Good morning,

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

  • The China Securities Regulatory Commission issued information-security rules after domestic shares rallied the most in three weeks yesterday on speculation the government would announce measures to boost markets;
  • Japan’s consumer prices in August matched the steepest decline in 16 months, and the nation’s industrial production fell more than economists forecast, while output in South Korea dropped for a third month;
  • Oil for November delivery traded at $92.29 a barrel, increasing 8.5 percent since the end of June. Crude is higher for a second day before a report forecast to show personal spending rose in the U.S., signaling an economic recovery that may boost fuel demand;
  • 10-year Italian debt is trading at 5.106%, 10-year Spain is trading at 5.910% and 10-year Portuguese debt is trading at 8.831%;
  • Consumer spending probably stagnated in August after adjusting for inflation, showing the U.S. economic expansion is struggling to gain momentum, economists said before a report today;
  • Spain's banks stress tests out today;
  • Apple closed the session at $681.32.

Before starting the blog, I recommend that you take a look at the news posted on the web yesterday titled 'A detailed report on what is happening in the markets.' The scope of the report is to give investors our view on the markets and where we think one should be invested.

The markets rose in the US yesterday after positive jobs data though don't get over excited. Every time the markets sell off, you always see markets rally when some positive news comes out. But don't lose sight of the bigger picture. The debt problem in the US and the lack of growth in Europe are not something that will be solved overnight.

In the US, a slack job market and higher gasoline prices are squeezing households, whose spending accounts for 70% of the economy. The slowdown is emerging just as concern mounts that lawmakers may not be able to avoid the fiscal cliff of tax increases and government spending cuts slated to take effect next year. Whoever wins the presidency will contend with a budget on a trajectory dubbed unsustainable by Federal Reserve Chairman Ben S. Bernanke. Barack Obama or Mitt Romney will have to tame a deficit that has topped $1 trillion in each of the past three years. How the new president goes about it will influence the direction of financial markets and define the economy and society for his four-year term and beyond.

Moving on to Europe, the problems are far from over and although Draghi said the ECB will buy unlimited amount of Italian and Spanish 2 and 3 year paper if the countries agree to strict conditions as part of a rescue package funded by euro-region governments, investors are not convinced that this will solve the problems. There are still alot of doubts as to when and if this will happen and the markets are confirming this doubt in two ways. First the sell-off in the markets and secondly the low yield on the bund which indicates that investors are still not ready to put risk back on the table.

Despite having raised some concerns on Europe, it is not all doom and gloom and there are sectors and companies which offer a good return in a well diversified portfolio. It is important to keep in mind that US stocks are trading at only a 9% discount to their long term average whereas German stocks are trading at a 30% discount and Italian stocks are trading at a 40% discount. Although these figures tell us that the market is much more concerned on European problems than on American problems, I would take advantage and get exposure especially to German corporates which offer a good return and have visibility going forward. Ask for a copy of our 'CC equity recommendation list' which includes a number of German companies which give attractive returns.

Taking a look at China, China’s stocks surged in the afternoon yesterday after the Shanghai Securities News, operated by the Xinhua News Agency, said there was speculation the CSRC would announce 10 measures to boost equities while Zheshang Securities Co. said there was market talk the regulator might suspend IPOs. We remain buyers of Chinese ETFs and emerging markets ETFs which in our view will offer the highest returns in 2013.

Stock to watch: Upgrading Beiersdorf and Henkel to BUY

Deutsche Bank comments: BDF and Henkel are both set to renew multi-year business plans. Having done an in-depth appraisal of both groups, we see the opportunity at both companies as still significant. Near term we raise both companies EPS by 7%, but significantly more so for outer years. We therefore upgrade both stocks to BUY with a TP of E70 for BDF and E75 for Henkel. We also look briefly at the merits of combining their personal care assets.

Both companies set to reach margins of 16% or more in the mid term. The key at both companies and their valuation is sustained margin potential. BDF margins of 11.5% in 2011 were unusually low. Having broken down the detail of margin drivers and constructed a margin bridge, we believe the breakeven of Chinese losses by 2014, c.10% margins in their US business and some margin increase in EM’s after significant growth can easily drive consumer margins to 16%. A self help “cleanup” of the Nivea brand and cost cutting should only make things easier. For Henkel, though initially skeptical of its 2012 14% margin target set back in 2008, we soon changed our mind and saw it as achievable. What is now more important is where the next margin (or earning) target gets set next. We see 16% as the minimum. A detailed breakdown of the current margin performance shows this has been achieved by a large 560bp underlying gross margin increase with potential for more.

For more information on Beiersdorf and Henkel, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli