Document 6561509

NEWS
th
MONTH
2014
1300th
October
2014
We continue to see risk to the downside in markets this week, given the growing fears regarding economic slowdown and
disinflation in the Eurozone. Markets were mostly lower last week and while dovish comments from the Fed gave a slight
reprieve Wednesday evening, weaker German export data and global GDP downgrades from the IMF saw markets
reverse gains in the second half of the week. Q3 earnings season gathers pace this week and we see this driving market
momentum. In our view, there is significant potential for earnings to disappoint this quarter, given diminishing global
growth. Economic releases should also influence momentum in the days ahead, with UK CPI Tuesday; Chinese and
German CPI, Empire Manufacturing and US Beige Book on Wednesday; US Industrial Production and Philly Fed on
Thursday; and University of Michigan Consumer Confidence to end the week. Given current market volatility, our
preference remains for cash and selective defensive names.
This week’s market events
Equities Commentary
M
Carrefour – Removal from core portfolio on Sector Technicals
We are removing Carrefour (BUY, TP: €32.50) from the core portfolio on the basis of our
Technical Analysts outlook for the Euro Stoxx 600 Retail sector. We remain Technical bears
on the sector since its breakout below the longer term trend line support. Momentum
indicators for the sector also remain bearish in the medium term. Fundamentally we retain a
BUY rating on Carrefour, however shorter term we believe the shares could come under
further pressure due to the general market and sector weakness. We keep the proceeds of
the sale in cash, bringing our total cash allotment in the core portfolio to 11.5% - the highest
level this year.
CORPORATE
n/a
T
CORPORATE
Intel – Q3
JP Morgan – Q3
Citigroup – Q3
JP Morgan – Remain positive ahead of results
Ahead of results this week, we continue to like JP Morgan in the US Banking sector.
Historically, JPM has beaten expectations in Q3 every year for the last 5 years. QoQ, the
bank has surpassed estimates in 7 of the last 8 quarters. Though investment banking fees
in the industry have soared this year, JPM can also boast a strong consumer and
commercial lending business. Bloomberg consensus expectations are for EPS of $1.384 for
the third quarter and a DPS of $0.40. JPMorgan shares trade on 1.4x Tangible Book value,
which we believe is an unwarranted discount to peers on 1.6x.
Equities
Portfolio Management
Research
UK – CPI YoY
GE – ZEW Survey
Exp.
Burberry- H115
W
CORPORATE
ECONOMICS
eBay – Q3
CH – PPI YoY
Danone – Q3
CH – CPI YoY
GE – CPI YoY
Rio Tinto – Q3
Bank of America – US – Empire Manuf.
Q3
US – Fed Beige
Book
Netflix – Q3
T
CORPORATE
ECONOMICS
Carrefour – Q3
EZ – CPI YoY
Google – Q3
US – Indus. Prod.
MoM
US – Philadelphia
Fed Business
Outlook
Nestle –Q3
Man Group – Q3
Mondi – Q3
Diageo – Q1
Earnings Outlook – Downgrades continue into Q4
As highlighted above, earnings season is kicking off in earnest this week, to a backdrop of a
weaker Eurozone, reduced global growth and on-going geo-political tensions. Earnings
forecasts have reduced steadily over the course of the year. Market expectations for full
year growth in the S&P are now just 7.3%, broadly in line with our expectations at the start
of the year. S&P earnings for Q3 are now expected to be ~4.5%, down from 8.9% in June,
while European expectations are for a 5.4% annual increase, down from 13% at the start of
2014. The impact of Russian sanctions during the quarter will also become clear, with a
number of companies already warning of a negative impact to bottom line. While markets
remain volatile, sector selection is an important consideration. We see the greatest
likelihood of earnings outperformance in Q3 in the Pharmaceutical, Telcoms and Insurance
sectors, while we see the greatest downside risk in Industrials, Energy and Consumer
Discretionary.
ECONOMICS
SAB Miller- Q2
Core Portfolio – 11.5% cash position reflective of our near term Bearish view
We forecast in our Q3 Outlook that “market volatility (will) increase in the latter stages
of the quarter and into the start of Q4, as increasingly divergent Central Bank policy
creates an uncertain interest rate backdrop”. We believe equity markets have not
accurately priced in the benign earnings environment, weaker global growth, or the level of
geopolitical risk. We reiterated that view in our Q4 Quarterly Outlook released last week
(which can be found here). In light of this we reduced our equity exposure over recent
months by removing Siemens (N/C) and now Carrefour, while also realising some profits in
Intel (N/C) and Apple (BUY, TP $123). Our cash position now stands at 11.5% of the core
portfolio. We have positioned the portfolio to take advantage of attractive valuations where
they exist, and in defensive names in our preferred sectors.
ECONOMICS
CH - Trade Balance
American Express –
Q3
Goldman Sachs –
Q3
F
CORPORATE
Travis Perkins –
Q3
GE – Q3
ECONOMICS
US – Univ. Michigan
Confidence
Upcoming Events
20/10/14
20/10/14
Apple – Q3
SAP – Q3
20/10/14
IBM – Q3
21/10/14
21/10/14
21/10/14
21/10/14
21/10/14
Verizon – Q3
GKN – Q3
William Hill – Q3
Coca Cola – Q3
ARM – Q3
22/10/14
GSK – Q3
Bonds
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