In this issue:
XX
Corporate earnings supportive of stocks
XX
Regional equity allocations adjusted
XX
Unlocking shareholder value
XX
Sub-sector differentiation is crucial
equity strategy
monthly
Investment
Communication
May 2014
corporate earnings supportive of stocks
Table of contents
Global equity markets have been volatile since the start of
the year, and this trend appears to be continuing for now.
corporate earnings supportive of stocks
2
regional equity allocations adjusted
3
unlocking shareholder value
4
After a weak January followed by a sharp recovery in February,
sub-sector differentiation is crucial
6
equity markets were in consolidation mode in March and April,
with a considerable amount of rotation into different sectors
and sub-sectors. While this makes the bull market advance
more widely based, with more sectors participating, the belief
that a solid foundation has been laid for a summer rally does not
seem to be catching on yet.
The cautious approach taken by equity investors was the result
of political upheaval in the Ukraine, the weak trend in Chinese
growth and the fragile recovery in confidence indicators and
capital expenditure in Europe.
The strongest markets year to date were the European peripheral
markets, with Italy rallying by more than 15%. Spain and France
also did well. Among emerging markets, China was again a disappointment with a decline of 4%. Smaller emerging markets such
as Taiwan, Thailand and Indonesia performed better after having
experienced marked corrections in the second half of 2013.
Brazilian stocks, which have been in a bear market since the start
of 2011, have been rallying since mid-March but have made little
progress year to date. Japan lost further momentum in both GDP
growth and in stock market gains.
Figure 1: Positive earnings surprises S&P 500 Index 1992-March 2014
no clear regional preference, although within EM Asia we do
90%
have an overweight position in Taiwan and Thailand.
Positive earnings surprises S&P 500 (%)
80%
In general, however, corporate earnings in mature markets
have been supportive of stocks. Earnings announcements for
70%
60%
We currently have a neutral stance on emerging markets with
the first quarter of 2014 have on the whole managed to beat
average
expectations both in the US (see figure 1) and in Europe.
While the strength of the euro is damaging for European multi-
50%
nationals, signs of a recovery in the eurozone after five years of
recession now seem to be convincing even the sceptics.
40%
The US economy is set to regain growth momentum following
its extraordinarily harsh winter. Consumer spending is perking
30%
1992
1995
Source: Bloomberg
1999
2003
2006
2010
2014
up as spring has finally arrived.
Emerging markets currently lack growth momentum, given the
tightening of US monetary policy on the horizon and the credit
issues beginning to plague emerging markets — with parallels
to the US and European credit crises.
>2
At the beginning of the year, markets started to worry about
than US or Japanese firms. Goldman Sachs reports that around
the impact on emerging markets of the US Federal Reserve
18% of European corporate revenues are derived from emerging
cutting back (tapering) its asset purchases. In particular,
markets. Britain (24%) and Switzerland (31%) are even more
emerging markets countries with current-account deficits
exposed. In the US, however, just about 15% of profits of S&P
were affected.
500 Index companies come from emerging markets.
Capital outflows have had a negative effect on the fragile eight
European banks also have exposure. Deutsche Bank calcu-
(India, Indonesia, Brazil, Turkey, South Africa,Argentina, Russia
lates that European banks hold about 12% of their assets
and Chile) and also a negative impact on European companies,
in emerging markets, with about USD 3.4 trillion in loans to
which typically have a bigger exposure to emerging markets
markets that could be viewed as wobbly.
regional equity allocations adjusted
The Global Investment Committee adjusted Asian country allocations in May. Japan is now neutral, while Thailand is overweight.
We are closing our active strategy on Japan and developed
Asia Pacific ex-Japan by downgrading Japan from overweight
to neutral and by upgrading Hong Kong from underweight to
neutral. At the same time, we are upgrading Thailand from
neutral to overweight, funded by a downgrade of Malaysia
from neutral to underweight. (See figure 2.)
Figure 2: Asian country allocation
Countries
New weighting
Australia
Neutral
China
Neutral
Hong Kong
Neutral
Indonesia
Neutral
India
Neutral
Japan
Neutral
Korea
Underweight
Malaysia
Underweight
Singapore
Neutral
Taiwan
Overweight
Thailand
Overweight
Source: ABN AMRO Private Banking
Change
Japan moved to neutral
Although we had expected the Bank of Japan to ease further
h
and the Japanese government to announce corporate tax
cuts, neither of these have materialised. Furthermore, the
yen remains stuck in a trading range of 101 to 103 against
i
i
h
the US dollar, leading to weak company guidance of only
3% recurring profit growth for FY 2014 as well as management assumptions that the yen will remain strong in FY 2014
(USD/JPY at 100 and EUR/JPY between 135 and 140).
With 61% of the companies listed on the Japanese stock
market having reported at the time of writing, analysts have
adjusted their 2014 earnings downwards (mostly in the
utilities, consumer staples and materials sectors), thereby
reducing 2014e consensus earnings by 1.8 percentage
points. This compares with Asia Pacific ex-Japan, where
there was a smaller reduction of 1.5 percentage points in
2014e consensus earnings. Despite some selling in January
and April 2014, the percentage of net foreign purchases of
Japanese equities remains the highest within Asia Pacific at
1.8% of total market capitalisation.
Hong Kong shifted from underweight to neutral
Since our downgrade of Hong Kong from neutral to underweight, the Hong Kong property sector has underperformed,
just as we had expected. As a result, this sector is now
trading at one standard deviation below its long-term historIf you have questions or comments about this publication, contact the Global Investment Communications team at I-Comms.Global@nl.abnamro.com
>3
ical average. Given signs that home prices are stabilising,
provide the impetus for a liquidity-driven market rally. At the
and with housing supply expected to peak in 2014, we see
same time, valuation is not cheap enough for us to recom-
value in selected developers’ share prices, which are at the
mend buying blindly and waiting for the above-mentioned
low end of their trading ranges. Similarly, we are neutral on
improvement to materialise. We consider politics to be the
the banking sector, which has limited potential for improve-
main risk to our overweight view.
ments in short-term net interest margins and return on equity
(ROE), but medium-term capacity for margin expansion once
Malaysia now underweight
interest rates begin to rise again.
We have downgraded Malaysia from neutral to underweight,
as it is the most expensive market in the region. Tightening
Thailand now overweight
measures are likely to lead to slower domestic demand
Our reason for upgrading Thailand from neutral to overweight
growth, which could impact earnings growth. As a result,
is that it is a global economic recovery play with signs of
given that it is considered a low-beta, defensive market,
improving macro-economic fundamentals. A government
Malaysia is likely to underperform other ASEAN markets in
should be elected and functioning by the second half of 2014,
the current environment, where investors are choosing to
which would not only reduce political uncertainty but also
add risk to their portfolios. The Malaysian market is, however,
boost the economy via fiscal spending, rising consumption
supported by large pools of captive domestic liquidity.
and a stronger belief among investors in Thailand’s structural
Renewed volatility in Asia poses the greatest risk to our
story.
strategy, as it would lead to fund flows back into Malaysia as
As foreign investors have tended to shun Thai stocks, an
a relative investment.
improvement in sentiment among foreign investors could
unlocking shareholder value
In our December 2013 Quarterly Outlook, we noted that
companies were being encouraged by shareholders to unlock more of their value. This scenario is now unfolding.
Initially, the tone was set by so-called activist investors putting
pressure on managements to do more to raise shareholder
value. Many larger companies came through the recession in
good shape from a financial point of view, often with considerable cash positions which are now earning very little return.
New technologies were developed and applied, and while
this helped to raise companies’ profitability, it did not always
boost companies’ valuations. Activist investors therefore
Figure 3: US M&A activity, value of deals in USD bln
called for higher dividend payments, share buybacks or split-
USD bln
1,500
Q4
offs and spin-offs, and in many cases these were successfully implemented.
1,200
Q3
Q2
900
Q1
600
A broad range of industries were affected by this proactive trend, with industrial and IT companies as well as
energy firms and materials makers among the first targets.
Well-known names such as Apple, Microsoft, Caterpillar,
Marathon Oil and Dow Chemical responded positively to
suggestions made by large shareholders. There was an
increase in mergers and acquisitions (M&A) in the internet
300
area, with Facebook buying Whatsapp earlier this year and
0
Google securing new monitoring techniques such as Nest
2007 2008 2009 2010 2011 2012 2013 2014
Labs, a producer of digital thermostats and smoke alarms.
Source: Mergermarket Q1 2014 trend report
This flurry of M&A activity started in the US, but the focus
is now turning to Europe. (see figures 3 and 4.) With US
>4
multinationals subject to heavy taxation when repatriating
earnings made in Europe, a number of them are choosing to
use this cash instead to buy European companies.
As one of the first big movers, GE began negotiations to
buy France’s Alstom at the end of April. Siemens has also
expressed interest in the French manufacturer. Pharmaceutical
companies were triggered into action by Pfizer’s bid for Astra
Zeneca from the UK. This deal would have been worth more
than USD 100 bln but is now called off. Soon after, Novartis
and Glaxo announced several asset swaps, including the
sale of Glaxo’s oncology portfolio to Novartis. Valeant, the
aggressive and highly acquisitive Canadian company, made a
hostile bid for Allergan, also worth some USD 100 bln. Sanofi
and Johnson & Johnson have been named as possible other
bidders for Allergan.
An important reason behind this rush to buy assets is the
need for older, ‘big pharma’ companies to add new, mostly
biological drugs and vaccines to their portfolios, as older drug
patents are expiring. This particular trend had been predicted
to happen for quite some time now, and those investors that
have been patiently following this strategy are now being
rewarded.
M&A activity tends to create its own momentum, as many
fear being left out of good deals. This fear prompts those
companies that have been eyeing certain targets to take
action. We therefore expect to see more corporate activity
in the months ahead, with companies from other sectors also
seen as possible targets. Examples where shareholder value
can be enhanced are also imaginable in the food and beverage
Figure 4: Global M&A volumes, % share by deal value (Jan-April 2014)
industry. PepsiCo is under pressure now, but even large
Other
conglomerates such as Unilever and Nestle are being scruti35
Telecoms
30
5
Technology
Oil & gas
Construction
10
Finance
15
Real estate
20
0
Source: Dealogic, Financial Times
Health care
25
Telecoms 20.6%
nised, given their poor share price performances. Integrated
Health care 13.5%
with shareholders asking whether it makes sense for an oil
Technology 8.7%
Real estate 8.6%
Oil & gas 5.9%
Construction 5.4%
Finance 4.9%
Other 32.4%
oil companies have become the subject of much discussion,
company to be vertically integrated when end prices are in
a longer-term correction trend. We may therefore see some
spin-offs or split-ups in this area.
Set in motion by activist investors, the trend to unlock
shareholder value is rapidly gaining traction, beginning with
share buybacks and increased dividend payments and now
moving into spin-offs, asset swaps and outright takeovers.
Shareholders can reap significant benefits from such moves.
We would therefore reiterate that there is still value to be
found in conservative, defensive companies with low valuations, even after the substantial gain in stock prices over the
past few years.
>5
sub-sector differentiation is crucial
While our overall outlook on equity markets remains posi-
However, European car companies have better prospects,
tive, with a preference for European stocks, we make a clear
as European economies are only just beginning to recover.
distinction between those sectors we would overweight and
Moreover, European automotive players have stronger posi-
those we would underweight. And within these sectors, we
tions in long-term growth markets such as China and Brazil.
prefer certain sub-sectors over others. An overview of our
recommendations is given in figure 5.
We have a neutral weighting within the industrials sector,
with a slight overweight in the capital goods subsector.
Within the energy sector, we continue to like the large service
We expect producer confidence in the developed world to
providers such as Halliburton. The sub-sector exploration
improve and the European economic recovery to slowly gain
and production is also very attractive right now, especially in
momentum. In addition, there are two longer-term reasons
the US which is benefitting from high volumes in shale gas
we are positive about capital goods. First, businesses are
and shale oil. Devon Energy is our main pick.
constantly searching for ways to enhance productivity. This
will be achieved through automation to a large extent, which
We remain positive about the IT sector. Within the sector, we
will increase the use of robots (both industrial and service
favour software companies over hardware players. Hardware
robots). (For a more in-depth look at this trend, see our
is likely to further commoditise as low-cost producers from
latest thematic update “New wave in industrialisation”.)
Asia take a bigger share of the pie. By contrast, software
Second, governments around the world are likely to step
companies should benefit from growth in cloud computing
up their investment in infrastructure in the coming years.
and the increasing importance of the internet and social
Developing countries still need to build up much of their
media. The stocks of 3D printing companies have experienced
infrastructure, while developed countries urgently need to
significant corrections in recent months and may now be at
replace or expand their existing infrastructure. According to
attractive levels for investors with a long-term horizon. We
the American Society of Civil Engineers, the US would need
also see opportunities in the semiconductor sector, as contin-
to invest USD 3.6 trillion in order to bring its infrastructure up
uing demand for mobile devices and the upswing in global
to a state of good repair by 2020. Both trends —automation
economic growth should drive worldwide demand for chips.
and increased investment in infrastructure — favour capital
goods companies.
In the consumer discretionary sector, we have a preference
for automotive-related stocks, in particular the European
players. The US car sector may rebound after first-quarter
sales were negatively affected by the unusually cold winter.
Equity Research & Strategy Team
Sybren Brouwer
sybren.brouwer@nl.abnamro.com
Daphne Roth
daphne.roth@sg.abnamro.com
Edith Thouin
edith.thouin@nl.abnamro.com
Ralph Wessels
ralph.wessels@nl.abnamro.com
Maurits Heldring
maurits.heldring@nl.abnamro.com
>6
Figure 5: Subsector preferences
Sector
Sub-sector
Top picks
Comments
Energy
Oil services
Halliburton, Schlumberger
Large service providers continue to benefit from shale gas & oil
Integrated Oils
Chevron
Exploration & Production
Devon Energy
projects and deepsea drilling.
US companies (refining and petrochemicals) are better positioned than those in Europe and Asia.
Refining
Materials
Pure US exploration and production with high volumes.
US companies are in better shape than European companies.
Chemicals
Dow Chemical, DuPont
Industrial gas
Praxair
US chemicals benefit from cheap gas as an energy source and
as a raw material.
Metals & Mining
Construction Materials
Low gas prices and high industrial demand.
Overcapacity is hurting prices.
Heidelberg Cement
Demand in Europe has improved.
Commercial Services & Supplies
Brunel, Randstad
Improving staffing trends within Europe; growth continues in
Capital Goods
GE, Schneider Electric, ABB,
Europe is recovering, while US was hurt by harsh winter. Mar-
Kuka, DMG Mori Seiki, Ar-
gins are improving.
Paper & Forest
Industrials
US.
cadis, Fluor Corp.
Transportation
CSX, Norfolk Southern, FedEx
Harsh US winter had a negative impact, but recovery seen since
March.
Cons. Discretionary
Consumer Durables
Swatch
Luxury players still suffer from weak Chinese demand.
Consumer Services
Accor
Growth of European and large emerging markets economies is
Retailing
Starbucks
Consumers are price sensitive, limiting growth.
Automobiles & Components
Daimler, Fiat
European car producers to benefit from replacement demand in
crucial.
Europe and EM.
Media
Vivendi
Advertising remains subdued; content players are well positioned.
Consumer Staples
Healthcare
Household & Personal Care
P&G
Low inflation is a headwind, but there is growth potential in EM.
Food & Drug Retailing
Delhaize
Low inflation and online trend are threats.
Food, Beverage & Tobacco
Nutreco, Wessanen
Some soft commodity prices (coffee, wheat, milk) are rising.
Health Care Equipment & Services
Cooper Companies
Eye care is a growth area
Pharmaceuticals, Biotech & Life
Gilead Sciences, Novartis
Biotech stocks still favoured; M&A increasing among large
Sciences
Financials
Diversified Financials
Insurance
pharmaceutical companies.
Berkshire Hathaway, ING,
Investment banking and the trading enivironment, in particular,
UBS, Visa, Morgan Stanley
is difficult.
Prudential, AIA Group, Ping An Underlying business, i.e. property & casualty, is a driver; profitability improving.
Commercial Banks
Real Estate
Wells Fargo, BNP Paribas,
Declining mortgage banking in the US; European banks should
SocGen, HSBC, Lloyds
again begin paying dividends.
Simon Property, Unibail-
US remains solid, while there is growth in Europe. Low interest
Rodamco, Eurocommercial
rates help.
Properties
Information Tech
Technology Hardware & Equipment TKH Groep
We expect profitability of hardware players to decline as Asian
players gain market share.
Software & Services
Priceline
Cloud solutions and software will improve productivity.
Semiconductors & Semiconductors ASML
Global economic recovery and growth in mobile devices is
Equipment
fueling chip demand.
Telecom
Telecommuncation Services
Utilities
Renewable Utilities
Regulated/Multi-Utilities
Source: ABN AMRO Private Banking
Orange
No growth in European markets; price war in the US.
Price pressures and high costs.
Exelon
US utilities are better positioned but dividend yields are lower.
Overweight - Neutral - Underweight
>7
Disclaimer
exemption under the Acts, any brokerage and investment advisory services provided by ABN
© Copyright 2014 ABN AMRO Bank N.V. and affiliated companies (“ABN AMRO”), Gustav
AMRO Bank N.V., including (without limitation) the products and services described herein are
Mahlerlaan 10, 1082 PP Amsterdam / P.O. box 283, 1000 EA Amsterdam, The Netherlands.
not intended for U.S. persons. Neither this document, nor any copy thereof may be sent to or
All rights reserved. This material is provided for informational purposes only and does not
taken into the United States or distributed in the United States or to a US person.
constitute an offer to sell or a solicitation to buy any security or other financial instrument.
While based on information believed to be reliable, no guarantee is given that it is accurate or
Other jurisdictions
complete. While we endeavour to update on a reasonable basis the information and opinions
Without limiting the generality of the foregoing, the offering, sale and/or distribution of the
contained herein, there may be regulatory, compliance or other reasons that prevent us from
products or services described herein is not intended in any jurisdiction to any person to whom
doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target
it is unlawful to make such an offer, sale and/or distribution. Persons into whose possession
price(s) contained in this material are as of the date indicated and are subject to change at any
this document or any copy thereof may come, must inform themselves about, and observe, any
time without prior notice. The investments referred to in this material may not be appropriate
legal restrictions on the distribution of this document and the offering, sale and/or distribution
or suitable for the specific investment objectives, financial situation, knowledge, experience,
of the products and services described herein. ABN AMRO cannot be held responsible for
or individual needs of recipients and should not be relied upon in substitution for the exercise
any damages or losses that occur from transactions and/or services in defiance with the
of independent judgement. ABN AMRO or its officers, directors, employee benefit programs
restrictions aforementioned.
or co-workers, including persons which were involved in preparing or issuing this material,
may from time to time hold long- or short-positions in securities, warrants, futures, options,
Sustainability Indicator Disclaimer
derivatives or other financial instruments referred to in this material. ABN AMRO may offer
ABN AMRO Bank N.V. has taken all reasonable care to ensure the indicators are reliable,
and render at any time investment banking-, commercial banking-, credit-, advice-, and other
however, the information is unaudited and subject to amendment. ABN AMRO Bank is not
services to the issuer of any security referred to in this material. Pursuant to offering and
liable for any damage that constitute from the (direct or indirect) use of the indicators. The
rendering such services, ABN AMRO may come into possession of information not included in
indicators alone do not constitute a recommendation in relation to a specific company or an
this material and ABN AMRO may prior or immediately after publication thereof have acted
offer to buy or sell investments. It should be noted that the indicators represent an opinion at
based on such information. In the past year, ABN AMRO may have acted as lead manager or
a specific period of time considering a number of different sustainability considerations. The
co-lead manager with regard to a public offering of securities from issuers as mentioned in this
sustainability indicator is only an indication regarding the sustainability of a company within
material. The stated price of any securities mentioned herein is as of the date indicated and is
its own sector.
not a representation that any transaction can be effected at this price. Neither ABN AMRO nor
other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive
Company disclosures
or exemplary damages, including lost profits arising in any way from the information contained
ABN AMRO may beneficially hold a major shareholding or a significant financial interest of the
in this material. This material is for the use of intended recipients only and the contents may
debt of this company. ABN AMRO currently maintains a market in the security of this company
not be reproduced, redistributed, or copied in whole or in part for any purpose without ABN
and otherwise purchases and sells securities of this company as principal. ABN AMRO has
AMRO’s prior express consent. This document is solely intended for dissemination amongst
received compensation for investment banking services from this company, its subsidiaries or
private/retail customers in a PC country. Distribution to private/retail customers in any jurisdic-
affiliates during the previous 12 months. All disclosures made herein refer to ABN AMRO and
tion that would require registration or licensing of the distributor which the distributor does not
its affiliates, including ABN AMRO Incorporated, which is regulated in the United States by the
currently have, is not permitted. Material means all research information contained in any form
NYSE, NASD and SIPC.
including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP.
Personal disclosures
US Securities Law
The information in this opinion is not intended as individual investment advice or as a recom-
ABN AMRO Bank N.V. is not a registered broker-dealer under the U.S. Securities Exchange Act
mendation to invest in certain investments products. The opinion is based on investment re-
of 1934, as amended (the “1934 Act”) and under applicable state laws in the United States. In
search of ABN AMRO. The analysts have no personal interest in the companies included in this
addition, ABN AMRO Bank N.V. is not a registered investment adviser under the U.S. Invest-
publication’. Their remuneration for this work is not, was not and will not be related directly or
ment Advisers Act of 1940, as amended (the “Advisers Act” and together with the 1934 Act,
indirectly to the specific recommendations or views expressed in this opinion.
80.6479 (05.14)
the “Acts), and under applicable state laws in the United States. Accordingly, absent specific