DB Today - Global/Macropg.jrj.com.cn/acc/Res/CN_RES/MAC/2016/2/2/bb81e5b2-ff0b...2016/02/02 · DB Today - Global/Macro Date 2 February 2016 Tuesday 2nd February, 2016 Mairead Smith

Deutsche Bank Group Markets Research

Global

Periodical

DB Today - Global/Macro

Date

2 February 2016

Tuesday 2nd February, 2016

________________________________________________________________________________________________________________

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Amy Wei

Equity Focus

(+1) 212 250-5574

[email protected]

John McNamara

Equity Focus

(+1) 212 250-4727

[email protected]

Mairead Smith

Equity Focus

(+44) 20 754-71054

[email protected]

MACRO HIGHLIGHTS

Europe Strategy - European Equity Strategy- Sebastian Raedler European equities have risen by 6% since the ECB meeting on Jan 21th, helped by ECB easing hints, a dovish Fed statement and a BoJ deposit rate cut. In combination with a 25% rally in the oil price and a stabilization of the Chinese RMB, this has allowed EM currencies to rebound and credit spreads to tighten. With the major central banks now out of action until March, there is palpable hope for a continued relief rally. Details on page 07

Credit Strategy - Early Morning Reid - Jim Reid Incentives are a great thing in life and there is starting to be chatter as to what the incentive is to buy Euro corporate bonds at a negative yield if it ever happens. It may well be tested very soon as one consequence of the recent ECB/BoJ hint/action has been the strong rally in global fixed income. A scatter of the European non-financial corporate yield universe (in today’s pdf) shows we have so far resisted such a move (bar 3 bonds with a bid yield a basis point or two sub-zero). There is a perception that investors won’t buy corporates with a negative yield and therefore a deeper rally in Government bonds would be a spread widener. Whilst this makes some sense the evidence of spread behavior as yields have gone lower and lower doesn’t necessarily support this. 1-3yr and 3-5yr Euro AA spreads have been range bound in the last 6 months - a period that 2 and 4 year. Details on page 08 German Equities-Weekly Fund Flows-Andreas Bruckner The combination of ECB easing hints and a dovish Fed statement gave rise to a relief rally in equity markets, and allowed for EM currencies to rebound and credit spreads to tighten. In the global investor space, the central banks rhetoric (and not reflecting the BoJ’s surprise deposit rate cut one day after last week’s data set close) helped high-yield fund flows to turn marginally positive for the first time in 2016, with US high-yield inflows being the decisive factor, after having been the main cause of concern since the turn of the year.. Details on page 09

FX Strategy - FX Daily- Robin Winkler Japanese banks are the largest holders of JGBs after the BoJ. Over the past fifteen years, banks' holdings have also been most sensitive to yield changes, even more so than pension fund holdings. A 50bp decline in the 10-year yield would typically see banks' share of outstanding JGBs fall by up to 1%.* Banks therefore are not only the largest but also the most price-sensitive holders of JGBs. Hence, even if BoJ critics are right in arguing that banks' propensity to sell JGBs is lower than in the past given their minimum collateral requirements, banks are still likely to end up with the largest excess funds as JGB yields fall and QQE continues. Details on page 10 Cont’d on Next Page…

GLOBAL MARKET WRAP

INDEX Close 1D YTD %Chg %Chg

S&P 500 1939.38 -0.04 -5.12

NASDAQ 4620.37 0.14 -7.73

DOW 16449.18 -0.10 -5.60

DJ STOXX 50 3008.42 -0.42 -7.93

FTSE 100 INDEX 6022.01 -0.63 -3.53

HANG SENG INDEX 19446.84 -0.76 -11.26

MSCI Asia ex Japan 461.72 0.02 -7.65

BRAZIL BOVESPA 40570.04 0.41 -6.41

RTS-2 INDEX 590.34 -1.66 -6.71

COMMODITY PRICES

COMMODITIES Close 1D YTD %Chg %Chg

West Texas 31.62 -5.95 -14.63

Brent 33.19 -0.87 -7.16

CRB 163.49 -1.96 -7.19

Copper 208.30 1.34 -2.44

Gold (Spot) 1125.06 -0.30 6.00

Alum. (LME) 1521.00 0.13 0.93

Baltic Dry 314.00 -0.95 -34.31

FOREIGN EXCHANGE PRICES

FOREX (vs US$) Close 1D YTD %Chg %Chg

HK$ 7.78 0.00 -0.35

EUR 1.09 0.17 0.46

JPY 120.66 0.27 -0.36

GBP 1.44 -0.35 -2.40

Source: Bloomberg Finance Lp

DERIVATIVES

Current %-ile Value Rank

SPX 3M Mat ATM-Strike Imp Vol 20.18 90.8

SPX 3M Mat 90%-110% IV Skew 11.14 49.8

SPX 3M Mat Realized Vol 17.39 74.2

Source: Bloomberg Finance Lp,

CREDIT

Credit Close 1D YTD %Chg %Chg

CDX.NA.IG 104.02 0.00 17.88

ITRX.Europe 94.80 1.86 23.03

CDX.NA.HY 99.59 0.00 -1.63

ITRAX.XOVER 376.23 1.99 19.66

Source: Bloomberg Finance LP

2 February 2016


Page 2 Deutsche Bank Securities Inc.

MACRO HIGHLIGHTS

Japan Strategy- Japan FI Morning Memo - Makoto Yamashita The BoJ's introduction of a negative rate has depressed yields. A negative rate on its own could push yields in both directions, but it is being combined with large JGB purchases. The shift to quantitative easing with a negative rate has increased the downside impact on yields from the BoJ's operations because investors participating in the operations move on the assumption that the auctions will have a tail. In addition, investors will prioritize taking duration risk in search of high yield since the base of the yield curve has been pinned down. However, negative rates should be able to facilitate a rise in yields. We expect funds in the portion of current accounts attracting a negative rate and investment fund rolls in the call market to flow into duration risk and risk assets such as foreign currency assets and stocks. If yen depreciation accelerates due to such moves, it should heighten inflation pressure somewhat from the fundamentals side. The rise in Bund yields in April 2015 was also likely sparked by euro depreciation.. Details on page 11

US Economics - US Economics Weekly - Joseph LaVorgna As we wrote in the current US Economics Weekly, we were particularly troubled by the weakness in business spending in the Q4 advance GDP report. In particular, nonresidential fixed investment, which is composed of three main categories (structures, equipment and intellectual property), was soft last quarter, while inventory accumulation has created the potential for a large reduction in stockpiles this year. Within the details of the former, structures has now contracted in 2 consecutive quarters and in 3 out of the last 4 quarters. This was entirely due to a plunge in expenditures on mining exploration, shafts and wells. This subcomponent within structures was down -38.7% last quarter. Structures less energy were up a healthy 2.8% in Q4 and a solid 16.2% over the past year. However, this mildly positive news was offset by non-energy related weakness in spending on equipment and intellectual property; the former category, which we estimate has very little exposure to energy, fell -2.6% last quarter and is up only 2.4% compared to one year ago. This is the slowest annual growth rate for a non-recessionary period since 2007, just as economic activity was peaking. Finally, spending on intellectual property products rose only 1.6%, not much of a bounce back from Q3’s unexpected -0.8% decline. The last two quarters have been the weakest since H1 2010. As an aside, newly-released construction data point to a 0.2% downward revision to Q4 GDP to 0.5%. Details on page 12

KEY COMPANY RESEARCH

ASIA MediaTek (2454.TW),TWD212.00 Sell Price Target TWD176.00

Michael Chou: Tgt TWD 188 to TWD176. We lower our 2016/17 EPS forecasts by 6%/4% to factor in weaker-than-expected sales momentum and margins. Our 2016/17E EPS are 16%/32% below consensus estimates. We expect intensified pricing in 3G/4G smartphone chips in 2016/17 due to Spreadtrum's ongoing low-margin pricing strategy and the introduction of the 4G Cat 6 smartphone chip solution in 2H16. Reiterating Sell. Details on page 13 Utilities - China Wind Michael Tong: The risks of curtailment hikes have been the primary reason behind sector underperformance of 15-20% in the past three months. By quantifying each developer’s curtailment exposure and the boost to wind utilization from the UHV transmission, we conclude that the negatives have been largely priced in after downward earnings revisions. Wind developers are also shifting new capacity addition away from curtailment areas in 2016. An earnings CAGR of 14-27% in 2015-17E, together with single-digit FY16 PEs, makes the sector’s risk-reward appear very attractive. We maintain Buy recommendations on Huadian Fuxin, Huaneng Renewable, and Longyuan Power... Details on page 14 JAPAN Japan Real Estate Inv. (8952.T),¥633,000 Hold Price Target ¥630,000 Yoji Otani: Buy to Hold, tgt ¥610,000 to ¥630,000. The Bank of Japan (BoJ) decided to introduce a negative interest rate on 29 January. The J-REIT sector surged after the BoJ’s announcement. Japan Real Estate Investment’s (JRE’s) unit price also rose to ¥638,000 (last price of 29 January), which was above our previous target price of ¥610,000. As a result of revising our earnings forecasts, we raise our target price slightly to ¥630,000. However, we downgrade our rating from Buy to Hold since our new target price is in line with the current unit price.. Details on page 15 Nippon Building Fund (8951.T),¥614,000 Hold Price Target ¥610,000 Yoji Otani: Buy to Hold, tgt unch at ¥610,000. The Bank of Japan (BoJ) decided to introduce a negative interest rate on 29 January. The J-REIT sector surged after the BoJ’s announcement. Nippon Building Fund’s (NBF’s) unit price also rose to ¥622,000 (last price of 29 January), which was above our target price of ¥610,000. Although we maintain our earnings forecasts, we downgrade our rating from Buy to Hold. We reiterate our target price of ¥610,000.. Details on page 16 Cont’d on next Page…..

2 February 2016


Deutsche Bank Securities Inc. Page 3

KEY COMPANY RESEARCH

EUROPE European insurers Oliver Steel: Insurers have been amongst the weaker performing sectors YTD - with the more market-sensitive companies leading the way down. In this note, we look at how the balance sheets of the larger insurers should have fared in the recent sell-off, and the vulnerability of each to different scenarios going forward. Thus far, we see dividend-paying ability as largely unaffected, offering attractive yields if markets stabilise. Inevitably, however, if markets fall further, we would expect dividend growth expectations to weaken - with Aviva (Buy), Generali (Hold) and L&G (Buy) more vulnerable, but AXA (Buy) and to a lesser extent Allianz (Buy) continuing to look well-placed. Details on page 17 LATIN AMERICA Latam Airlines Dec Q 2015 Preview Michael Linenberg: We are projecting our Latam airline coverage universe will generate an operating profit of $369 mm in the Dec Q, which represents a 44.6% decline from the prior year. While fuel expense is estimated to fall 33.6% or $748 mm from a year ago, we think the decline will not be enough to offset significant revenue pressure (estimating top-line to decline 17.2%), as most carriers fail to raise/maintain fares. In that regard, we project the industry’s yield (average fare per mile) will slide 21.7% y-o-y, representing a $1.3 bb headwind to industry profits, driven in large part by weak FX/macroeconomic conditions (with key economies, such as Brazil and Venezuela, in deep recessions). Details on page 18 SOUTH AFRICA Food - Food for thought; inflating expectations Caron Bramwell: We assess the impact of the continued run-up in soft commodity prices and ZAR weakness on food price inflation. Movement in underlying grains prices is a key driver of food inflation in SA. Food inflation bottomed out in July 2015, following the recent surge in grain prices. We forecast food inflation to rise to 10% during FY16, driven by high double-digit grain price increases. We expect to see moderate price increases of 6% to 8% across other food categories.. Details on page 19 NORTH AMERICA Google (GOOG.OQ),USD752.00 Buy Price Target USD1,080 Ross Sandler: Tgt USD900 to USD1080. Google’s 4Q results left little confusion around the strength of the core franchise. There are few companies in global technology with $20B in quarterly revenue, consistently growing north of 20% ex-fx on top and bottom lines, and further, seeing re-acceleration – all truly astonishing feats. Despite this positive backdrop, shares trade at 19x 2016 “core” EPS, slightly above the S+P multiple (after netting out “other bets”). We think the current re-rating in GOOGL shares is 2/3rds of the way complete and is likely to grind to $1000+, hence remains our top pick. Buy... Details on page 20 Retail - 2016 Top Picks Paul Trussell: Thematically, the low-end is working in this volatile backdrop, with WMT and the dollar stores consistently in the green of late. We acknowledge the “improved prospects” of their core customer, but remain selective at current valuations. Instead, our best ideas are proven winners in their sector, each outperforming peers on the top-line. We argue that these trends are sustainable and underappreciated at current multiples, especially with catalysts ahead. This report provides a detailed overview of 3 of the main supporting points behind our Buy ratings for Foot Locker (FL), JCPenney (JCP), and Costco (COST) while also discussing the one major risk to our calls... Details on page 21

2 February 2016



TODAY’S HEADLINES

Markets: Equities down in many markets Monday as manufacturing PMI data disappoints, but losses substantially pared in late trade, energy leads commodities lower, bond yields generally higher. Asian bourses mostly softer early Tuesday, but China’s markets more than recoup Monday’s losses.

USA: Fed's Fischer says difficult to gauge impact of recent turmoil, still expects gradual rate hikes, March decision uncertain, says policy to be data-dependent.

USA: Personal spending prints flat in December, below mkt, core PCE deflator also flat.

USA: Markit Manufacturing PMI revised down 0.3pts to 52.4 in January.

USA: Manufacturing ISM rises 0.2pts to 48.4 in January, below mkt.

USA: Construction spending rises 0.1% mom in December, below mkt.

EMU: Manufacturing PMI confirmed at 52.3 in January, down from 53.2 in December.

DEU: Manufacturing PMI revised up 0.2pts to 52.3 in January, down from 53.2 in December.

FRA: Manufacturing PMI confirmed at 50 in January, down from 51.4 in December.

ITA: Manufacturing PMI down 2.4pts to 53.2 in January, below mkt.

ESP: Manufacturing PMI up 2.4pts to 55.4 in January, above mkt.

UK: Manufacturing PMI up 0.8pts to 52.9 in January, above mkt.

UK: Mortgage approvals up 70.8k in December, up from 70.4k in November.

CHE: Manufacturing PMI down 0.4pts to 50 in January, below mkt.

SWE: Manufacturing PMI down 0.5pts to 55.5 in January, below mkt.

NOR: Manufacturing PMI up 2.1pts to 49.2 in January, above mkt.

AUS: RBA leaves cash rate at 2%, as widely expected, notes recent labour market improvement but also recent financial turbulence that could foreshadow weaker global & domestic demand.

THE DAY AHEAD.

USA: Fed's George speaks, IBD/TIPP economic optimism (Feb), ISM New York (Jan), Vehicle sales (Jan)

EMU: Unemployment rate (Dec), PPI (Dec)

DEU: Labour report (Jan)

ITA: Unemployment rate (Dec P)

ESP: Unemployment (Jan)

CHE: SNB's Jordan speaks, Real retail sales (Dec)

JPN: Monetary base (Jan)

IN: RBI repo rate announcement

Source: Extract from DB Daily published on 02 February 2016

2 February 2016



Forecast G7 Quarterly GDP growth

% qoq saar/annual: % yoy

Q1 15 Q2 15 Q3 15 Q4 15F Q1 16F Q2 16F Q3 16F Q4 16F 2015F 2016F 2017F

US 0.6 3.9 2.0 0.5 1.5 2.2 2.1 2.4 2.4 1.8 2.1

Japan 4.4 -0.5 1.0 0.5 1.2 0.5 1.6 1.8 0.7 0.9 0.7

Euroland 2.2 1.6 1.2 1.4 1.7 1.7 1.8 1.8 1.5 1.6 1.5

Germany 1.4 1.8 1.3 1.4 2.1 0.9 2.1 2.1 1.7 1.9 1.6

France 2.8 0.1 1.0 0.8 1.6 2.0 1.6 1.2 1.1 1.4 1.5

Italy 1.7 1.1 0.8 1.3 1.7 1.6 1.4 1.0 0.7 1.4 1.0

UK 1.5 2.2 1.8 2.5 2.6 2.6 2.5 2.5 2.4 2.5 2.3

Canada -0.7 -0.3 2.3 1.3 1.7 2.0 2.3 3.0 1.3 1.8 2.5

G7 1.4 2.3 1.6 0.8 1.6 1.8 .0 2.1 1.8 1.7 1.8 a) Euroland forecasts as at the last forecast round on 08/12/15. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)GDP figures refer to working day adjusted data, except Germany. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions. e) The world aggregate has been calculated based on the IMF weights released in April 2015. Sources: National authorities, Deutsche Bank Research Data updated from Global Economics Perspective note published on 26 Jan 2016

Commodities: Energy Commodities & Precious Metals Price Forecasts

USD Q4 15 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017 2018

WTI (bbl) 43.6 49.2 45.0 50.0 50.0 50.0 48.8 53.0 53.0 57.0 57.0 55.0 65.0

Brent (bbl) 46.5 54.2 49.0 55.0 55.0 55.0 53.5 58.0 58.0 62.0 62.0 60.0 70.0

US Natural Gas (mmBtu)

2.30 2.66 2.30 2.50 2.55 2.70 2.51 3.00 3.08 2.96 3.36 3.10 3.30

Gold 1103 1160 1100 1050 1000 980 1033 1050 1100 1100 1150 1100 1150

Silver 14.8 15.7 14.8 14.6 14.0 13.6 14.3 14.5 15.0 15.5 16.0 15.3 16.5

Aluminium

USc/lb 67.1 75.3 66.0 67.6 69.4 71.7 68.7 70.3 71.7 73.5 74.0 72.4 77.1

USD/t 1478 1660 1455 1490 1530 1580 1514 1550 1580 1620 1630 1595 1700

Copper

USc/lb 220.8 249.8 208.7 217.8 204.2 199.6 207.6 204.2 208.7 217.8 226.9 214.4 242.0

USD/t 4866 5505 4600 4800 4500 4400 4575 4500 4600 4800 5000 4725 5333 Source: Deutsche Bank, Figures are period averages

CENTRAL BANK POLICY (%)

Current Q2-16F Q416F Q4-17F

US 0.375 0.875 1.125 2.125

Eurozone 0.05 0.05 0.05 0.05

Japan 0.10 0.10 0.10 0.10

UK 0.50 0.75 1.00 1.50

China 1.50 1.50 1.00 1.00

India 6.75 6.50 6.50 6.50 Source: The House View published on 13 January 2016

2 February 2016



FORECAST

FOREIGN EXCHANGE RATES Vs US Dollar vs. Euro

Countries Current Jun16 Dec 16 Dec 17 Current Jun16 Dec 16 Dec 17

United States - - - - 1.09 1.02 0.95 0.85

Japan 120.65 125 128 120- 131.72 128 122 102-

Euroland 0.92 0.98 1.05 1.18 -- - - -

United Kingdom

0.70 0.72 0.78 0.87- 0.76 0.73 0.74 0.74-

Switzerland 1.02 1.08 1.18 1.33- 1.11 1.10 1.12 1.13-

Canada 1.40 1.40 1.45 1.35- 1.53 1.43 1.38 1.15-

China 6.58 6.74 7.00 7.00 7.18 6.87 6.65 5.95

India 67.99 68 68 69 74.18 69 65 59 * Sources: Deutsche Bank, Bloomberg, Datastream. Data last updated form ‘Macro Forecasts’ report published on 02February2016 Current rates taken from Bloomberg Finance Lp

GOVERNMENT RATES Current Q2-16F Q4-16F Q4-17F

US 10Y yield 1.97 2.75 2.25 2.75

EUR 10Y yield 0.44 0.75 1.10 1.50 Source: The House View published on 13 January 2016 *Current Rates taken from Bloomberg Finance Lp

INDEX FORECASTS Current* 2015

DJ Stoxx 600 336.90 390

FTSE 100 5978.03 NA

Dax 600 9640.15 NA

MSCI AC World 375.99 NA

S&P 500 1939.38 2050 Source: : The Equity View published on 13 November 2015 *Current Rates taken from Bloomberg Finance Lp

CORPORATE ACCESS

UPCOMING CONFERENCES/TRIPS/EVENTS

Date Conferences

February 16 – 17, 2016 dbAccess Philippines Corporate Day 2016 @ Hong Kong

February 18 – 19, 2016 dbAccess Philippines Corporate Day 2016 @ Singapore

February 15 – 16, 2016 dbAccess Korea LG Corporate Day 2016@ Hong Kong

February 18 – 19, 2016 dbAccess Korea LG Corporate Day 2016@ Singapore

March 3, 2016 Pharma One-on-One Day @ Denver

March 2 - 4, 2016 9th Annual dbAccess India Conference @ Mumbai and New Delhi

March 8, 2016 New Zealand Corporate Day @ Australia Source: Deutsche Bank For more details log on to www.conferences.db.com

2 February 2016



European Equity Strategy

Market overview – February 2016: A lot has to go right

European equities have risen by 6% since the ECB meeting on Jan 21th, helped by ECB easing hints, a dovish

Fed statement and a BoJ deposit rate cut. In combination with a 25% rally in the oil price and a stabilization of

the Chinese RMB, this has allowed EM currencies to rebound and credit spreads to tighten. With the major

central banks now out of action until March, there is palpable hope for a continued relief rally.

Yet, we believe a lot has to go right for risk assets to perform well – and still see downside risk for European

equities over the coming months, given that: (a) The market is now priced for an extremely dovish Fed

delivering less than one 25bps rate hike in 2016. However, the Fed will not give up easily on its project of

curbing financial risk-taking and will see any reduction in financial stress as an occasion to hike. Until we get

an explicit Fed relent, this is likely to make risk asset rallies ultimately self-defeating; (b) US (and global) macro

data continue to weaken. This reduces the risk of a Fed hike in the near-term, but raises that of a US

recession. US macro data have to be weak enough to keep the Fed on the sidelines, but strong enough to

allay recession fears – a tricky path to get right; (c) We see upside risks to US HY spreads, as the default

scenario they are priced for appears too benign (4%, vs our analyst’s projection of 5.7%), given stretched US

energy balance sheets. European equities are slightly above fair value, given current HY spread levels; (d) The

30bps drop in the US 2-year note yield over the past month has taken pressure off the Chinese RMB, but any

increase in US rate expectations will bring the issue back to the fore. The publication of Chinese FX reserve

data on Feb 7th could be a negative catalyst if it show signs of accelerating capital flight.

European investors remain defensively positioned: our European sector positioning proxy (based on the

correlation between European equity fund returns and sector performance) points to consumer staples as

investors’ main overweight, while energy, materials and financials are key underweights. Investors have

smaller overweight positions in utilities, tech and industrials, while telecoms is a surprise underweight.

Overall, there is a strong correlation between positioning and valuation: investors continue to hide in the

expensive safe havens, while value sectors remain unloved.

The European Q4 earnings season is off to a solid start: With 15% of companies having reported so far, 58%

have beaten on EPS. Reported aggregate EPS are up 8.6% year-on-year (while consensus only expected 1.8%

growth for these names). Industrials stand out, having contributed almost half of total EPS growth so far.

Consensus expects 4.5% European EPS growth for 2016 (close to our forecast of 5%), with banks and autos

projected to make the largest positive contribution.

Sebastian Raedler (+44) 20 754-18169

[email protected]

2 February 2016



Early Morning Reid Macro Strategy

*** Last week we canvassed opinion as to whether readers would tolerate us adding a topical or interesting graph

to the PDF of the EMR or whether they'd rather see it as a separate document later in the day. The first option won

out by around 85% so we are going to trial it for a few weeks. We envisage adding a chart 2 or 3 times a week. If it

gets too much please tell us. We'll try to keep the accompanying commentary brief. ***

I haven't mentioned Bronte for a while but I must inform you about her new found crafty side. We have been having

problems with her as a few times recently she has indicated a desire to go to the toilet, only to be let out and

afterwards refuse to come back in. Instead she runs around the garden getting very muddy and digging holes to

Australia in the process. So by the time we persuade her to come in she’s filthy meaning we have to wash her (often

in the cold, rain and dark). So as to get her to come back on command we've started letting her sniff high value

cooked chicken before letting her out so she has an incentive to do her business and then come straight back in. It

works a treat as she loves chicken. However she's now caught on and her toilet requests have increased. She now

goes outside, fakes it and sprints back in to collect her prized piece of chicken. One has to hand it to her.

