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Good morning,
Markets are called to open higher this morning. This is what's happening today:
Today I'd like to share with you Barclays' outlook for high yield going into 2013 –
2012 has been a year of transition. The year began with wide spreads amid concerns about systemic risks, notably the European sovereign crisis. As we approach 2013, spreads are much closer to average levels across regions and credit quality, and investors’ focus has shifted somewhat to fundamentals and idiosyncratic risks. This evolution occurred in fits and starts, with the most important catalysts coming from central banks. September was a key month – interventions by both the ECB (the announcement of the Outright Monetary Transactions program) and the Fed (QE3) came during a period of strong financial market conditions, at least relative to previous interventions. These aggressive policy maneuvers have disrupted, if not ended, the cycle of crisis/intervention that had dominated markets through the sovereign crisis.
We expect another year of positive excess returns in 2013. Ongoing support from central banks should translate into muted macro-led volatility, and the systemic risk premium should continue to be drained from the credit market. However, with tighter spreads, excess returns are likely to be lower than those achieved this year, and investors will be forced to seek outperformance in parts of the market that have lagged, such as BBBs in investment grade and CCCs in high yield.
Importantly, we expect the shift from macro, systemic risks into idiosyncratic, single-name volatility to continue. In the past few quarters correlation across credits has begun to decline. The lackluster economic backdrop, particularly in Europe, has started to weigh on results, evidenced by weak Q3 earnings, as well as credit ratings. Shareholder-friendly activity is likely to increase, as companies continue to take advantage of low yields. We also expect a rise in M&A activity, which should be neutral on average for credit investors, but will clearly contribute to differentiation across single names.
The fiscal cliff may turn out to be the major near-term exception to our view. We expect a solution to be reached that avoids a full-blown recession, and ascribe little importance to the cliff in our full-year forecasts. However, a market disruption of some kind could well be the catalyst to an eventual compromise. Given the forementioned Fed and ECB programs, we believe any cliff-led volatility will be less severe than the sovereign-related episodes in 2010 and 2011, and would likely be a buying opportunity. The need to move further out the risk curve to seek outperformance, combined with a potential rise in idiosyncratic single-name volatility, will translate into an environment in which a good bond is hard to find – the theme of our Global Credit Outlook for 2013.
Stock to watch: Medivation (Price $55.33, Price Target $70)
Citigroup Comments: Our target price of $70 is based on 30x our 2015 non-GAAP EPS estimate of $3.10 and discounted by 15% annually. We use a 30x forward multiple, which appropriately reflects the lucrative opportunity in prostate cancer and potential that Astellas might acquire Medivation to consolidate full global rights to the drug. We apply a discount rate of 15% as we believe the solid efficacy data and clean safety profile bode well for clinical adoption and commercial success for Xtandi. We use 2015 as our valuation year as we believe it will be the second year of profitability for Medivation which will accurately reflect the future prospects for earnings growth.
For further information on Medivation or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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