Good morning,

Markets are called to open flat this morning. This is what's happening today:

  • Australian employers boosted payrolls in February by the most in almost 13 years, data showed today;
  • Asian stocks retreated further from a 19-month high amid concerns about property-market curbs in China;
  • European Union leaders start a two-day meeting in Brussels today;
  • HeidelbergCement among cos. reporting results.

2013 big picture view remains that we are in a secular bull market and we recommend that investors overweight equities. JP Morgan came up with 5 notable factors have incrementally supported further gains in stocks:

  • 1: Performance anxiety by portfolio managers as 63% are trailing their benchmarks this year and 15% by 250bp. The average mutual fund is missing their benchmark this year by around 100bp, with 63% of managers trailing their benchmarks. Thus, dips are going to be used by managers to close the performance gap.
  • 2: Announced buybacks recently soared to $23b weekly (4-week avg), a $1.2T annualized rate, or nearly 8% buyback yield. This is the highest 4-week average at any time in this bull market and surpasses the June 2012 peak of $17b by 35%. This massive increase in expected inflows is a positive dynamic on equities. For those wondering, historically, 95%-plus of announced buybacks are executed.
  • 3: Dividend yields of highest payers exceeds investment grade bonds yields by largest margin since 2009. The topquintile of dividend payers in the S&P 500 has a yield of 4.2% compared to 3.5% for investment grade bonds (JULIY Index GP). In December 2012, this yield exceeded bonds by 123bp, the largest since 2009.
  • 4: The "fat tails” are shrinking as expectations for shocks diminish. Financial markets confronted two shocks in the past month, the failed Italian elections and US sequestration and after some initial dips, equities have largely shrugged off these events. Over the past few years, we have heard investors argue for lower P/Es given the prevalence of global tail risks—with those diminishing, these argue for equity P/Es to re-rate.

More information on companies reporting results today:

Heidelbergcement (Deutsche Bank research) – Price E55, Price Target E81 – After the strong stock performance of the last months, HeidelbergCement’s earnings multiples have re-rated to levels comfortably above their historical averages (see page 9). We believe, however, that the stock has further upside potential as the favorable geographical footprint and above-average operating leverage should allow the company to outpace the sector in an upside risk scenario for volumes. Our subdued price growth assumptions (+2.2% pa) leave additional room for outperformance particularly if the company’s pricing initiatives end up being successful.

Lufthansa (Deutsche Bank research) – Price E15, Price Target E19 – Profitability in Lufthansa's passenger business is currently unsatisfying, while profit contribution from the other segments is good. Lufthansa has taken care of several problems over the last quarter: it closed down loss-making Lufthansa Italia and sold bmi to IAG. Now it is tackling the major challenge: improving the profitability in its major business segment, Passenger Airline. The program behind it (which is also meant to improve profits in other segments) targets an operating result of EUR2.3bn in FY15, which would be an all-time high. While we do not yet give Lufthansa the benefit of the doubt that it can reach that target, we still see significant earnings improvement potential. Lufthansa's home market Germany remains a robust base, the competition for new slots at Lufthansa's home base Frankfurt is less intense than initially feared (i.e. fewer defensive steps necessary) and the earnings enhancement efforts are more serious than in previous years in our view. We expect significantly more details about the restructuring program to be provided over the upcoming months, which should further support confidence in Lufthansa's ability to sustainably improve earnings. Based on this assessment, we rate Lufthansa a Buy.

Gemalto (Deutsche Bank research) – Price E72, Price Target E85 – We view Gemalto as a quality growth stock which benefits from several mobile & payment security trends: 1) Mobile payments/NFC, 2) global 4G/LTE mobile network migration, 3) US migration to high-security chip-based (EMV) payment cards. Its market leading position in smartcards, security software and services should enable it to drive an expected 11% 2012-15e revenue & 20% EPS CAGR, amongst the highest in European Technology. We rate Gemalto Buy.

For further information on these stocks or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli