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Julius Baer Research | Please find important legal information at the end of this document.
1/16
THURSDAY, 02 MARCH 2017; 08:54 CET
MARKET UPDATE
US equities surged on Wednesday, as sentiment turned risk-
on following a well-received speech from President Trump to
Congress last evening. Hawkish commentary from key Fed-
eral Reserve officials sent treasuries tumbling, while the
dollar was slightly stronger. Financials led the market out-
performance on higher Treasury yields, while defensive
sectors lagged. The S&P rose 1.4% and the DJIA jumped
1.5% to close at 2,396 and 21,116 respectively. European
equities also jumped yesterday, aided by Trump trades and a
firm open on Wall Street. All sectors ended higher, led by
financials and basic resources. The Stoxx 600 added 1.5% to
close at 375.69. Asian markets closed with the Nikkei gaining
0.9% and the Hang Seng up 0.4%.
Weihao Chen
TOP STORIES
Economics: Slow Swiss growth in Q4 2016
Swiss real gross domestic product (GDP) for Q4 2016, pub-
lished earlier today, revealed that economic growth ticked up
to 0.1% quarter on quarter, after stalling in Q3. This is well
below expectations of 0.4%. Private and government con-
sumption had a positive impact, while investments in con-
struction and equipment fell slightly. The trade balance also
curbed GDP growth. Overall, Switzerland’s economy expand-
ed by 1.3% in 2016. This is still quite a performance, since the
Swiss franc showed a strengthening trend against the euro
from May 2016 onwards, when Brexit tensions rose, retreating
from 1.11 to a level below 1.07 at the end of the year. The
ongoing positive growth momentum in the eurozone compen-
sated the currency headwinds for Swiss exporters to that area.
The Swiss industrial virtues of constant value and productivity
enhancement allow for higher volumes and in many cases
concessions with margins. In fact, the latest Swiss leading
indicators, like the surging KOF barometer reported last
Tuesday, and yesterday’s highly expansionary manufacturing
purchasing managers’ index for February, signal further
growth improvement for 2017.
A resilient economic backdrop and an undervalued franc
against the USD allow the Swiss National Bank to toler-
ate a firming of its significantly overvalued currency
against the euro while keeping monetary policy un-
changed. We adjusted our forecasts for EUR/CHF to 1.05
from 1.07 in 3 and 12 months.
Janwillem Acket
Economic events today
Time (CET)
Ctry Event Period Survey Prior
08:00 MY BNM Rate Decision 3.0% 3.0%
09:15 CH Retail sales (Y/Y) Jan -- -3.5%
11:00 EC PPI (Y/Y) Jan 3.2% 1.6%
11:00 EC Unemployment Rate Jan 9.6% 9.6%
14:30 CA GDP (Q/Q, ann.) 4Q 2.0% 3.5%
DAILY WIRE
Latest equity updates
Georg Fischer: Hold
Price/Target:
CHF898.00/900.00
Georg Fischer reported
solid 2016 results that
were overall in line with
consensus.
Net profit after minorities
was up 14% y/y to
CHF225m.
SAP: Buy
Price/Target:
EUR89.37/99.00
Adjusted revenues rose 6%
y/y to EUR6.7bn, driven
by significant growth in
adjusted cloud subscrip-
tions.
For 2017, the company
guided for non-IFRS cloud
subscription revenues of
EUR3.8bn-EUR4.0bn.
Latest publications
Emerging markets –
dividend strategy quar-
terly update
Over the last three
months, our emerging
market dividend model
portfolio was up by 10.1%
while the MSCI Emerging
Markets total return index
increased 9%.
The quality of the portfolio
is shown in its strong up-
side participation over the
last three months.
NEXT GENERATION
Global Education
Education is a structurally
growing industry offering
attractive investment op-
portunities.
We favour EdTech, educa-
tion content providers and
select for-profit education
providers.
http://www.juliusbaer.com/
nextgeneration
Please see the corresponding
Research publications for
further information.
