks basket (GSSBBKGL) has outperformed Domestic European Banks (GSSBBKDE) by 12% since March 2010 and would have done better if BBVA and Santander were not in the basket. Our Banks team argues that
the Stress tests should move the focus away from Spanish banks where funding appears secure."
GoldmanSachs Europe Portfolio Strategy 20100713
- Expect slow loan growth in Europe "However, despite the crisis financials still make up 24% of the market cap in Europe; only fractionally below the long-term average of 25%. The large near-term uplift in expected earnings for banks is driven by provisioning rather than loan growth. Declining provisions is obviously helpful (and provides a high level of viability) but beyond this we see weak loan growth especially for banks with domestic exposure."
- Valuation case for Banks is not compelling "Banks trade at a P/E relative of 67% (2012E) compared with an historical average of 75% – a small discount to where it has typically traded. But given the risks to the sector, uncertainty regarding pending regulatory
reform and that Greek sovereign debt fears have not fallen away, the sector should arguably be on more of a discount. Furthermore, it is not yielding more than other low growth sectors such as telecoms or utilities."
- We are long Global Banks versus short Domestic Banks "We continue to prefer banks with global exposure. Our European Global Retail Banks basket (GSSBBKGL) has outperformed Domestic European Banks (GSSBBKDE) by 12% since March 2010 and would have done better if BBVA and Santander were not in the basket. Our Banks team argues that
the Stress tests should move the focus away from Spanish banks where funding appears secure."
GoldmanSachs Europe Portfolio Strategy 20100713
EMEA Weekly: We remain worried about ZAR and HUF
- Market movers ahead: Will the SARB cut again? "Rate decisions in Hungary and South Africa are the main events to watch next week. In Hungary we expect the Hungarian central bank to stay on hold keeping the key policy rate at 5.25% as the recent sell-off in forint and the increased uncertainty outlook for fiscal policy probably mean that easing cycle has come to an end. South African rate decision will undoubtedly prove interesting to follow as the uncertainty about the outcome is fairly high. While consensus expect the South African central bank (SARB) to stay on hold we see a chance of yet another 50bp rate cut. That would bring the key policy rate to 6.00% in South Africa. For the rate reduction argues recent dovish comments from the SARB governor Gill Marcus, inflation development but also recent data from the economy, which mostly surprised on the downside signalling that economic recovery is losing steam."
- FX Outlook: CZK back on the top spot "Last week our EMEA FX Scorecard overall send relatively bearish signals. The bearish signals are not quite as strong now, but nonetheless the Scorecard is still overall negative and we would therefore overall continue to expect some pressure on the EMEA currencies going forward in next 1-3 months. That said the signal is certainly not a “massive sell” signal and the Scorecard is in fact positive on three out of the seven currencies in the Scorecard – CZK, PLN and TRY. The Czech koruna is now back as the top scorer and CZK also remain the currency with the strong potential for strengthening over the longer term due to attractive valuation. Therefore we feel pretty confident in recommending investors to continue to be long the Czech currency both against its region peers and USD and EUR. This week we updated our FX forecasts. Read more in the July version of the Emerging Markets Briefer."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended buying RON/ZAR based on our EMEA FX Scorecard. That trade is up a bit over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Czech koruna now is the highest scoring currency in the Scorecard. We therefore recommend buying CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100716
- FX Outlook: CZK back on the top spot "Last week our EMEA FX Scorecard overall send relatively bearish signals. The bearish signals are not quite as strong now, but nonetheless the Scorecard is still overall negative and we would therefore overall continue to expect some pressure on the EMEA currencies going forward in next 1-3 months. That said the signal is certainly not a “massive sell” signal and the Scorecard is in fact positive on three out of the seven currencies in the Scorecard – CZK, PLN and TRY. The Czech koruna is now back as the top scorer and CZK also remain the currency with the strong potential for strengthening over the longer term due to attractive valuation. Therefore we feel pretty confident in recommending investors to continue to be long the Czech currency both against its region peers and USD and EUR. This week we updated our FX forecasts. Read more in the July version of the Emerging Markets Briefer."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended buying RON/ZAR based on our EMEA FX Scorecard. That trade is up a bit over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Czech koruna now is the highest scoring currency in the Scorecard. We therefore recommend buying CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100716
Weekly Credit Update
- "Modest primary activity and indices trading sideways"
- "Scandi reporting season kicking off"
- "Financial bill approved in US"
DenDanske Weekly Credit Update 20100716
- "Scandi reporting season kicking off"
- "Financial bill approved in US"
DenDanske Weekly Credit Update 20100716
Market Implications of Growth Deceleration
- "Concern about a slowdown in global economic growth in the second half of 2010 has been one of the distinguishing features of the recent weakness in global markets. These concerns have been sparked by a softer patch of macro data, most notably from the US, but also a moderation in survey data across the world."
- "A 2010H2 slowdown is embedded in our economic forecasts, but it is important to be clear: in several parts of the world, such as China, and indeed globally, economic growth in the first half was running at above-trend levels, so a degree of slowing is both likely and desirable. We estimate that on a qoq annualised basis global growth will slow from an average of about 4.8% in the first half of 2010 to about 3.8% in the second half."
- "Even if one were confident about the better growth prospects ahead, this deceleration in growth momentum is likely to involve a fairly choppy period in asset markets. We find that currently both equity returns and bond yields are tracking at the lower end of the historical distribution of outcomes from previous instances of growth deceleration (that do not end in recessions)."
- "Given the scars from the acute financial and housing crash that preceded this recovery, and that policy is likely to be much more constrained if growth slows much further, it is possible to explain such a performance. And, although we find that a wide range of outcomes are consistent with the kind of growth deceleration that we have in our forecast, this poor starting point suggests that—absent a serious valuation overhang—a move to worse economic outcomes would normally be required for markets to deteriorate significantly."
GoldmanSachs Global Economics Weekly 20100714
- "A 2010H2 slowdown is embedded in our economic forecasts, but it is important to be clear: in several parts of the world, such as China, and indeed globally, economic growth in the first half was running at above-trend levels, so a degree of slowing is both likely and desirable. We estimate that on a qoq annualised basis global growth will slow from an average of about 4.8% in the first half of 2010 to about 3.8% in the second half."
- "Even if one were confident about the better growth prospects ahead, this deceleration in growth momentum is likely to involve a fairly choppy period in asset markets. We find that currently both equity returns and bond yields are tracking at the lower end of the historical distribution of outcomes from previous instances of growth deceleration (that do not end in recessions)."
- "Given the scars from the acute financial and housing crash that preceded this recovery, and that policy is likely to be much more constrained if growth slows much further, it is possible to explain such a performance. And, although we find that a wide range of outcomes are consistent with the kind of growth deceleration that we have in our forecast, this poor starting point suggests that—absent a serious valuation overhang—a move to worse economic outcomes would normally be required for markets to deteriorate significantly."
GoldmanSachs Global Economics Weekly 20100714
European bank stress tests: A preview
- "We view the upcoming release of the European banks stress test results as a potentially important inflection point for the market. The experience in the US last year suggests that properly executed stress tests can greatly improve confidence in the stability of the financial system. In Europe, they may ease concerns by ensuring that the sovereign crisis and a likely slowdown in euro area growth will not result in widespread bank failures."
- "We have a bias to be long risk as the results of the stress tests are released. First, the capital needs we estimate are not insurmountable, particularly given the programs already in place to address them: FROB in Spain, the SoFFin in Germany, and the Financial Stability Fund in Greece. In each case, the total needs are within the potential scope of the programs. Even if some programs have difficulty funding, it is possible that the European Financial Stability Facility (EFSF) would provide a backstop, given the relatively small size of the needs. Second, although pessimism has retreated somewhat as markets have rallied over the past two weeks, many investors are still very sceptical of the stress tests, suggesting room for upside surprises. Finally, for the majority of banks, transparency alone may succeed in restoring confidence. Any market stabilization due to the stress tests would be beneficial to banks, particularly if it allowed them to issue term debt at lower spreads and move away from covered bonds and ECB funding that they have been forced to use recently."
- "To achieve this, the tests must: create transparency and/or stress balance sheets with respect to loans to corporates and individuals, as well as sovereigns; differentiate
between strong and weak banks using a sufficiently high minimum core T1 capital
hurdle; and force recapitalization of failing banks, with governments positioned to
backstop institutions that are unlisted/unable to raise capital privately."
- "In our view, the institutions most likely to “fail” the stress tests – meaning be forced to raise new capital – are Spanish cajas, German Landesbanks, and Greek banks. Based on some simple assumptions using the information available from the European regulatory authorities, supplemented with the methodology used in the US stress tests, we estimate capital needs of EUR36bn for Spanish cajas, EUR34bn for German Landesbanks, and EUR8.6bn for Greek banks. Importantly, these estimates are based on a number of assumptions and are designed more to compare the potential capital needs with the programs in place to address them than to predict the exact results of the tests."
- "There are admittedly a number of risks to a long bias going into the release of the
results. According to our estimates, FROB may have to issue EUR34bn. Although this
could be spread out over time, difficulties in issuing cannot be ruled out while Spain
itself remains under scrutiny. Regulators may fail to create the transparency needed or
to set sufficiently aggressive loss assumptions. Capital hurdles may be set too low by
looking at T1 capital instead of core T1 capital. Bank books may be treated too lightly.
Finally, spreads have rallied over the past two weeks, suggesting the bar is no longer set so low that any disclosure whatsoever will cause a rally."
Barclays Credit Research 20100714
- "We have a bias to be long risk as the results of the stress tests are released. First, the capital needs we estimate are not insurmountable, particularly given the programs already in place to address them: FROB in Spain, the SoFFin in Germany, and the Financial Stability Fund in Greece. In each case, the total needs are within the potential scope of the programs. Even if some programs have difficulty funding, it is possible that the European Financial Stability Facility (EFSF) would provide a backstop, given the relatively small size of the needs. Second, although pessimism has retreated somewhat as markets have rallied over the past two weeks, many investors are still very sceptical of the stress tests, suggesting room for upside surprises. Finally, for the majority of banks, transparency alone may succeed in restoring confidence. Any market stabilization due to the stress tests would be beneficial to banks, particularly if it allowed them to issue term debt at lower spreads and move away from covered bonds and ECB funding that they have been forced to use recently."
- "To achieve this, the tests must: create transparency and/or stress balance sheets with respect to loans to corporates and individuals, as well as sovereigns; differentiate
between strong and weak banks using a sufficiently high minimum core T1 capital
hurdle; and force recapitalization of failing banks, with governments positioned to
backstop institutions that are unlisted/unable to raise capital privately."
- "In our view, the institutions most likely to “fail” the stress tests – meaning be forced to raise new capital – are Spanish cajas, German Landesbanks, and Greek banks. Based on some simple assumptions using the information available from the European regulatory authorities, supplemented with the methodology used in the US stress tests, we estimate capital needs of EUR36bn for Spanish cajas, EUR34bn for German Landesbanks, and EUR8.6bn for Greek banks. Importantly, these estimates are based on a number of assumptions and are designed more to compare the potential capital needs with the programs in place to address them than to predict the exact results of the tests."
- "There are admittedly a number of risks to a long bias going into the release of the
results. According to our estimates, FROB may have to issue EUR34bn. Although this
could be spread out over time, difficulties in issuing cannot be ruled out while Spain
itself remains under scrutiny. Regulators may fail to create the transparency needed or
to set sufficiently aggressive loss assumptions. Capital hurdles may be set too low by
looking at T1 capital instead of core T1 capital. Bank books may be treated too lightly.
Finally, spreads have rallied over the past two weeks, suggesting the bar is no longer set so low that any disclosure whatsoever will cause a rally."
Barclays Credit Research 20100714
The 5 best things about the Flash Crash
- "On May 6 2010, major U.S. market indices dropped by over 9%, with a 7% decline within one 15-minute span, temporarily evaporating $1 trillion in market capitalization, before recovering. The SEC has not yet determined what caused this event. In their examinations, the SEC is dealing with a world that has changed a lot from the traditional floor-based outcry model; the percentage of total volumes executed by floor brokers and specialists fell from 52% in 1999 to 7.5% as of 2007."
- "That’s why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading, and in Europe, 40%. The broad category of HFT includes funds that employ algorithms to arbitrage away market variances (e.g., between exchange traded funds and their component stocks), a benign and helpful function for markets. Other HFTs track the order flow of other participants to both influence and benefit from it, which engenders a lot more debate."
JPMorgan Eye on the Market 20100713
- "That’s why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading, and in Europe, 40%. The broad category of HFT includes funds that employ algorithms to arbitrage away market variances (e.g., between exchange traded funds and their component stocks), a benign and helpful function for markets. Other HFTs track the order flow of other participants to both influence and benefit from it, which engenders a lot more debate."
JPMorgan Eye on the Market 20100713
Where do stock market prices not follow earnings per share over a long period, and why?
- "We look at the situations of the United States, the euro zone, the United Kingdom and Japan and we compare trends in share prices and EPS (earnings per share). A significant difference in these developments can result from:
• marked changes in the determinants of PER (and therefore of long-term interest rates and growth);
• "parasitic" influences on stock market prices; for example sluggish growth in consumption can depress demand for stocks and stock market prices, even if EPS are on the rise."
- "The elasticity of stock market indices to EPS is too low, and above all in Japan where it is virtually zero. We show that in all likelihood:
• the changes in the determinants of PER do not explain the bias between stock market indices and PER;
• the trend in household consumption explains stock market indices better than EPS, and the slowdown in consumption plays a part in the weakness of the elasticity of indices to EPS, especially in Japan."
Natixis Special Report 20100709
• marked changes in the determinants of PER (and therefore of long-term interest rates and growth);
• "parasitic" influences on stock market prices; for example sluggish growth in consumption can depress demand for stocks and stock market prices, even if EPS are on the rise."
- "The elasticity of stock market indices to EPS is too low, and above all in Japan where it is virtually zero. We show that in all likelihood:
• the changes in the determinants of PER do not explain the bias between stock market indices and PER;
• the trend in household consumption explains stock market indices better than EPS, and the slowdown in consumption plays a part in the weakness of the elasticity of indices to EPS, especially in Japan."
Natixis Special Report 20100709
The uncertainty is set to last
- "Since the end of 2009, the financial markets have been characterised by great volatility and a rise in risk premia, sure signs of highly significant uncertainty among investors."
- "This uncertainty is definitely set to last, since it has causes that are themselves longlasting:
• difficulty in ascertaining what the outcome of the sovereign debt crisis in the euro zone will be: stabilisation of public debt ratios and possibility for countries to finance themselves again normally, or a divergent dynamics and eventually a default? We will have to wait until 2012 or 2013 to have a clear view;
• uncertainty about the banks’ real situation, due to additional real estate losses (Spain, United States) and the massive holding of sovereign debts in Europe. We will have to wait for the outcome of the sovereign debt crisis, i.e. 2012 to (possibly) be reassured;
• continued recovery or dip in the United States? The latest figures are downbeat, but we will have to until the end of 2010 and 2011 to gain a better understanding;
• uncertainty about the effects of the restrictive fiscal policies in European growth, and hence the results and the financial situation of companies; will a decline in the savings rate offset this? Fiscal deficits must be drastically reduced from 2011 to 2013."
- "We can therefore expect continued high volatility in the financial markets for several years."