Incentives are a great thing in life and there is starting to be chatter as to what the incentive is to buy Euro corporate

bonds at a negative yield if it ever happens. It may well be tested very soon as one consequence of the recent

ECB/BoJ hint/action has been the strong rally in global fixed income. A scatter of the European non-financial

corporate yield universe (in today’s pdf) shows we have so far resisted such a move (bar 3 bonds with a bid yield a

basis point or two sub-zero). There is a perception that investors won’t buy corporates with a negative yield and

therefore a deeper rally in Government bonds would be a spread widener. Whilst this makes some sense the

evidence of spread behavior as yields have gone lower and lower doesn’t necessarily support this. 1-3yr and 3-5yr

Euro AA spreads have been range bound in the last 6 months - a period that 2 and 4 year Bund yields have rallied

around 30bp and 40bps respectively and deep into negative territory. So one might have expected some widening if

the zero bound was a hard floor for corporates. Our central view is that zero might be a temporary resistance point if

Government yields rally further but that at some point the dam will break and corporates will trade on a spread basis

and go sub-zero. Obviously this all depends on whether a further deeper rally occurs. At the moment 2 year bunds

are at -0.47% and 1-3yr AA spreads at +58bps so we’re getting closer to testing the theory, especially for the tighter

bonds in the index. All thoughts on this very welcome. Even the most bearish strategist might have laughed loudly at

the thought of negative corporate bond yields even a couple of years back. We should add that AA Swiss corporate

yields are negative out to 10 years (see second graph) which given 2, 5 and 10yr Government bonds are at -1.085% -

0.78%, -0.31% respectively shouldn't be a surprise. Clearly it's not as big a market but the zero bound didn't hold for

corporates here.

Jim Reid (+44) 20 754-72943

[email protected]

2 February 2016



Weekly Fund Flows US sovereign bonds remain default option for fund investors

Last week’s (Wed-Wed) review of funds’ in/outflows as % of funds’ AuM.

The combination of ECB easing hints and a dovish Fed statement gave rise to a relief rally in equity markets, and allowed for EM currencies to rebound and credit spreads to tighten. In the global investor space, the central banks rhetoric (and not reflecting the BoJ’s surprise deposit rate cut one day after last week’s data set close) helped high-yield fund flows to turn marginally positive for the first time in 2016, with US high-yield inflows being the decisive factor, after having been the main cause of concern since the turn of the year. However we think this sentiment lift will be short-lived and see upside risks to US HY spreads, because the default scenario they are priced for appears too benign given stretched US energy balance sheets (A lot has to go right , Feb 1).

The accommodating environment for risk on the other hand did not translate into auto-replies by investors, and neither did the risk-averse markets of the week prior. Instead fund investors continued to show very selective tastes, (i) extending the strong inflows in US sovereign bond funds into a fourth week and a two-year cumulative high, reassured by the Fed’s dovish statement (see top right chart), (ii) solidifying Japanese equity funds as the strongest risk asset year-to-date, while (iii) shying away from European and US equity mandates. The large equity flow re-allocation out of the US has stalled (details ), but US mutual equity funds in particular have not seen flows return, now posting seven-year high outflows on a 3-month average basis (see middle right chart).

Across asset classes – MM (+) vs. equities (~) & bonds (~): Total equity funds (-0.0%) remained directionless as small gains for DM (+0.0%) were offset by sizeable losses in EM (-0.2%). Total bond funds (+0.0%) turned positive as inflows for sovereign bond funds (+0.5%) outweighed outflows for credit (-0.1%). Investors consolidated their YTD-positions in US sov bonds (+2.3%), and Japanese equities (+0.9%). MM flows turned positive (+0.2%).

DM equity funds (~) with US (-), Western Europe (~) vs. Japan (+): DM equity funds (+0.0%, MFs: -0.1%, ETFs: +0.3%) showed no direction, with strong inflows into Japan (+0.9%, MFs: +0.4%, ETFs: +1.2%) again being offset by US outflows (-0.1%, MFs: -0.2%, ETFs: +0.0%). Western European equity funds (+0.0%, MFs: -0.4%, ETFs: +0.4%) remained neutral despite ECB easing hints.

EM equity funds (-) with EMEA (-) & Lat-Am (~) but Asia ex-J turning (+): The threat of falling oil prices, and a strong dollar took a breather last week and so did Asia ex Japan equity funds (+0.3%), driven by significant inflows into China (+0.9%, highest since mid-July’15). However overall, EM equity funds (-0.2%, MFs: -0.5%, ETFs: +0.4%) ended in negative territory once more, majorly driven by losses in EMEA (-0.3%), while Lat-Am (+0.0%) remained muted.

Bond funds (~) on sov bond gaining (+) and credit partly rebounding (-): Flows into bond funds overall turned marginally positive (+0.0%) with inflows for sov bonds (+0.5%) outweighing outflows for credit (-0.1%). Credit outflows however slowed significantly from the previous week (-0.9%) as HY flows (+0.0%) turned positive for first time in five weeks driven by US HY flows (+0.4%). Investors’ strong interest for US sov bonds (+2.3%) continued for a 7th consecutive week, while EM bond funds (-0.3%) experienced outflows for a third week in a row.

Andreas Bruckner (+44) 20 754-18171

[email protected]

2 February 2016



FX Daily Following Japan's flow of funds

Japanese banks are the largest holders of JGBs after the BoJ. Over the past fifteen years, banks' holdings have also been most sensitive to yield changes, even more so than pension fund holdings. A 50bp decline in the 10-year yield would typically see banks' share of outstanding JGBs fall by up to 1%.* Banks therefore are not only the largest but also the most price-sensitive holders of JGBs. Hence, even if BoJ critics are right in arguing that banks' propensity to sell JGBs is lower than in the past given their minimum collateral requirements, banks are still likely to end up with the largest excess funds as JGB yields fall and QQE continues.

So where will banks' excess funds flow: into the non-financial sector as expected by the BoJ, abroad as hoped by yen bears, or simply back into BoJ deposits? We expect to see all these flows in some measure, as in past years, but we believe that a disproportionately large share of banks' excess funds is likely to flow abroad.

Although banks, including Japan Post, are the largest holders of JGBs, these comprise only 12% of their total assets of ¥1,800trn. Changes in JGB yields, therefore, are unlikely to unleash tectonic shifts in banks' balance sheets, but even marginal changes are large when measured against Japan's balance of payments. In the average quarter since 2000, Japan's banks invested roughly ¥1trn in overseas securities. During quarters in which JGB yields fell by 50bps, however, they would have bought an additional ¥1.2trn, all things constant. Although banks would have added to their stocks of cash and deposits by the same amount as they underweight JGBs, in relation to their aggregate balance sheet they display a higher propensity to invest in foreign assets than in cash and deposits. Importantly, this result is conservative considering that BoJ current accounts now yield negative at the margin. Hence, the flow of funds from the past fifteen years suggest that banks are likely to keep some of the proceeds from JGB sales in liquid form whilst also stepping up foreign security investment meaningfully. Other institutional and retail investors are also likely to rotate into foreign assets as JGB yields fall. Overall, we expect post-BoJ outflows to push USD/JPY toward 125 even if the structural GPIF re-allocation is petering out.

Robin Winkler (+44) 20 754-71841

[email protected]

2 February 2016



Japan FI Morning Memo Qty+ neg rate+ concerns of global economic slowdown= fall in JGB yields

Quantity + negative rate + concerns of global economic slowdown = likely fall in JGB yields The BoJ's introduction of a negative rate has depressed yields. A negative rate on its own could push yields in both directions, but it is being combined with large JGB purchases. The shift to quantitative easing with a negative rate has increased the downside impact on yields from the BoJ's operations because investors participating in the operations move on the assumption that the auctions will have a tail. In addition, investors will prioritize taking duration risk in search of high yield since the base of the yield curve has been pinned down. However, negative rates should be able to facilitate a rise in yields. We expect funds in the portion of current accounts attracting a negative rate and investment fund rolls in the call market to flow into duration risk and risk assets such as foreign currency assets and stocks. If yen depreciation accelerates due to such moves, it should heighten inflation pressure somewhat from the fundamentals side. The rise in Bund yields in April 2015 was also likely sparked by euro depreciation.