Last ∆1d YTD
MSCI World 1856.3 1.0% 6.0%
S&P 500 2396.0 1.4% 7.0%
Dow Jones 21115.6 1.5% 6.8%
Nasdaq 5904.0 1.3% 9.7%
Euro Stoxx 50 3390.2 2.1% 3.0%
Dax 30 12067.2 2.0% 5.1%
FTSE 100 7382.9 1.6% 3.4%
CAC 40 4960.8 2.1% 2.0%
SMI 8634.7 1.0% 5.0%
SPI 9456.6 1.0% 5.5%
Nikkei 225 19564.8 0.9% 2.4%
Kospi 2102.7 0.5% 3.8%
Hang Seng 23874.2 0.4% 8.5%
Shanghai Comp. 3234.8 -0.4% 4.2%
Russia RTS 1114.2 0.4% -3.3%
India Sensex 30 29071.7 0.3% 9.2%
Brazil Bovespa 66988.9 0.5% 11.2%
Spot +3mE +12mE
EUR/USD 1.05 1.04 1.05
USD/JPY 114.2 118.0 120.0
EUR/GBP 0.86 0.86 0.92
GBP/USD 1.23 1.21 1.14
EUR/CHF 1.06 1.05 1.05
USD/CHF 1.01 1.01 1.00
EUR/SEK 9.54 9.35 9.20
EUR/NOK 8.88 9.00 9.30
USD/CAD 1.34 1.35 1.36
AUD/USD 0.77 0.73 0.72
NZD/USD 0.71 0.70 0.68
USD/BRL 3.09 3.30 3.80
USD/CNY 6.89 7.10 7.20
USD/INR 66.74 67.50 69.00
Last ∆1d +12mE
Gold 1249.5 0.1% 1150.0
Silver 18.4 0.6% 15.0
Platinum 1016.3 -0.8% 1050.0
Palladium 777.5 0.9% 700.0
Aluminium 1942.5 1.2% 1450.0
Copper 6003.0 0.6% 4600.0
Iron Ore (62% Fe) 91.3 0.0% 50.0
Crude oil (Brent) 56.4 -0.3% 47.5
Natural gas (US) 2.80 0.9% 2.80
Corn (cts/bushel) 375.8 2.2% 400
Wheat 4.36 3.0% 475 Source: Bloomberg Finance L.P., Julius Baer
Data as of: 02/03/2017; 08:00 CET; E=estimate
Equity markets
Currencies
Commodities
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 2/16
ECONOMICS
Eurozone inflation approaches 2% threshold
Today’s advanced release of February inflation in the eurozone is an impressive demonstra-
tion of the return of inflation. After slightly stronger-than-expected German figures, which
were released yesterday, the chances are high that eurozone inflation will reach the ECB’s
threshold for price stability the first time since four years. However, the core inflation that is
expected to have remained just below 1% highlights that higher commodity prices - particu-
larly oil - are by far the most important driver. Underlying inflation dynamics, including wage
inflation, remains weak in the eurozone. Nevertheless, the latest figures put pressure on the
ECB to revise its inflation projections on its governing council meeting next week. We expect
a significant revision from 1.3% to 1.8%, which should trigger more intense discussion about
a tapering of the ongoing asset-purchasing programme. Reluctance of the ECB to reduce
monetary stimulus will keep the EUR/USD weak as the US Fed is signaling more clearly that
it stands ready to tighten its monetary policy.
Higher eurozone inflation and accompanying speculation over an ECB tapering will
not help EUR/USD much, given that the Fed is much clearer in its intentions to hike
rates this month.
David Kohl
Beige book and Fed officials increase probability of a March rate hike
The latest Beige Book, which was released yesterday in preparation of the FOMC meeting
on March 15, suggested the US business were generally optimistic about the near-term
outlook and that the economy has expanded at a moderate pace. This is consistent with a
better-than-expected Institute for Supply Management (ISM) reading driving the US eco-
nomic surprise indicator to new highs. The probabilities implied by Fed Funds futures of a
rate hike in March rose to 84% supporting the US dollar in particular against the Japanese
yen. Fed Governor Brainard and Dallas Fed President Kaplan voiced their support for higher
rates adding to rising probabilities of a March rate hike.
We stick with higher conviction to our view that the US dollar resumes its apprecia-
tion path now as the Fed gets ready to hike rates at the March meeting.
David Kohl
Bank of Canada: On hold amidst ‘significant uncertainty’
Canada’s central bank left its policy rate unchanged at 0.5% p.a. after yesterday’s March
meeting. While acknowledging accelerating momentum, which could also have brought a
stronger growth figure for Q4 of 2016 (data to be presented later today, expected by market
consensus at 2.0% quarter-on-quarter annualised), the Bank of Canada (BoC) stressed
“significant uncertainties” surrounding the outlook, as cited already in its January monetary
policy report. With “significant uncertainty” the BoC means the uncertainties surrounding
the future economic policies of the administration of US President Trump, which remained
in the opaque also this week after Tuesday’s rather disappointing speech in front of the joint
Congress. While markets are rather relaxed in assessing Canada’s exposure to the US -
following Trump’s statement only to “tweak” the trade relationship - the looming US border
tax and the uncertain future of NAFTA will nevertheless remain something to keep an eye
on in assessing the economic outlook for Canada.
The BoC’s hold stance confirms our neutral outlook on the Canadian dollar. The
uninspiring oil price outlook and political risks south of the border, which entail the
risk of further interest-rate cuts, call rather for cautiousness over the next few
weeks.
David A. Meier
FINANCE TALK
Click image to access video stream www.juliusbaer.com/financetalk
Spot +3mE +12mE
US Fed Funds 0.75 1.00 1.75
ECB Main Refi. Rate 0.00 0.00 0.00
BoJ Overnight 0.10 -0.10 -0.10
UK Base Rate 0.25 0.25 0.25
SNB 3m CHF-Libor -0.75 -0.75 -0.75
10y government bond yields
Spot +3mE +12mE
US 10y T-Notes 2.46 2.90 2.55
Euro 10y Bund 0.28 0.60 0.40
Japan 10y Gov't 0.07 0.00 0.00
UK 10y Gilts 1.19 1.50 1.20
Swiss Conf. 10y -0.20 0.20 0.10
Growth (real, % year-on-year)
2015 2016E 2017E
World 3.4 3.1 3.3
United States 2.6 1.6 2.5
Eurozone 1.9 1.7 1.6
Germany 1.7 1.9 1.5
United Kingdom 2.2 1.8 1.4
Switzerland 0.8 1.4 1.6
Japan 1.3 1.0 1.1
China 6.9 6.7 6.5
India 7.2 7.0 6.0
Brazil -3.8 -3.5 0.0
2015 2016E 2017E
World 2.8 2.9 3.3
US 0.1 1.3 2.4
Eurozone 0.0 0.2 1.8
Germany 0.1 0.4 1.9
UK 0.1 0.6 1.8
Switzerland -1.1 -0.4 0.6
Japan 0.8 -0.1 0.5
China 1.4 2.0 2.1
India 4.9 4.5 5.0
Brazil 9.0 8.7 5.0 Source: Bloomberg Finance L.P., Julius Baer
Central bank policy rate
Data as of: 02/03/2017; 08:00 CET; E=estimate
Inflation (% year-on-year)
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 3/16
EQUITIES
Adecco (Hold, Price/Target: CHF72.6/59): Solid Q4 2016 results
Sales were up 3% y/y (up 5% y/y organically) to EUR5.9bn, 1% above consensus, showing
acceleration in Q4, led by Europe while North America was flat y/y. Gross profit grew 1%
y/y on a total and organic basis to EUR1.1bn, 1% above consensus. EBITA excluding one-
offs fell 3% y/y to EUR300m, in line with consensus net profit after minorities increased 17%
y/y to EUR216m, above consensus of EUR181m, led by EUR100m related to the disposal
gain of Beeline (not listed). The board proposes an unchanged y/y dividend of CHF2.40 per
share for 2016, in line with consensus. The group also announced a EUR300m share buy-
back, which was widely expected. Management stated that organic growth into 2017 was
4%-5% y/y, reflecting a modest slowdown vs. Q4.
Q4 results were solid, reflecting acceleration in European markets. We expect only
minor changes to consensus forecasts and maintain our Hold rating.
Britta Simon, CEFA
Swiss Prime Site (Hold, Price/Target: CHF87.35/85): FY 2016 result broadly solid and
slightly better than consensus
FY 2016 reported rental income of CHF453m (+1.6% y/y) was 1.6% above consensus, while
EPS excluding revaluation gains of CHF4.04 per share (profit of CHF285m, +1.4%) was
down 4% y/y due to a higher share count, while lower net gains from property sales
(CHF25m vs. CHF31m last year) were about offset by the higher rental income. FY 2016
vacancy rate improved by 10bps to 6.1% vs. 9M and by 60bsp y/y and was in line with guid-
ance. Positively, management expects that vacancy rate should continue to decline this year
towards 5.5% to 6.0%. Net asset value (NAV) after deferred taxes increased 3.1% y/y to
CHF72.4, which is ca. 1% better. Declared FY 2016 dividend is unchanged at CHF3.7 and
not subject to withholding tax (implied net yield of 4.2%). Outside the pure rental business,
results had partly strong external revenue growth, while earnings visibility is low. Assisted
Living revenues increased 77% to CHF328m. Real estate services revenues grew 6% to
CHF116m. Performance in retail remained soft with revenues declining 2% y/y to
CHF134m, while Jelmoli – The House of Brands recorded the inflection point with 1.1% y/y
sales growth thanks to a good Christmas season.
We tend to keep our Hold rating, given a subdued underlying cash flow growth out-
look vs. recommended European peers.
Roger Degen
LafargeHolcim (Hold, Price/Target: CHF58.75/58): Q4 results
LafargeHolcim reported Q4 sales of CHF6.53bn (-12.3% y/y, -1.4% y/y like-for-like), 4%
below consensus, with all region except Middle East and Africa (+6.1% y/y) reporting lower
like-for-like sales. Group cement volumes declined 5.8% like-for-like with all regions except
Europe (+0.4% y/y) recording significantly lower volumes. However, adjusted EBITDA in-
creased across all regions and reached CHF1611m (+15.5% y/y, +30.5% like-for-like), 10%
above consensus, implying a margin improvement from 18.8% to 24.7% (vs. consensus
21.6%) driven by higher prices, synergies and solid cost management. Operating free cash
flow improved significantly to CHF1342m (vs. CHF647m in Q4 2015) while net debt was
reduced to CHF14.7bn (vs. CHF16.5bn at the end of Q3 2016). The dividend proposal for
fiscal 2016 is CHF2.0 per share (from CHF1.5 in 2015 and consensus of CHF1.85). In addi-
tion, the company announced a share buyback programme of up to CHF1bn over 2017-
2018. For 2017, management expects double-digit like-for-like growth in adjusted EBITDA
(consensus ca. +10%), recurring EPS to grow more than 20% y/y and net debt to adjusted
EBITDA to move to around 2x.
As we have seen in Q3, the price over volume strategy is paying off. Top line misses
estimates, but margin improvement is ahead of expectations. Better-than-expected
2017 outlook and a higher payout should be well received by the market. We will
review our price target and investment rating.
Philipp Lienhardt, CFA
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 4/16
Roche (Buy, Price/Target: CHF246.00/270.00): Significant overhang removed
Roche announced this morning that the APHINITY study investigating Perjeta for adjuvant
breast cancer therapy was positive. This is a long-awaited clinical study binary event, which
has been delayed several times. Given the size of this event, it has been acting as an over-
hang on the stock for the last 12 months. We now know that the drug provides statistically
significant benefit for breast cancer patients, and expect this to be seen as clinically mean-
ingful when the full data is presented at an upcoming medical meeting. This positive result
opens up a USD5bn opportunity, which should more than offset declining sales in the core
franchise when it faces biosimilar competition. With Perjeta already on the market for other
stages of breast cancer, we would expect a rapid sales ramp and therefore an impact on
near-term earnings. De-risking of future Perjeta sales will drive consensus earnings upgrades
(circa 3% for 2018; 5% to 10% in later years) and we would also expect a multiple re-ratings
now that this overhang has passed.
Long-awaited major binary event is positive. Perjeta provided benefit in breast can-
cer in the APHINITY study. This is a USD5bn per annum opportunity. We expect the
stock to be up around 5% today. Supported by this positive development, we see
Roche as one of the most attractive growth stories in major pharma. We continue to
prefer Roche over Novartis (Hold, Price/Target: CHF78.75/77.00) at present. Main-
tain Buy rating.
Terence McManus, PhD
Panalpina (Buy, Price/Target: CHF127/150): Q4 2016 results
Net sales fell 8% y/y to CHF1.3bn while gross profit declined 9% y/y to CHF333m, each ca.
1% below consensus. Air freight reported strong a volume growth of 14% y/y while the
gross profit-per-freight unit declined 14% y/y. Sea freight posted muted volume growth of
1% y/y and the gross profit-per-freight unit down 18% y/y. EBIT declined to CHF14m, vs.
CHF25m in Q4 2015, 12% below consensus, with the miss led by sea freight where the low
gross profit margin led to an operating loss of -CHF7m (including restructuring expenses of
CHF2m). Net profit declined to CHF6m vs. CHF19m in Q4 2015, below consensus, with the
miss driven by the lower-than-expected EBIT and higher-than expected taxes. The board
proposes a dividend increase of 7% y/y to CHF3.75 per share for 2016, slightly above con-
sensus of CHF3.60. Management issued vague 2017 guidance, expecting the air and sea
freight markets to grow by 2017.
Q4 results reflect strong volume growth in its main business air freight and good
cost control, but results fell overall short of consensus. We expect minor downside to
consensus forecasts and will review our investment thesis.
Britta Simon, CEFA
Deutsche Telekom (Buy, Price/Target: EUR16.47/16.50): Q4 2016 results
Revenue came in at EUR19.55bn, up 9.4% y/y and 1.8% ahead of consensus estimates.
Revenue growth was mainly driven by strong figures from the US (already published on 14
February 2017) and a resilient business in the Germany. Results from Europe and T-Systems
were weaker compared to Q4 2015 and are the key negatives in these quarterly figures.
Adjusted Group EBITDA came in at EUR5.26bn, a growth of 2 .4% y/y but a 0.9% miss vs.
consensus estimates. For FY 2017 the company is guiding for an increase in revenues and an
adjusted EBITDA of EUR22.2bn, which is 1.6% behind current consensus figures. However,
the guidance for FY 2017 Free Cash Flow of EUR5.5bn is slightly ahead of current consensus
estimates at EUR5.4bn, which we view as positive.
Deutsche Telekom reported solid Q4 2016 figures, with the US continuing to be the
source of growth and the German business showing resilience. Guidance for FY 2017
is mixed: adjusted EBITDA is below and Free Cash Flow is ahead of consensus esti-
mates. Overall, we continue to be positive on the shares and confirm our Buy rating.
Barbara Elbel
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 5/16
ABInbev (Hold, Price/Target: EUR103.9/98): another weak quarter
ABInbev reported weak Q4 results this morning well below consensus expectations on virtu-
ally all key lines. Q4 organic sales growth of 0.2% missed consensus expectations +3.4%
mainly due to weak volumes (organic volumes were down 3% in Q4 vs. consensus of -0.6%).
Q4 EBITDA growth of -3.6% was also below market expectations of +1.3%. Q4 EPS came in
at USD0.43 (consensus USD0.85). By region, Latin America was weak mainly driven by very
weak demand in Brazil but North America also was below market expectations. On the
positive side management raised the synergy targets (from USD2.45bn to USD2.8bn) but
this was largely expected. Guidance for FY17 is for accelerated sales growth which is also in
line with consensus (5.1% is consensus for FY17 organic sales growth vs. 2.4% in FY16).
We expect mid-single digit EPS downward revisions but the stock should not be
down that much as the market was already cautious into the results. The stock
trades at 21x forward EPS and looks fully valued to us.
Patrik Lang, CFA
First Republic Bank (Buy, Price/Target: USD96.9/110): Upgrade to Buy on encouraging
growth outlook
First Republic Bank (FRB) reported a solid Q4 result with a 23% y/y EPS growth, driven by a)
21% growing revenues on 21% higher net interest income (due to 18% loan growth y/y
mainly in the mortgage (single home, home equity and multifamily) area while Q4 interest
margin was about stable y/y at 3.08% and b) a lower tax rate. We like First Republic’s supe-
rior loan and deposit growth vs. US banking peers, given its exposure to economically
strong, coastal, urban markets (San Francisco, New York, Boston and Los Angeles). In Q4,
deposit growth remained strong at 6% q/q and 22% y/y. Management guides for mid-
teens loan growth for 2017 (slightly slowing due to higher mortgage rates) and interest
margin should record an upward movement from current trough levels (more likely to be
seen in Q1), which we expect to translate into double-digit EPS and tangible book value
growth. FRB has a leading banking franchise in the US wealthy client segment built on a
sticky deposit base, superior client service, a solid balance sheet and strong credit risk man-
agement.
We increased our price target by USD35 to USD110, now including the recent upward
shift of the US yield curve, by rolling forward to 2017E estimates and including the
planned US tax rate reductions. With a remaining 14% upside we upgraded the
shares to Buy, as the 5% premium on a 17.6x P/E 2018E valuation vs. the US regional
banking peers appears justified given stronger EPS growth dynamics.
Roger Degen
Broadcom Limited (Buy, Price/Target: USD 215.4/199.0): Strong phone business
For FQ1 2017, Broadcom Limited (the combined entity of Avago and Broadcom) reported
solid strong sales of USD 4.15bn (consensus: USD 4.08bn) helped by a healthy wireless
business (sales of USD 1.175bn, 28% of sales), strong enterprise storage (17% of sales) and
industrial&auto (4% of sales). The largest Wired segment (USD 2.09bn, 50% of sales) was
just in-line with expectations though. The gross margin of 62.4% beated consensus of 61.5%
and accordingly non-GAAP EPS came in higher at USD 3.63 (consensus: USD 3.49).
FQ2 2017 guidance was strong as well with revenues expected to reach roughly USD 4.1bn
(-1.2% q/q, consensus: USD 3.9bn) and implied EPS of USD 3.48 (consensus: USD 3.24).
We reiterate our Buy rating on Broadcom Limited as it is our preferred large cap
semiconductor company due to its broad sales base and strong product pipeline.
Additionally, it profits from the secular trend of increasing connectivity require-
ments due to Internet of Things (IoT) and cloud computing. Price target under re-
view.
Michael Studer, PhD
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 6/16
HK Exchanges and Clearing (Hold, Price/Target: HKD193.5/206): Three swing factors
for market turnover
Investor sentiment has improved so far (particularly in February), as evidenced from a high-
er average daily turnover (ADT) vs. Q4 2016. ADT in 2017 will have three key swing factors:
Southbound fund flow from the Stock Connects, a higher USD interest rate impact on
emerging market equities, and the pace of CNY depreciation. Stronger trading volumes of
the derivative market and its London Metal Exchange (LME) acquisition have bought HK
Exchanges and Clearing (HKEx) a more balanced revenue mix, making its profits less cycli-
cal to the cash equity market. For 2016, revenues fell 17% y/y to HKD11.1bn, mainly due to
weak cash market activity (ADT fell 37% y/y to HKD67bn) and commodities trading on the
LME (the number of commodities contracts traded dropped 8% y/y). Net profits fell 27%
y/y to HKD5.8bn. HKEx announced a final dividend per share (DPS) of HKD2.04 (-29%
y/y), bringing the full-year DPS to HKD4.25 (an implied payout of 90%). There will be more
new products launched from the current Connect programme. Any expansion of the pro-
gramme should see a limited near-term earnings impact, but it will further consolidate HKEx
value proposition as a gateway to both the China (for overseas investors) and global (for
domestic investors) capital markets.
ADT has improved year-to-date, but we believe that three key swing factors for
higher ADT are: Southbound fund flow, the impact from stronger USD interest rate,
and the pace of CNY depreciation. We maintain our Hold rating with a revised price
target of HKD206 (an implied 35x 2017E P/E).
Eric Mak, CFA
Daikin Industries (Hold, Price/Target: JPY10,850/11,250): Strong Q3 FY 3/2017 re-
sults
Daikin continues to report solid local currency results. Results mainly benefitted from higher
AC sales from China, the US and Asia, partly offset by a negative currency impact. Daikin
has hedged its FY3/2017 material cost exposure but c.50% of its exposure next fiscal year
could face increases in material costs, given current copper prices.
While valuations are expensive, we are now more positively biased as inventory was
not built up despite the low season, cost controls remain in place and growth seems
sustainable. We see levels around JPY10,100 as good risk-reward. Our higher price
target implies a 19x FY 3/2018E P/E, above its five-year average P/E.
Kelly Chia
Stock of the week
Unilever (Buy, Price/Target: EUR45.00/51) wake up call to unlock shareholder value
Following the withdrawal of the Kraft-Heinz, KHC (Hold, P/T: USD91.43/95) bid Unilever
announced that it will conduct a review of options available to accelerate delivery of value to
the benefit of our shareholders. We believe that the unfriendly bid of KHC represents a
wake-up call for Unilever to create shareholder value to ensure that KHC or any other inves-
tor will not come back any time soon with another takeover offer. We see various opportuni-
ties to improve efficiency including (a) disposal of underperforming assets (e.g. spreads) (b)
increased cost savings and more demanding margin targets, (c) accelerate bolt-on acquisi-
tions in Home and Persona Care (d) share buy-backs and (e) more aggressive working capi-
tal management. Following the hostile bid management has already increased the margin
target (2017 margin increase “at the upper end of the previous 40-80bps).