Natixis Flash Economics 355 20100709
- "This uncertainty is definitely set to last, since it has causes that are themselves longlasting:
• difficulty in ascertaining what the outcome of the sovereign debt crisis in the euro zone will be: stabilisation of public debt ratios and possibility for countries to finance themselves again normally, or a divergent dynamics and eventually a default? We will have to wait until 2012 or 2013 to have a clear view;
• uncertainty about the banks’ real situation, due to additional real estate losses (Spain, United States) and the massive holding of sovereign debts in Europe. We will have to wait for the outcome of the sovereign debt crisis, i.e. 2012 to (possibly) be reassured;
• continued recovery or dip in the United States? The latest figures are downbeat, but we will have to until the end of 2010 and 2011 to gain a better understanding;
• uncertainty about the effects of the restrictive fiscal policies in European growth, and hence the results and the financial situation of companies; will a decline in the savings rate offset this? Fiscal deficits must be drastically reduced from 2011 to 2013."
- "We can therefore expect continued high volatility in the financial markets for several years."
Natixis Flash Economics 355 20100709
First Half Not Exactly As Expected – So What to Expect in 2H?
- India and Indonesia look expensive — "In terms of straight valuations, both India and Indonesia now rank amongst Asia’s most expensive equity markets. Even adjusting for ROE, the premium now looks excessive. At the other end of the spectrum, one has Korea on single-digit P/E, but cranking out an above-average ROE; all hallmarks of an end-of-cycle for a cyclical market. China now also features amongst the cheaper markets based on P/E, P/CE and ROE; a market to look at for the second half."
- Defensive stocks are expensive — "Sector wise, the consumer defensives are amongst the most expensive whichever valuations you care to look at. They are also well held by the consensus. What comes out looking cheap is a combination of cyclical, tech hardware and the semiconductors. Amongst the interest sensitives, banks score well, as increasingly does real estate. The cheapest defensive is telecoms. Across the board, earnings revisions continue to decline, with the cyclicals underperforming. Appetite towards cyclicals or real estate remains low at present."
- Market is likely to weaken in summer — "We continue to believe that markets will weaken into August-to-September, driven by downward revisions to earnings, global growth fears, and continued tightness in Asian excess liquidity. The shift in our portfolio will be away from telecoms and towards greater cyclicality. Country wise, the biggest call will be whether to overweight China."
Citigroup Asia Macro Investigator 20100712
- Defensive stocks are expensive — "Sector wise, the consumer defensives are amongst the most expensive whichever valuations you care to look at. They are also well held by the consensus. What comes out looking cheap is a combination of cyclical, tech hardware and the semiconductors. Amongst the interest sensitives, banks score well, as increasingly does real estate. The cheapest defensive is telecoms. Across the board, earnings revisions continue to decline, with the cyclicals underperforming. Appetite towards cyclicals or real estate remains low at present."
- Market is likely to weaken in summer — "We continue to believe that markets will weaken into August-to-September, driven by downward revisions to earnings, global growth fears, and continued tightness in Asian excess liquidity. The shift in our portfolio will be away from telecoms and towards greater cyclicality. Country wise, the biggest call will be whether to overweight China."
Citigroup Asia Macro Investigator 20100712
China Property: Current sector rebound could be shortlived; sales performance is the key
- June sales stabilized: "Primary home sales in the eight major cities in June slipped only 1% M/M after a 46% decline in May. That said, sales in fact increased at end-June as some developers started offering more sizable discounts in the sales price. In 1H10, sales in the eight
major cities dropped 36% Y/Y, in contrast to the 20% Y/Y growth for sales volume nationwide in 5M10."
- Price correction underway: "In June, the Centaline Leading Index (secondary transaction price) for the top five cities fell 1.0% to 3.6% M/M, thus bringing the overall cumulative decline to 3.2% since April’s peak. More price cuts are underway with a 20-30% price drop seen in Tongzhou (beyond 5th-ring-road) in Beijing. According to government statistics, in 5M10 the national average ASP reached Rmb4,959psm, and affordability is now close to 47% based on our estimates. We therefore see room for a further correction, especially in overheated cities, where we expect a 20-30% price decline."
- Sector may stay range-bound: "We also do not anticipate any nearterm easing of policy measures. The effect of any policy easing in late 2010 could be offset by a potential sharp increase in inventories. Hence we expect the sector to remain range-bound and prefer companies with better sales performance due to their more flexible pricing strategies (e.g. Vanke) and companies with improvement in net gearing (e.g. R&F). We are concerned about the slow run rate of some mid-cap names such as Shimao, Agile and CR Land relative to their own targets. While we have a long-term bullish view and OW rating on these stocks, in the next quarter their share price performance could be constrained by slower contract sales until sales catch up, say in 4Q10."
JPMorgan China Property Monthly Wrap 20100715
major cities dropped 36% Y/Y, in contrast to the 20% Y/Y growth for sales volume nationwide in 5M10."
- Price correction underway: "In June, the Centaline Leading Index (secondary transaction price) for the top five cities fell 1.0% to 3.6% M/M, thus bringing the overall cumulative decline to 3.2% since April’s peak. More price cuts are underway with a 20-30% price drop seen in Tongzhou (beyond 5th-ring-road) in Beijing. According to government statistics, in 5M10 the national average ASP reached Rmb4,959psm, and affordability is now close to 47% based on our estimates. We therefore see room for a further correction, especially in overheated cities, where we expect a 20-30% price decline."
- Sector may stay range-bound: "We also do not anticipate any nearterm easing of policy measures. The effect of any policy easing in late 2010 could be offset by a potential sharp increase in inventories. Hence we expect the sector to remain range-bound and prefer companies with better sales performance due to their more flexible pricing strategies (e.g. Vanke) and companies with improvement in net gearing (e.g. R&F). We are concerned about the slow run rate of some mid-cap names such as Shimao, Agile and CR Land relative to their own targets. While we have a long-term bullish view and OW rating on these stocks, in the next quarter their share price performance could be constrained by slower contract sales until sales catch up, say in 4Q10."
JPMorgan China Property Monthly Wrap 20100715
China Property: Hope in 2H, Selectively Focus on Beta
- Strong June sales rebound— "Key developers we tracked announced an average 45% MoM rebound in June contracted sales vs. the 43% MoM slippage in May. Market giants Vanke, China Poly, COLI, etc. demonstrated strong sales capabilities with monthly sales up 42.6%-98.9% MoM, even hitting monthly record high sales. Apart from several developers such as CR Land, Glorious & Country Garden, the remainder reported a gentle recovery of 20-30% MoM on transaction value."
- June 2010: National residential prices -0.1% MoM; 1st drop in past 16 months —
"The strong sales rebound in leading developers was due to price cutting, especially for Vanke and Poly. NBS released the Jun-2010 operating statistics of China property sector that growth momentum on investment and building activities has been decelerating under the tightening while the pricing is resilient, on the grounds that developers are still reining in launching new supply with significant price cuts. Transaction volume recovered on a MoM basis given the low-base sales in previous month as well as price cuts from selective developers."
- Recent share price rally triggered by rumor of mortgage lending loosening — "In the past two trading days, China property stocks rebounded by about 7% on average due to the rumor that a few banks in Shanghai have resumed third home mortgages and loosened standards for second home mortgages."
- Hope in 2H — "In 1H, we suggested investors only stick to quality names such as COLI and Shimao, and they have been the top two best share price performers among all leading developers YTD. Entering 3Q, policy risk has been partially settling along with developers’ price cuts. Potential strong property demand has been well proven. Though we do not think the central government should loosen the tightening in the remainder of 2010, which could be too risky – the central government could lose credibility and could trigger a crazy rebound in volume and property prices – it is still possible for the central government to give more
feasibility to commercial banks in 1Q of next year after considering its critical contribution to economic growth."
- Selectively focus on beta – Shimao and Poly HK. — "If we expect the physical market turning point to emerge in 1Q2011, a good entry timing to the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. After the expected price cuts of 10-15% in June and July, the policy risk should be partially settled already. Entering 3Q, investors could gradually add weights to higher-beta names such as Shimao and Poly HK. We believe these names not only have higher beta but also have specific selling points that could result in share price outperformance."
Citigroup China Property 20100713
- June 2010: National residential prices -0.1% MoM; 1st drop in past 16 months —
"The strong sales rebound in leading developers was due to price cutting, especially for Vanke and Poly. NBS released the Jun-2010 operating statistics of China property sector that growth momentum on investment and building activities has been decelerating under the tightening while the pricing is resilient, on the grounds that developers are still reining in launching new supply with significant price cuts. Transaction volume recovered on a MoM basis given the low-base sales in previous month as well as price cuts from selective developers."
- Recent share price rally triggered by rumor of mortgage lending loosening — "In the past two trading days, China property stocks rebounded by about 7% on average due to the rumor that a few banks in Shanghai have resumed third home mortgages and loosened standards for second home mortgages."
- Hope in 2H — "In 1H, we suggested investors only stick to quality names such as COLI and Shimao, and they have been the top two best share price performers among all leading developers YTD. Entering 3Q, policy risk has been partially settling along with developers’ price cuts. Potential strong property demand has been well proven. Though we do not think the central government should loosen the tightening in the remainder of 2010, which could be too risky – the central government could lose credibility and could trigger a crazy rebound in volume and property prices – it is still possible for the central government to give more
feasibility to commercial banks in 1Q of next year after considering its critical contribution to economic growth."
- Selectively focus on beta – Shimao and Poly HK. — "If we expect the physical market turning point to emerge in 1Q2011, a good entry timing to the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. After the expected price cuts of 10-15% in June and July, the policy risk should be partially settled already. Entering 3Q, investors could gradually add weights to higher-beta names such as Shimao and Poly HK. We believe these names not only have higher beta but also have specific selling points that could result in share price outperformance."
Citigroup China Property 20100713
Do not fear a weaker euro, but do not expect too much either - US growth: good news and bad…
- United States "Business surveys are signalling a slowdown in the US economic recovery as the second half of the year gets underway. We believe this is less a sign that a "double-dip” recession is imminent than it is of the inventory cycle's diminishing contribution to growth. The combination of slower growth, lower inflation and turmoil in financial markets in the wake of the sovereign debt crisis, will no doubt encourage the Federal Reserve to maintain its extremely accommodative monetary policy well into next year."
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010
The correlation between risks since 2009
- "Since 2009, there has been a correlation between four types of risks:
• sovereign risk;
• banking risk;
• corporate credit risk (default risk);
• currency risk."
- "The sovereign risk and the banking risk are correlated (in Europe and Japan) because of the massive holding of government securities by banks and the appearance of sovereign risk due to the fiscal deficits linked to the crisis."
- "The credit risk and the banking risk are normally correlated, because of the banks’ portfolios of corporate loans; the corporate credit risk and sovereign risk are correlated since, if there is a public debt crisis in a country, there is either a very rapid reduction in the fiscal deficit, or a default, and in both cases a fall in gross domestic product."
- "Lastly, the currency risk is correlated to other risks because of the dollar’s safe haven role: concern about European countries, banks and companies leads to an appreciation of the dollar. The "stress-test" has become global, since all risks unfold simultaneously."
Natixis Flash Economics 353 20100708
• sovereign risk;
• banking risk;
• corporate credit risk (default risk);
• currency risk."
- "The sovereign risk and the banking risk are correlated (in Europe and Japan) because of the massive holding of government securities by banks and the appearance of sovereign risk due to the fiscal deficits linked to the crisis."
- "The credit risk and the banking risk are normally correlated, because of the banks’ portfolios of corporate loans; the corporate credit risk and sovereign risk are correlated since, if there is a public debt crisis in a country, there is either a very rapid reduction in the fiscal deficit, or a default, and in both cases a fall in gross domestic product."
- "Lastly, the currency risk is correlated to other risks because of the dollar’s safe haven role: concern about European countries, banks and companies leads to an appreciation of the dollar. The "stress-test" has become global, since all risks unfold simultaneously."
Natixis Flash Economics 353 20100708
Comparisons with Japan, US, Hong Kong and Singapore housing markets for China
• China housing sector development compared with Japan, US, Hong Kong and Singapore: "This report reviews the development of the housing sectors in Japan, US, Hong Kong and Singapore, focusing on the high-growth periods in those markets, in order to make comparisons with China's rapidly growing housing market. We also review housing finance systems and the nature of housing sector leverage during periods of rapid growth, and analyze the impact of specific policy measures on the development of the housing sectors in each country."
• China’s housing sector faces short-term cyclical challenges but longterm outlook is robust: "China’s housing sector exhibits the pronounced cyclicality of a high-growth emerging market. Since 1998, housing values have risen almost 400x and the housing loan market has expanded 125x to become the second-largest home loan market in Asia- Pacific (after Japan)."
• Policy risks appear adequately priced in China developer share prices, but timing of re-entry depends on sales momentum: "The lessons drawn from a review of the other comparative markets show that policy failures/mistakes can accentuate the cyclicality of this sector. We believe the China homebuilders already price in a substantial policy risk premium, but will consider a concerted re-entry into the China homebuilders when contract sales momentum begins to re-accelerate (toward the end of 2010 based on our expectations)."
JPMorgan Asian Property Yardstick 20100714
• China’s housing sector faces short-term cyclical challenges but longterm outlook is robust: "China’s housing sector exhibits the pronounced cyclicality of a high-growth emerging market. Since 1998, housing values have risen almost 400x and the housing loan market has expanded 125x to become the second-largest home loan market in Asia- Pacific (after Japan)."
• Policy risks appear adequately priced in China developer share prices, but timing of re-entry depends on sales momentum: "The lessons drawn from a review of the other comparative markets show that policy failures/mistakes can accentuate the cyclicality of this sector. We believe the China homebuilders already price in a substantial policy risk premium, but will consider a concerted re-entry into the China homebuilders when contract sales momentum begins to re-accelerate (toward the end of 2010 based on our expectations)."
JPMorgan Asian Property Yardstick 20100714
Recovery Is In The Details
- "A light data week provided a much needed respite from the overspinning of disappointing numbers in recent weeks. Recovery appears poised to slow but not falter. The latest business surveys, jobless claims and anecdotal consumer reports suggest moderate growth will continue, while the headlong retreat in risk appetite has paused."
- "Despite an uninspired jobs recovery, a decomposition of employment data shows some encouraging signs. In particular, some structurally damaged sectors may be stabilizing. Nonetheless, the wide disparity between rising profits and capex on one side and lackluster hiring on the other reinforces concern that policy-related uncertainty is delaying a healthier upturn in employment."
- "Headline weakness in retail sales belies relative strength in more comprehensive data on consumer spending. Discretionary consumer outlays continued to ramp up through May. Again in June, the dampening effects of lower gasoline prices and a continuing correction in building materials sales may mask expected gains in areas more directly linked to consumer spending. We expect a rise in core sales of 0.3% for June consistent with roughly 3% growth in real consumer outlays for the second quarter."
Citigroup Comments on Credit 20100709
- "Despite an uninspired jobs recovery, a decomposition of employment data shows some encouraging signs. In particular, some structurally damaged sectors may be stabilizing. Nonetheless, the wide disparity between rising profits and capex on one side and lackluster hiring on the other reinforces concern that policy-related uncertainty is delaying a healthier upturn in employment."
- "Headline weakness in retail sales belies relative strength in more comprehensive data on consumer spending. Discretionary consumer outlays continued to ramp up through May. Again in June, the dampening effects of lower gasoline prices and a continuing correction in building materials sales may mask expected gains in areas more directly linked to consumer spending. We expect a rise in core sales of 0.3% for June consistent with roughly 3% growth in real consumer outlays for the second quarter."
Citigroup Comments on Credit 20100709
Subscribe to:
Posts (Atom)