However, we expect superlong sector yields to test room for downside through 2016. Concerns of a worldwide economic slowdown continue to weigh on yields. Even if the BoJ's negative rate provides some support for the Japanese economy through yen depreciation, this is merely a beggar-thy-neighbor policy. It is important to remember that the direction of the world's fixed income markets are based on fundamentals. Looking at the US economy, the ISM Manufacturing Index has spent four straight months below 50 and concerns of an economic slowdown persist (even with the ISM new orders index back above 50, concerns of a downturn in the capital investment cycle are likely to persist as core capital goods orders are weak). We expect the BoJ's new quantity + negative rate policy will put sustained downside pressure on yields. The BoJ has likely put downward pressure across the entire yield curve to help prevent an undersubscription of auctions. Examples in countries that have introduced negative rates indicate that yields are likely to continue to decline in the absence of a bull-flattening rally led by superlong government bonds. We expect yields to have a strong downward bias amid continued high volatility. We expect the 10y to trade in a range of -0.05% to +0.15% for now. We see the near-term bottom for the 20y yield at 0.5% and the 30y at 0.75%, and recommend buying at those levels.

Today's market forecast: 10y JGB auction to weigh JGB yields tested downside yesterday. Overseas markets were risk-on last Friday, but the market's attention focused on the BoJ's JGB purchase operation. The Bank conducted a purchase operation in the intermediate sector which encouraged yields in that sector to fall and depressed yields overall. The pro-rata yield in the 1-3y sector purchase operation was -8bp, with a 3.4bp tail. This was likely within the expected range. The introduction of a negative rate was unexpected, so funds are likely to flow into the superlong sector in search of high yield. We expect volatility to continue depending on the result of the BoJ's operations. The ISM Manufacturing Index for January, announced yesterday, remained below 50, and with personal consumption expenditure also weak inflation did not heighten. We see little news that would hasten a US rate hike. As a result, Fed Vice Chair Stanley Fischer also likely had to take the stance that a rate hike in March is uncertain and depends on economic data.

Makoto Yamashita (+81) 3 5156-6622

[email protected]

2 February 2016



US Daily Economic Notes Weak business spending bodes poorly for 2016 growth

Commentary for Today: As we wrote in the current US Economics Weekly, we were particularly troubled by the

weakness in business spending in the Q4 advance GDP report. In particular, nonresidential fixed investment, which

is composed of three main categories (structures, equipment and intellectual property), was soft last quarter, while

inventory accumulation has created the potential for a large reduction in stockpiles this year. Within the details of

the former, structures has now contracted in 2 consecutive quarters and in 3 out of the last 4 quarters. This was

entirely due to a plunge in expenditures on mining exploration, shafts and wells. This subcomponent within

structures was down -38.7% last quarter. Structures less energy were up a healthy 2.8% in Q4 and a solid 16.2%

over the past year. However, this mildly positive news was offset by non-energy related weakness in spending on

equipment and intellectual property; the former category, which we estimate has very little exposure to energy, fell -

2.6% last quarter and is up only 2.4% compared to one year ago. This is the slowest annual growth rate for a non-

recessionary period since 2007, just as economic activity was peaking. Finally, spending on intellectual property

products rose only 1.6%, not much of a bounce back from Q3’s unexpected -0.8% decline. The last two quarters

have been the weakest since H1 2010. As an aside, newly-released construction data point to a 0.2% downward

revision to Q4 GDP to 0.5%.

The weak profile of business spending resulted in a sharper slowdown in final sales, defined as GDP less inventories,

than we had assumed. Final sales increased just 1.2% last quarter, and growth has been trending downward. Our

favorite measure of underlying domestic demand is final sales to private domestic purchasers, which was up 1.8% in

Q4 and a still-respectable 2.7% over the past year. Nevertheless, demand is still not strong enough to prevent what

will likely be a further slowdown in the rate of inventory accumulation. Inventories increased $69 billion in Q4 2015

compared to $86 billion previously. This meant that inventories subtracted only 45 basis points (bps) off Q4 growth.

Based on the level of inventories compared to demand, a further substantial slowing in the rate of stockpiling should

ensue in the first half of this year. We de-trend the economy-wide inventory-to-sales ratio and show that inventory

positions are currently too high. Unless current-quarter demand unexpectedly rebounds, the rate of stockpiling

should slow significantly further. It is possible that inventories will subtract a full 50 bps off our current 2.0% 2016

growth estimate. With consumer spending losing momentum and net exports impaired by the strength of the dollar,

the economy has little cushion to accommodate such a correction.

Joseph LaVorgna (+1) 212 250-7329

[email protected]

2 February 2016



MediaTek Sell Reuters: 2454.TW Exchange: TAI Ticker: 2454

Tgt TWD 188 to TWD176. Fundamentals could continue to deteriorate in 2016/17; Sell

Price (TWD) 210.00

Price target (TWD) 176.00

52-week range (TWD) 488.00 - 205.00

Market cap (USDm) 9,828

Shares outstanding (m) 1,544.6

Net debt/equity (%) -42.1

Book value/share (TWD) 159.97

Price/book (x) 1.3

FYE 12/31 2014A 2015E 2016E

Sales (TWDm) 213,063 213,255 238,308

Net Profit (TWDm)

46,396.7 25,959.3 22,200.6

DB EPS (TWD)

30.05 16.60 14.20

PER (x) 15.6 12.7 14.8

Yield (net) (%) 4.7 6.0 5.0

Cutting estimates We lower our 2016/17 EPS forecasts by 6%/4% to factor in weaker-thanexpected sales momentum and margins. Our 2016/17E EPS are 16%/32% below consensus estimates. We expect intensified pricing in 3G/4G smartphone chips in 2016/17 due to Spreadtrum's ongoing low-margin pricing strategy and the introduction of the 4G Cat 6 smartphone chip solution in 2H16. Reiterating Sell.

4Q15 missed EPS reached NT$2.83 in 4Q15 (-44% QoQ and -58% YoY), below our/consensus estimates of NT$3.83/NT$3.71. GM fell 4.1ppt QoQ to 38.5% in 4Q15, which was at the low end of the guided 41.5-38.5% but lower than our/consensus estimates of 41.0%/40.4%. This stemmed from 3G/4G pricing pressure in 4Q15. The operating margin dropped 7.3ppt QoQ to 6.1%, below our/consensus estimates of 9.3%/10.0%.

1Q16 guidance missed Management guides for a 7-15% QoQ sales decline in 1Q16, worse than our previous and the consensus estimate of a 7% and 9% decline, respectively. Management guides for a lower-than-expected GM in 1Q16. Management guided more than 10% YoY sales growth in 2016, supported by double-digit growth of smartphone and IoT (Internet of Things) sales. Given persistent price pressure on 3G and 4G mid/low-end smartphone chip solutions, management guided GM to be 35-40% in 2016 vs. our previous estimate of 39.9%. Management expects increasing sales of Helio solutions (20%+ of total smartphone chip shipments) to help GM stabilize in 2H16. We expect Spreadtrum’s 4G Cat 6 smartphone chips to lead to low margins in mid/low-end 4G smartphone chips from 2H16 onwards. This could partially offset the positive impact of rising high-end 4G sales for MediaTek in 2H16 and 2017.

Valuation and risks Our new target price of NT$176 (NT$188 previously) is based on 12.4x 2016E PE, below the 2010-15 trough PE of 14.9x. This reflects our revised forecast of -15% EPS CAGR in 2015-17, lower than the 2010-15 EPS CAGR of -9%. Upside risks: slower-than-expected 3G market share loss, faster-than-expected 4G market share gain, 4G-led margin improvement, and demand.

Michael Chou (+886) 2 2192 2836

[email protected]

2 February 2016



Utilities - China Wind Quantifying curtailment risk and UHV impact; Buy FX/HNR/LY

Negatives in price, L-T fundamentals intact; Buy ratings on wind developers The risks of curtailment hikes have been the primary reason behind sector underperformance of 15-20% in the past three months. By quantifying each developer’s curtailment exposure and the boost to wind utilization from the UHV transmission, we conclude that the negatives have been largely priced in after downward earnings revisions. Wind developers are also shifting new capacity addition away from curtailment areas in 2016. An earnings CAGR of 14-27% in 2015-17E, together with single-digit FY16 PEs, makes the sector’s risk-reward appear very attractive. We maintain Buy recommendations on Huadian Fuxin, Huaneng Renewable, and Longyuan Power.

Curtailment likely to persist in near term, but with visibility to be resolved Wind utilization in 2015 touched the historical low since 2008, primarily on rising curtailment as well as weak wind speed in 2H15. The curtailment issue is likely to hover around in 2016, and thus, we have quantified the risk in utilization assumptions based on developers’ location exposure. However, we believe curtailment in Gansu, Xinjiang, Inner Mongolia, and the Northeast will be greatly eased with an estimated 20GW of wind export capacity by UHV lines in 2018, which represents over 25% of the current wind capacity of these regions. We also think the digestion of wind is less an issue due to the sheer size of receiving provinces. HNR exhibits greater defensiveness against curtailment risk in 2016-17. Fuxin, however, is more exposed to curtailment while presenting more upside potential once UHV lines begin to operate.

Wind tariff cut milder than proposed; project return sustainable The wind tariff adjustment plan was finalized in late December and is much milder than the one proposed in October 2015. The returns of new wind projects could largely be sustained with the help of interest rate cuts as well as location optimization (limited new capacity planned in high-curtailment areas in 2016-17). We do not expect a further tariff cut before the curtailment issue is meaningfully addressed but factor in a further 1% tariff discount, as wind developers may more actively participate in competition-based power markets.

Earnings/target price revision on more conservative utilization assumption We reduce earnings forecasts for wind developers by 4-28% in 2015-17, mainly to reflect the worse-than-expected wind output/utilization in 2015 and lowered utilization assumption in 2016-17. We also cut our capacity addition assumption in 2016-17 and incorporate the final tariff cut plan and rate cut of 50bps in 2016 forecast by our economist team (to be reflected in 2017 for developers). Our earnings forecasts are 5-23% lower vs. consensus.

Improving wind speed in January Several large wind capacity provinces without curtailment issues had a lower-than-historical average wind speed in 2015. If wind conditions improve in 2016, there could be some utilization upside. As per high-frequency wind speed data, there was strong yoy and mom improvement in January 2016.

Valuation and risks Our target prices for wind developers are based on DCF, assuming WACCs of 8.3-9.8% and a TGR of 2%. Key downside risks: higher-than-expected curtailment, lower-than-expected wind speed, lower-than-expected capacity addition, and risk of new equity issuance.

Michael Tong (+852) 2203 6167

[email protected]

2 February 2016



Japan Real Estate Inv. Hold Reuters: 8952.T Exchange: TYO Ticker: 8952

Buy to Hold, tgt ¥610,000 to ¥630,000

Price (¥) 675,000

Price target - 12mth (¥) 630,000

52-week range (¥) 675,000 -

498,000

Market cap (¥bn) 884

Shares outstanding (m) 1

Foreign shareholding ratio (%)

30.8

TOPIX 1,463

FYE 3/31 2015A 2016E

Sales (¥bn) 58.3 61.2

OP (¥bn) 23.3 24.5

RP (¥bn) 20.1 21.4

NP (¥bn) 20.1 21.4

EPS (¥) 15,349 16,330

P/E (x) 37.2 41.3

Downgrading to Hold as unit price reached our target The Bank of Japan (BoJ) decided to introduce a negative interest rate on 29 January. The J-REIT sector surged after the BoJ’s announcement. Japan Real Estate Investment’s (JRE’s) unit price also rose to ¥638,000 (last price of 29 January), which was above our previous target price of ¥610,000. As a result of revising our earnings forecasts, we raise our target price slightly to ¥630,000. However, we downgrade our rating from Buy to Hold since our new target price is in line with the current unit price.

Office market to deteriorate in 2016 We expect net office supply to surge 402% YoY to around 325,000 tsubo (1 tsubo = about 3.3 sqm.) in 2016. In other words, we believe supply could reach the massive levels of 2012. On the other hand, according to the Financial Statements Statistics of Corporations by Industry, the employee count remains 5m people lower than that of 2007, with little evident change. We believe the office market will deteriorate in 2016 amid an increase in supply and continued sluggish demand.

Raising target price slightly from ¥610,000 to ¥630,000 We base our valuation on the FFO multiple for J-REITs. We first set the FFO multiple for Nippon Building Fund (NBF; 8951; ¥622,000; Hold), the largest J-REIT, and then set multiples for other J-REITs by referencing historical movements relative to NBF. We apply 1.0 for JRE's FFO multiple relative to NBF and 24 for its target FFO multiple. As a result of revising our earnings forecasts, we raise our target price slightly to ¥630,000. Our target price is equivalent to a dividend yield of 2.6%

Risks Major downside risks specific to JRE include: 1) reduction in target LTV; 2) losing property pipelines from its sponsor; and 3) substantial dilution from a capital increase. Major upside risks include: 1) rent from existing tenants clearly on the rise, 2) acquisition of S and A Class buildings at yields higher than the market average; and 3) introduction of new office development regulations increasing the value of existing offices.

Yoji Otani (+81) 3 5156-6756

[email protected]

2 February 2016



Nippon Building Fund Hold Reuters: 8951.T Exchange: TYO Ticker: 8951

Buy to Hold, tgt unch at ¥610,000

Price (¥) 655,000

Price target - 12mth (¥) 610,000

52-week range (¥) 655,000 -

491,000

Market cap (¥bn) 925

Shares outstanding (m) 1

Foreign shareholding ratio (%)

26.7

TOPIX 1,463

FYE 12/31 2014A 2015E 2016E

Sales (¥bn) 71.4 69.2 69.5

OP (¥bn) 29.4 26.8 27.4

RP (¥bn) 23.6 21.7 22.8

NP (¥bn) 23.6 21.7 22.8

EPS (¥) 16,726 15,391 16,116

P/E (x) 34.4 42.6 40.6

Downgrading to Hold as unit price reached our target The Bank of Japan (BoJ) decided to introduce a negative interest rate on 29 January. The J-REIT sector surged after the BoJ’s announcement. Nippon Building Fund’s (NBF’s) unit price also rose to ¥622,000 (last price of 29 January), which was above our target price of ¥610,000. Although we maintain our earnings forecasts, we downgrade our rating from Buy to Hold. We reiterate our target price of ¥610,000.

Office market to deteriorate in 2016 We expect net office supply to surge 402% YoY to around 325,000 tsubo (1 tsubo = about 3.3 sqm.) in 2016. In other words, we believe supply could reach the massive levels of 2012. On the other hand, according to the Financial Statements Statistics of Corporations by Industry, the employee count remains 5m people lower than that of 2007, with little evident change. We believe the office market will deteriorate in 2016 amid an increase in supply and continued sluggish demand.

Maintaining target price of ¥610,000 We maintain our earnings forecasts but shift the base periods for calculating our target price. Our target price of ¥610,000 reflects our forecasts (using total FP6/16 and FP12/16 as annual NOI) and our implied cap rate of 3.5% for market capitalization divided by the number of investment units outstanding. We maintain our target price (see ‘Valuation’ section for details). The target price is equivalent to a dividend yield of 2.6%.

Risks Major downside risks to NBF include: 1) another fall in revenues from existing buildings; 2) losing property pipelines from its sponsor; and 3) substantial dilution from a capital increase. Major upside risks include: 1) rents from existing tenants, which are clearly on the rise; 2) acquisition of S and A Class buildings at yields higher than the market average and 3) introduction of new office development regulations, increasing the value of existing offices.

Yoji Otani (+81) 3 5156-6756

[email protected]

2 February 2016



European insurers Solvency and markets

Companies Mentioned

AXA (AXAF.PA),EUR22.52 Buy Price Target EUR28.80

Allianz (ALVG.DE),EUR147.50 Buy Price Target EUR190.00

Aviva Plc (AV.L),GBP475.50 Buy Price Target GBP610.00

Legal & General (LGEN.L),GBP240.10 Buy Price Target GBP305.00

Prudential (PRU.L),GBP1,326.50 Hold Price Target GBP1,565.00

Generali Ass. (GASI.MI),EUR13.55 Hold Price Target EUR18.00

Aegon (AEGN.AS),EUR5.15 Buy Price Target EUR6.50

Dividend-paying ability OK for now, but pressured if markets weaken further Insurers have been amongst the weaker performing sectors YTD - with the more market-sensitive companies leading the way down. In this note, we look at how the balance sheets of the larger insurers should have fared in the recent sell-off, and the vulnerability of each to different scenarios going forward. Thus far, we see dividend-paying ability as largely unaffected, offering attractive yields if markets stabilise. Inevitably, however, if markets fall further, we would expect dividend growth expectations to weaken - with Aviva (Buy), Generali (Hold) and L&G (Buy) more vulnerable, but AXA (Buy) and to a lesser extent Allianz (Buy) continuing to look well-placed.

We assess asset and solvency risk for the larger, more sensitive insurers This note analyses investment leverage and asset mix (see Figures 3-11 and Appendix B) for the larger, more market-sensitive insurers. We then assess how solvency ratios have moved YTD and each company’s positioning in case of further market downside – first in the context of a milder stress scenario (markets falling the same again or slightly worse than YTD), secondly in a more extreme negative scenario. We show how each company might appear against their own capital management targets in Figures 13-20.

The story so far… solvency ratios down 8pts on average since FY15 Our findings suggest that solvency ratios have fallen 8pts on average YTD – with Generali, Allianz and Zurich likely to have been the most affected, and Aegon, L&G and Aviva the least (but from a lower starting point). Despite the falls, we don’t expect any of the companies’ dividend-paying ability to have been affected at this stage – though in Zurich’s case, the dividend may well be re-assessed in any case under its new CEO.

Most and least vulnerable if markets continue to fall As we test for even weaker market conditions, however, a clearer divide starts to emerge. In reality, it would be surprising if any of the more market-sensitive insurers were able to outperform a further market fall – at least in the short-term. However, our analysis suggests that AXA’s solvency ratio would remain sufficiently robust (at c.190%) even on our more severe stress test to provide a high level of confidence in its dividend-paying ability. This therefore remains our top pick out of these names. Second to AXA is Allianz, whose dividend-paying ability likewise appears supported, but where the scale of potential M&A might have to be curtailed. In contrast to these two, none of the remaining companies look wholly immune from pressure if markets fall further (though not to the extent of dividend cuts) – with Generali and Prudential potentially facing the steepest solvency declines in such a scenario, and dividend growth estimates at Aviva and L&G also under pressure.

Valuation and risks The insurance sector currently trades at 11.0x 2016e earnings with a 2015e / 2016e yield of 4.8% / 5.1% - both close the cheaper end of the recent trading range. See page 17 for current valuation data and recommendations. Recognising this and the attractive available yields, we retain a neutral stance on the sector – despite the uncertain market backdrop. Key upside / downside risks derive from financial markets, catastrophic losses, mis-estimation of long-term liabilities and regulatory / political intervention.

Oliver Steel (+44) 207 54-77592

[email protected]

2 February 2016



Latam Airlines Dec Q 2015 Preview

Recessionary environment/inflationary pressures drive profits lower

Depreciating currencies/weak macro drive top-line and profits lower We are projecting our Latam airline coverage universe will generate an operating profit of $369 mm in the Dec Q, which represents a 44.6% decline from the prior year. While fuel expense is estimated to fall 33.6% or $748 mm from a year ago, we think the decline will not be enough to offset significant revenue pressure (estimating top-line to decline 17.2%), as most carriers fail to raise/maintain fares. In that regard, we project the industry’s yield (average fare per mile) will slide 21.7% y-o-y, representing a $1.3 bb headwind to industry profits, driven in large part by weak FX/macroeconomic conditions (with key economies, such as Brazil and Venezuela, in deep recessions).

Raising earnings estimates for LFL and VLRS Our operating profit forecast is slightly improved from $308 mm previously, due to higher estimates for LFL and VLRS ; the former is taking aggressive measures to improve profitability (e.g. cost cutting initiatives, subleasing aircraft to better right-size capacity, etc.) and the latter is benefiting from a healthy macroeconomic backdrop in Mexico and good execution of its ultra-low cost model.

Expect two carriers to generate margin expansion Among our coverage universe of six Latam names, only VLRS and AVH are expected to generate margin expansion of 4.1 pp and 0.5 pp, respectively. We estimate that the industry’s operating margin will decline by 3.0 pp to 6.2%.

Loyalty program fundamentals remain solid; Smiles shares tied to GOL shares We expect the earnings growth experienced at Smiles and Multiplus in the first nine months of 2015 to continue in the December quarter and into 2016 despite the macro headwinds facing the Brazilian consumer (i.e. FX volatility, contracting GDP, high unemployment, high inflation, etc.). In that regard, we are raising our Dec Q and FY 2015 forecasts for both Multiplus and Smiles. We are raising our Multiplus Dec Q and 2015 forecasts from R$0.62 to R$0.82 and from R$2.80 to R$3.00, respectively. We are raising our Smiles Dec Q and 2015 forecasts from R$0.71 to R$0.90 and from R$2.80 to R$3.00, respectively. Despite our positive outlook for Smiles we are of the view that its shares will trade “in sympathy” with GOL until its airline partner sees a more stable market backdrop, which underpins our Hold rating on the stock (Mulitplus shares remain Buy-rated).

VLRS remains top pick; downgrading CPA to Hold Year-to-date (YTD), Mexican airline stocks are showing the strongest performance relative to other Latam names, which is a reflection of solid profitability, healthy macro trends, and good overall market performance. We expect this trend to continue and rank VLRS as our top pick. Our order of preference is VLRS, AEROMEX, and AVH. We are lowering our rating on CPA from Buy to Hold due to our reduced earnings outlook for 2016 (EPS of $5.00 goes to $4.10). Our Hold-rated stocks are CPA, GOL, and LATAM.

Valuation and risks On an EV/EBITDAR basis, Latam airlines are trading at 6.9x and 6.5x our 2016 and 2017 forecasts, respectively (compared to the group’s historical trading range of 6x - 8x). Fuel price volatility is a key risk for the group. See Pages 9 - 11 for more on our valuation methodology and key risk factors.

In this report, we downgrade Copa Holdings to Hold. We also adjust target prices for Copa Holdings and Grupo Aeromexico, and we are introducing 2017 EPS estimates and adjusting many of our 2015 and 2016 EPS estimates for our Latam airline coverage universe.

Michael Linenberg (+1) 212 250-9254

[email protected]

2 February 2016



Food - Food for thought; inflating expectations

Initiating coverage on TBS, PFG and AVI at Buy

Grain inflation and ZAR weakness will likely drive double-digit food inflation in 2016 We assess the impact of the continued run-up in soft commodity prices and ZAR weakness on food price inflation. Movement in underlying grains prices is a key driver of food inflation in SA. Food inflation bottomed out in July 2015, following the recent surge in grain prices. We forecast food inflation to rise to 10% during FY16, driven by high double-digit grain price increases. We expect to see moderate price increases of 6% to 8% across other food categories.

Understanding the impact of inflation on food producers SA food producers have re-rated relative to the market during periods of peak food inflation, trading at a premium of up to 1.2x (vs. current rating of 1x). The sector also tends to outperform during periods of low and muted economic growth. We expect this re-rating to take place over the next 12 months. Interestingly, we have not seen any direct correlation between changes in food inflation and food producer margins. We have, however, seen margins impacted by the de-leveraging effect of volume declines in price-sensitive categories. In 2016 it will be important to understand which categories these are and which companies are most exposed to them.

Significant maize price increases will likely cause volumes to fall in 2016E We have analysed the impact of significant local wheat and white maize price hikes on major food category volumes and margins. In the highly competitive bread category we expect key players to invest in pricing in order to protect market share, and in our view, category volumes will therefore not be significantly impacted. In the maize category however, we expect cost inflation to be fully passed on with volumes declining significantly in response. We see Pioneer’s FY16 earnings being most significantly impacted by the drop in maize volumes, with forecast adjusted FY16 DHEPS growth of just 2%. Following the anomalous events of 2016, we see Pioneer’s margin expansion programme delivering adjusted FY17 DHEPS growth of 31%.

Sector rating relative to history and global peers At current rating levels we see value across the board. The sector is trading at a forward P/E of 13x, below the five-year average of 15x and the one-year average of 16x. The JSE Food Producer Index has historically traded at an average discount of 15% to its global peer group. At current valuation levels, this discount has increased to 35%. US and European peers are trading at forward P/Es of 19x, and emerging market peers at 20x.

Valuation and risk We value all three companies using a SOTP 12-month forward P/E ratio and our FY17/18E DHEPS. Key risks include FX, prolonged weak consumer environment, drought duration and soft commodity prices.

Relative preference for Pioneer Foods We prefer Pioneer Foods for its superior re-rating and FY17/18E earnings growth potential. Pioneer is trading at a forward P/E of 15x (vs 1 year average of 24x). We forecast the group to deliver DHEPS growth of 26% for FY17/18 (24m forward). With the market currently pricing the stock based on muted FY16 earnings growth expectations, we see significant upside potential over the next twelve months.

Caron Bramwell (+27) 11 775 7069

[email protected]

2 February 2016



Google Buy Reuters: GOOG.OQ Exchange: NMS Ticker: GOOG

Tgt USD900 to USD1080. Google Delivers The Goods - Core Is A Scarce Undervalued Asset

Price (USD) 752.00

Price target 1080.00

52-week range 776.60 - 516.83

Market Cap (USDm) 257,298.7

Shares outstanding (m) 684.3

Free float (%) –

Volume (1 Feb 2016) 1,599,255

S&P 500 INDEX 1,939.38

FYE 12/31 2014A 2015E 2016E

1Q EPS 6.16 6.47A 7.81

2Q EPS 5.98 6.99A 8.27

3Q EPS 6.25 7.35A 8.42

4Q EPS 6.76 7.88 9.28

FY EPS (USD) 25.14 28.69 33.77

P/E (x) 22.2 26.2 22.3

The Key Take-Away Google’s 4Q results left little confusion around the strength of the core franchise. There are few companies in global technology with $20B in quarterly revenue, consistently growing north of 20% ex-fx on top and bottom lines, and further, seeing re-acceleration – all truly astonishing feats. Despite this positive backdrop, shares trade at 19x 2016 “core” EPS, slightly above the S+P multiple (after netting out “other bets”). We think the current re-rating in GOOGL shares is 2/3rds of the way complete and is likely to grind to $1000+, hence remains our top pick. Buy.

Positives in the Quarter Google reported impressive 4Q15 results with Sites growth re-accelerating 2ppts y/y ($14.9B) and Core margins improving 250bps y/y. EBITDA for core Google increased 20% Y/Y in 2015, despite heavy FX headwinds. Management called out strength in mobile Search, Youtube, Programmatic and other areas- the first two core businesses accelerating from what we label the “Rule of 50” (link to report ). This is best exemplified by growth in the UK, a market where digital advertising is over 50% of total ad spend, yet Google saw revenue growth accelerate to 21% y/y ex-FX, the first time crossing above 20% in 3 years. The “third ad link” in some mobile commercial queries, which was introduced mid 3Q helped on the margin once again (but comps-through in 2H16). Buyer ARPU on Play increased 30% y/y and YouTube continues to show strong consumption and revenue trends. Lastly, Gmail joined Android, Chrome, Maps, Search, and YouTube in the billion active users club.

Items to Monitor 4Q15 had few negatives to call out. Gross margin (as a % of net revenue) declined 87bps Y/Y, driven largely by hardware costs (new Nexus, Chromecast and Pixel devices) which were smaller in 4Q14, data center operating costs and content acquisition costs for YouTube. The company continues to invest in “Other bets”, where operating losses increased from ~$2B in 2014 to ~$3.5B in 2015 and are expected to remain lumpy in the near term. Licensing & Other and Network revenue also lagged Sites growth.

Valuation & Risk Our $1080 price target is based on using a blended average of 25x EPS, 15x EBITDA, and 4% FCF yield (unchanged target multiples) on our 2016 and 2017 estimates for Core GOOG, and 2x revenue on our 2016 and 2017 estimates for Other Bets. Risks include: 1) competition, 2) future downward estimate revisions, 3) smartphone legal issues and the stability of Android's ecosystem long term, 4) regulatory scrutiny across many regions worldwide, and 5) partner loss.

Ross Sandler (+1) 415 262-2028

[email protected]

2 February 2016



2016 Top Picks Three Reasons to Be Bullish: FL, JCP, COST

Companies Mentioned

Foot Locker (FL.N),USD69.10 Buy Price Target USD81.00

Costco Wholesale (COST.OQ),USD151.25 Buy Price Target USD198.00

J.C. Penney Company (JCP.N),USD7.46 Buy Price Target USD12.00

Nike, Inc. (NKE.N),USD63.16 Buy Price Target USD75.00

Thematically, the low-end is working in this volatile backdrop, with WMT and the dollar stores consistently in the green of late. We acknowledge the “improved prospects” of their core customer, but remain selective at current valuations. Instead, our best ideas are proven winners in their sector, each outperforming peers on the top-line. We argue that these trends are sustainable and underappreciated at current multiples, especially with catalysts ahead. This report provides a detailed overview of 3 of the main supporting points behind our Buy ratings for Foot Locker (FL), JCPenney (JCP), and Costco (COST) while also discussing the one major risk to our calls.

FL: Best Idea – Sneaker Trend is Strong – We Can Stop Saying “Cycle” ($81 PT) FL is a top pick for 2016 based on: 1) the strong athletic footwear trends that continue to benefit FL domestically and internationally; 2) meaningful margin upside opportunities; and 3) compelling valuation in relation to peers such as NKE and LB. FL is beat-and-raise story, topping EPS expectations for the past nine consecutive quarters with strong top and bottom line results, which we expect to continue for 4Q15 and FY16. The major risk to FL has been and continues to be an eventual top-line slowdown as the consumer appetite for athletic footwear could shift, vendors could sell more product through their direct arm, and ASPs on average are moving lower (therefore creating a need to sell more units). We believe this risk has been and continues to be mitigated by the company’s unique and exclusive partnership with NKE/UA & others who are focused on driving robust demand for many years to come; FL’s growing kids, women’s and International business; as well as its proactive approach to the mall (closed 1,000 doors over the last decade). FL is a winner worth sticking with, in our view.

JCP: Gaining Market Share with Many Levers to Pull ($12 PT) We choose JCP as one of our top picks for 2016 based on: 1) market share momentum; 2) many levers available to expand margins; and 3) an upcoming balance sheet catalyst. JCP continues to separate itself from peers as a self-help story with each line item in the P&L improving of late, and therefore we believe it should see its valuation gap to our $12 PT close as investors gain confidence in the company’s $1.2B EBITDA goal (we are modeling $1.2B vs. the Street at $1.08B). While we acknowledge that the company is vulnerable to weak mall traffic and a high level of promotions within the struggling apparel category from peers, we believe JCP showcased in 4Q that it is able to overcome these concerns and still produce improving free cash flow. Combined with further debt restructuring/refinancing, we believe this market share gaining story will be a stock market winner as well.

COST: Not Only Defensive But Also with Catalysts on the Horizon ($198 PT) After outperforming last year, COST’s stock momentum has reversed of late, but still remains one of our top picks for 2016 based on: 1) revenue growth drivers (e.g. organic and fresh foods and higher gas gallons); 2) margin expansion opportunities (e.g. increasing penetration of private label and organic food and international mix shift); and 3) a number of catalysts ahead including the transition to Visa, lapping IT modernization, and the eventual MFI increase. Specifically, COST is trading down ~11% off of the stock’s 52-week high, underperforming its staple peers of late on concerns top-line trends could slow given tough compares and high-end weakness. We disagree and point to the company’s strong traffic throughout 2008 as well as its recent performance despite low gas prices. We see multiple years of double-digit earnings growth ahead combining with the company’s Amazon proof model (consistent traffic, two-thirds consumables, & ~90% membership renewal rate).

Paul Trussell ( ) 212 250-8343

[email protected]

2 February 2016



Appendix 1

Important Disclosures

Additional information available upon request

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report.

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

47 % 47 %

6 %

36 %30 %

23 %0

200

400

600

800

1000

1200

1400

1600

Buy Hold Sell

Global Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

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consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

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2 February 2016



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Documents

DB Today - Global/Macropg.jrj.com.cn/acc/Res/CN_RES/MAC/2016/2/2/bb81e5b2-ff0b...2016/02/02 · DB Today - Global/Macro Date 2 February 2016 Tuesday 2nd February, 2016 Mairead Smith