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Good morning,
Markets are called to open lower in Europe this morning. This is what's happening today:
Markets in the US turned negative yesterday after the Federal Reserve signaled it may consider slowing the pace of asset purchases as officials extended a debate over whether record monetary easing risks unleashing inflation or fueling asset-price bubbles.
In China we also had a negative session as the Chinese Premier Wen Jiabao urged local authorities to “decisively” curb real estate speculation as the country’s leading economic index climbed at a faster pace in January.
A strong sell off in the markets which started in the US and shifted on to Asia. We also expect the European markets to open in negative territory. Its not new news to hear that the Fed could stop quantitative easing if it is having a negative effect on inflation. The goal of the Fed is to get the unemployment rate down though NOT at the detriment of inflation. And with all this money being pumped into the economy, we are seeing a bubble being formed in the market especially in high yield. This is why it makes alot of sense in my opinion to monitor your portfolio periodically and take profits expecially on long dated paper once inflation starts to become a problem.
The definition of a bubble is when alot of money chases too few goods. And this is what we are seeing in high yield. We aren't seeing alot of new issuances on the markets and investors are holding alot of cash. With the feel good factor there is in the markets we are seeing investors chase yield and this is what is worrying officials.
In the UK, the financial services authorities started to go round bond funds to make sure they have enough liquidity in order to cater for eventual redemption from the funds. Don't forget, high yield are illiquid assets. Don't look at them now when there is a feel good factor in the markets. Look at them when we see a correction in the markets and a widening of spreads.
Today I'd like to talk about Schneider Electric and Axa which are both issuing results today. Deutsche Bank have a HOLD recommendation on Schneider Electric. This is what they have to say about the stock, 'We forecast FY sales of €23.7bn and EBITA of €3,387m, a 14.3% margin (and within the guidance of 14-15%). We expect organic sales growth to have decelerated in Q4'12, although the recent stabilization/improvement in industrial PMIs suggests Schneider can likely point to stability in its end markets, which are largely short cycle. After the recent strong run in the shares however we see valuation as full and retain our Hold rating.'
On AXA, Deutsche Bank are OVERWEIGHT with a price target of Eur16. This is what they have to say about the stock, 'AXA reports FY12 results on 21st February. In our view, the key focus remains the economic solvency position (152%e ex US equivalence). Though this is lower than ideal, our view is that (a) this is recovering organically at c6% pa, (b) market movements – especially rising risk-free rates – should have lifted it by a further 5% YTD, and (c) the valuation over-compensates for the risk in any case. As a guide, based on our 2013e forecast, we think the hypothetical EPS dilution from lifting it to 180% would be c10%; yet the shares trade almost 20% below Allianz (Buy; EUR103.25). For this reason, we remain buyers, though we recognise the principal driver is continuing macro normalisation.'
For more information on Schneider Electric or Axa or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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