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Good morning,
Markets are called higher this morning. This is what's happening today:
Today is an important day for the markets because European countries start to issued GDP growth figures for Q212. France is expected to show a slowdown in growth of -0.1% for the quarter. Analysts are also predicting a slowdown in growth in France in Q312 which will lead France into a technical recession. On the other hand Germany is expected to post a GDP growth figure of 0.2%. However this is lower than the 0.5% which was seen in Q112 plus exports to emerging markets are falling. Comsumer spending in both France and Germany is falling as people hang on to their savings in a time of crisis. Growth in the Eurozone as a whole is expected to contract by 0.2%.
Despite these negative numbers, we are seeing the markets rally. This is all on high expectations on next week's ECB meeting where the market is expecting Draghi to come out with some measure that will stimulate growth in the Eurozone and send stock markets flying. Though it has happened time and time again that Draghi and the politicians say something but do not deliver what they promised. In the last meeting we saw the markets rally before the meeting and sell of after since the ESM did not have the necessary licence to allow the ECB to use the ESM to buy bonds in the market.
We are expecting France to go into recession next quarter and we are seeing a slowdown in growth in the strongest economy in Europe. Despite this the markets are rallying on hopes that the ECB will stimulate the economy. Don't get over excited by this thought for two main reasons. The first is that the ECB and EU leaders have let us down in the past and secondly the fact that the ECB has to intervene is only a positive in the short run because it will have negative repercussions in the long run. Despite having said this, the markets like any form of stimulus and will rally on the news.
If the ECB had to come out with some form of easing, the banks will be the first to rally. And if I had to place my money on a bank in Europe it would definitely be BNP.
BNP is one of the safest banks in Europe and they beat expectations when they reported their results at the beginning of this month. Deutsche Bank have increased their net income forecast for 2012, 2013 and 2014 by respectively 1%, 5% and 5% (mainly due to higher revenues and lower provisions). Their new price target has been revised upwards to E42. Main risks are a further deterioration of the macro situation in Europe, a contagion of the sovereign debt crisis and some political risk in France.
I would stay invested in US blue chips and the US dollar. However, with expectations that the ECB will eventually intervene, it would be wise to close part of the USD exposure and convert back to Euros. The cash can be used to pick up European corporates which have visibility and are trading on interesting multiples and at a discount to their peers. In my opinion however, a portfolio should remain overweight the dollar and US bluechips at this point in time.
Stock to watch: BNP (Price E33.75, Deutsche Bank Price Target E42)
We find BNP Paribas well positioned in the current challenging environment. First of all, BNP Paribas is little impacted by Basel 3 and we even calculate a comfortable capital surplus under Basel 3 for the company, which is a luxury among European banks in our view and something for which the bank should trade at a premium. We also think that BNPP is particularly well positioned to positively surprise on the execution of its announced deleveraging plan. Indeed, from a funding perspective BNPP should not be under pressure to deleverage after the recent ECB move and as it has a strong franchise that should allow the bank to tap wholesale funding markets at a decent price in our view. Besides, given the capital surplus under Basel 3 and given that BNPP should be able to bridge the current capital gap versus EBA requirements for June 2012 with retained earnings only we also see no pressure to deleverage from the solvency position. Despite likely depressed earnings for the next two years we also expect BNPP to be able to maintain its investment banking ranking, after the bank has recently gained market shares globally. We also find that BNPP faces few risks from the current sovereign debt crisis as its exposure to Greece is negligible. Given the substantial upside to our target price and the good positioning of BNPP in these challenging times we rate the stock Buy.
For further information on BNP or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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