The new margin target should results in mid-single digit EPS consensus upside revi-
sions for each of the next 2-3 years and we expect more to come.
Patrik Lang, CFA
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 7/16
FIXED INCOME
More Chinese developers are expanding into Hong Kong
Chinese developers have become increasingly active in the Hong Kong property market over
the past few years. The larger developers have expanded into Hong Kong since 2014, while
medium-sized developers started to enter the market more recently. Following reduced land
supply in China’s top tier cities, Chinese developers have been active participants in recent
auctions of high quality land in Hong Kong, often paying prices that exceed market expecta-
tions. Fitch Ratings commented that moving into the Hong Kong market is a natural choice
for Chinese developers as it provides geographical diversification, quality sites which yield
comparable margins to projects in China’s tier-1 cities, and a natural hedge against USD-
denominated funding. Land premiums have been pushed up by the increase in participation,
with land sales in H2 FY2017 (ended 31 March) amounting to HKD77bn, versus HKD43bn in
FY2016. Despite the benefits of investing in Hong Kong, developers that are inexperienced
in this market could face higher risks as they compete with local developers, given their
unfamiliarity with the different operating environment. Compared to the mainland, Hong
Kong’s residential market has a slower cash recovery cycle and greater complexity in proper-
ty price drivers due to its more open nature. Furthermore, the market faces further policy
risk as home prices have reached an all-time high in January, up 10.75% y/y. Last week,
KWG Property Holdings (Buy/Speculative) and Logan Property Holdings (not covered)
together paid a record HKD16.9bn for a high-end residential site, 50% over market valua-
tions, which triggered a rise in property prices. Tender for a Hong Kong MTR site has also
been awarded to Road King Infrastructure who partnered Pingan Real Estate Capital (both
not covered) for this site.
While the Hong Kong property market presents beneficial opportunities for more
experienced developers such as China Overseas Land and Investment
(Buy/Opportunistic), developers newly venturing into the market could face
heightened risks, given expensive land premiums and a lack of experience amid
tough competition.
Magdalene Teo
Argentina: Rapidly declining inflation to support consumers and the economy
Inflation in Argentina has been declining rapidly over the last six months and Vice President
Gabriela Michetti said yesterday that they expect it to end the year at around 18% (slightly
above the previously set target of 14%-17%). While that is still a high level, it represents a
notable improvement compared to last year, when it reached 47%. At this point, the most
pressing issue for authorities is to show that the economy is indeed on a recovery path after
the many unpopular measures taken by the government since December 2015. In that
sense, we remain positive about the economic outlook and believe growth should reach
2.5%-3% this year, supported by stronger consumption due to a recovery in real wages, the
start of several corporate investments that were committed over the last year and strong
exports due to a good harvesting season. In that context, we think bonds can continue to
perform well and we maintain our Buy/Speculative recommendation on Argentina and YPF.
We believe that the economy will expand by 2.5%-3% in 2017, supported by a pick-up
in investments and a stronger consumer. In that context, we think government and
corporate bonds can continue to perform well and we maintain our Buy/Speculative
recommendation on Argentina and YPF.
Alejandro Hardziej
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 8/16
COMMODITIES
Industrial metals: China to suspend production in winter
Air pollution has become a growing problem in China over the past couple of years with the
heavy industries being one of its main sources. In the past, temporary production cuts had
been ordered around certain events such as political summits. Now the government has put
in place a policy that orders the partial suspension of aluminium and steel production in
certain areas of northern China during the winter heating season. With winter almost over,
we expect the policy to be in effect from November 2017 to March 2018. Assuming the
suspension is fully implemented, it would have a significant impact on supply, reducing
aluminium and steel production by around 4%. For aluminium, the biggest issue will be the
costs associated with the restart of production. This is why even loss-making smelters are
very reluctant to cut production. Unless companies decide to overproduce ahead of the
suspension, it would lead to low inventories ahead of the peak demand season. While the
impact on aluminium and steel prices should be positive, it should be negative for iron ore as
demand from the steel mills would be falling. We lift our three and twelve-month aluminium
price targets to USD 1,750 per tonne, still implying downside from today’s levels. As most
industrial metals, aluminium has rallied over the past couple of weeks, reflecting high-flying
growth expectations which are unlikely to be met. Hence, we reiterate our cautious stance
on aluminium and the industrial metals overall.
In order to curb air pollution, China will partly suspend aluminium and steel produc-
tion during the winter heating season. While the impact on aluminium and steel
prices should be positive, it should be negative for iron. As prices have rallied strong-
ly in recent weeks, we nevertheless reiterate our cautious stance.
Carsten Menke, CFA
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 9/16
TECHNICAL ANALYSIS
(SHORT-TERM INVESTMENT RECOMMENDATIONS)
Legal note: Technical analysis may be inconsistent with and reach
different conclusions to fundamental analysis.
Are animal spirits back in Europe?
Yesterday the EuroStoxx50 managed to surpass key resistance at
3,350 and closed at a new 52-week high. Next up will be the 61%
retracement at 3,390, which is likely to act as a short-term re-
sistance. Nevertheless, we should remember that in US dollar terms
the EuroStoxx50 still trades below the peak in January and April of
last year. Thus, for animal spirits to fully take place in Europe, the
euro is likely required to move below 1.05, which would open the
way for parity. This remains our main scenario. Consequently, local
investors, as in our European portfolio, should be fully invested.
Unfortunately, in a global context European equities remain serious
laggards.
EUR/USD below 1.05 is likely required, pushing European
equities higher. Local investors should remain fully invested,
and international investors should continue to avoid Europe
due to underperformance vs. MSCI World.
Mensur Pocinci, MFTA
EuroStoxx50 (SX5E)- daily bar chart
Source: Bloomberg Finance L.P., Julius Baer Please see information on abbreviations/charts at the end of the document.
Last Trend Sup Res 5d%
S&P500 2396 2240 2400 1.4
Nasdaq100 5391 5100 5380 0.7
DAX 30 12067 10900 12080 0.6
SMI 8635 7650 8750 0.6
EuroStoxx50 3390 3080 3400 1.5
Nikkei 225 19565 18200 20000 1.0
T-Note Future * 124.27 122.30 132.80 -0.6
Bund Future * 164.93 158.50 166.20 0.0
Dollar Index 101.91 94.10 102.40 0.9
EUR/USD 1.0527 1.0500 1.0840 -0.5
USD/CHF 1.0112 0.9640 1.0250 -0.5
EUR/CHF 1.0644 1.0600 1.0850 0.1
USD/JPY 114.18 106.00 115.80 -1.4
WTI crude oil * 53.59 48.00 56.50 -1.6
Gold 1245 1120 1310 -0.4
Last Entry Stop Since PnL
Nasdaq100 5391 4077 3760 16 Feb 32.2%
Apple ** 139.79 98.84 89.00 18 Feb 43.2%
NYSE Biotech Index 3589 2874 2400 22 Mar 24.9%
Swatch Group 336.80 314.00 240 22 Dec 7.3%
Last Entry Stop Since PnL
Silver (Short) 18.39 16.46 19.00 9 Jan -10.5%
GBP/JPY (long) 140.2 143.8 135.0 2 Dec -2.5%
USD / CHF (Long) 1.0112 0.9973 0.9280 5 Nov 1.4%
EUR/USD (Short) 1.0527 1.1345 1.2000 20 Jun 7.8%
Source: Bloomberg Finance L.P., Julius Baer
** Dividends included in the PnL* continued contract
Technical Analysis: Medium-term trends
Equity Recommendations
Fixed income, currencies and commodities
Data as of: 02/03/2017; 08:00 CET
Aug Sep Oct Nov Dec 2017 Feb Mar
3000
3200
3400
1.10
1.05EUR/USD
(inverted scale)
EuroStoxx50
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 10/16
IMPORTANT LEGAL INFORMATION
This publication constitutes investment research and has been produced by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated
by the Swiss Financial Market Supervisory Authority (FINMA). This publication series is issued regularly. Information on financial instruments and
issuers is updated irregularly or in response to important events.
IMPRINT
Authors
Janwillem Acket, Chief Economist, [email protected] 1)
David Kohl, Chief Currency Economist, [email protected] 2)
David A. Meier, Macro Research, [email protected] 1)
Carsten Menke, Commodity Research, [email protected] 1)
Patrik Lang, Head Equity Research, [email protected] 1)
Roger Degen, Equity Research, [email protected] 1)
Barbara Elbel, Equity Research, [email protected] 1)
Philipp Lienhardt, Equity Research, [email protected] 1)
Terence McManus, Equity Research, [email protected] 1)
Britta Simon, Equity Research, [email protected] 1)
Michael Studer, Equity Research, [email protected] 1)
Alejandro Hardziej, Fixed Income Research, [email protected] 1)
Mensur Pocinci, Head of Technical Analysis, [email protected] 1)
Peng Koon Kelly Chia, Equity Research Asia, [email protected] 3)
Siew Siew Magdalene Teo, Fixed Income Research Asia, [email protected] 3)
Weihao Chen, Equity Research, [email protected] 3)
Eric Mak, Equity Research Asia, [email protected] 4)
1) This analyst is employed by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority
(FINMA).
2) This analyst is employed by Bank Julius Bär Europe AG, which is authorised and regulated by the German Federal Supervisory Authority (BaFin).
3) This analyst is employed by Bank Julius Baer & Co. Ltd., Singapore branch, which is regulated by the Monetary Authority of Singapore.
4) This analyst is employed by Bank Julius Baer & Co. Ltd., Hong Kong branch, which holds a full banking license issued by the Hong Kong Monetary
Authority under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong SAR). The Bank is also a registered institution under the Securities
and Futures Ordinance (Chapter 571 of the Laws of Hong Kong SAR) to carry on Type 1 (dealing in securities), Type 4 (advising on securities) and
Type 9 (asset management) regulated activities with Central Entity number AUR302.
APPENDIX
Analyst certification
The analysts hereby certify that views about the companies discussed in this report accurately reflect their personal view about the companies and securities.
They further certify that no part of their compensation was, is, or will be directly or indirectly linked to the specific recommendations or views in this report.
Methodology
Please refer to the following link for more information on the research methodology used by Julius Baer analysts:
www.juliusbaer.com/research-methodology
Structure
References in this publication to Julius Baer include subsidiaries and affiliates. For additional information on our structure, please refer to the following link:
www.juliusbaer.com/structure
Price information
Unless otherwise stated, the price information reflects the closing price of the previous trading day.
Disclosure
No specific disclosures
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 11/16
Frequently used terms and abbreviations
BoAML Bank of America Merrill Lynch Boe/d Barrels of oil equivalent per day CAGR Compound annual growth
rate
c.c. Constant currencies CFF Cash flow from financing CFI Cash flow from investing
CFO Cash flow from operation Consensus
rating
The analysts’ opinions on the
security. It shows the number of
analysts covering the security
and the breakdown between
Buy, Hold and Sell ratings.
Consensus
target
The average price to which analysts
expect the security to rise.
CPI Consumer price index DCF Discounted cash flow E Estimate
EBIT Earnings before interest and taxes EBITDA Earnings before interest, taxes,
depreciation and amortisation
EM Emerging markets
EPS Earnings per share EV Enterprise value FCF Free cash flow
Fed Federal Reserve, the US central bank FFO Funds from operation FY Fiscal year
GAAP Generally accepted accounting princi-
ples
GDP Gross domestic product Ifo Institut für Wirtschaftsforschung, a
German economic research institute
IMF International Monetary Fund KOF Konjunkturforschungsstelle der
ETH Zürich (Swiss Economic
Institute)
MAV Moving average
MV Market value NAV Net asset value NII Net interest income
PBoC People’s Bank of China P/B Price-to-book value P/E Price-to-earnings ratio
PEG P/E divided by year-on-year EPS
growth
PEG Price/earnings-to-growth ratio PMI Purchasing Managers’ Index
q/q Quarter on quarter RCF Retained cash flow REIT Real Estate Investment Trust
ROE Return on equity y/y Year on year ZEW Zentrum für Europäische Wirtschafts-
forschung (German Centre for Euro-
pean Economic Research)
Equity research
Equity rating allocation as of 02/03/2017
Buy 31.5% Hold 65.6% Reduce 2.9%
Julius Baer does not provide investment banking services to the companies covered by Research.
Equity rating history as of 02/03/2017
Company Rating History
Adecco Hold Since 20/02/2014
Anheuser-Busch InBev Hold (initiation of coverage) Since 24/11/2014
Broadcom Limited Buy (initiation of coverage) Since 26/06/2014
Daikin Industries Hold (initiation of coverage) Since 03/12/2014
Deutsche Telekom Buy Since 18/11/2014
First Republic Bank Buy Since 01/03/2017
Hold (initiation of coverage) Since 17/06/2016
Georg Fischer Hold Since 25/11/2016
Buy (initiation of coverage) Since 14/03/2005
HK Exchanges and Clearing Hold Since 13/11/2015
Kraft Heinz Company Hold (initiation of coverage) Since 03/12/2014
LafargeHolcim Hold Since 16/11/2016
Buy Since 03/12/2015
Novartis Hold Since 18/01/2017
Buy Since 14/05/2015
Panalpina Buy Since 07/05/2013
Roche Buy Since 27/06/2013
SAP Buy Since 06/01/2006
Swiss Prime Site Hold Since 30/03/2011
Unilever Buy Since 31/10/2012
Rating system for global equity research (stock rating)
Buy Expected to outperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise stated.
Hold Expected to perform in line (±5%) with the regional industry group in the coming 9-12 months, unless otherwise stated.
Reduce Expected to underperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise
stated.
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 12/16
Frequency of equity rating updates
An update on Buy-rated equities will be provided on a quarterly basis. An update for Hold and Reduce-rated equities will be provided semi-annually or on an ad-
hoc basis.
Risk rating systerm for global equity research (stock rating)
The risk rating (High/Medium/Low) is a measure of a stock’s expected volatility and risk of losses in case of negative news flow. This non-quantitative rating is
based on criteria such as historical volatility, industry, earnings risk, valuation and balance sheet strength.
Strategy research
Countries, sectors and investment styles are rated “overweight”, “neutral” or “underweight”. These ratings are based on our expectations for relative perfor-
mance versus regional and global benchmark indices.
Overweight Expected to outperform regional or global benchmark indices in the coming 9-12 months, unless otherwise stated.
Neutral Expected to perform in line with regional or global benchmark indices in the coming 9-12 months, unless otherwise
stated.
Underweight Expected to underperform regional or global benchmark indices in the coming 9-12 months, unless otherwise stated.
Equity investments are divided into three different risk segments. Risk here is defined as the historical five-year volatility based on
monthly returns in CHF. Based on the data of all segments considered (developed markets, emerging markets, global sectors, investment styles) the following
distinction is made:
Conservative Investments whose historical volatility is in the bottom quartile of the universe described above.
Medium Investments whose historical volatility is in the middle two quartiles of the universe described above.
Opportunistic Investments whose historical volatility is in the top quartile of the universe described above.
Fixed income research
Issuer rating allocation as of 02/03/2017
Buy 53.4% Hold 42.7% Sell 3.9%
Julius Baer does not provide investment banking services to the companies covered by Research.
Issuer rating history as of 02/03/2017
Issuer Rating History
Argentina Buy Since 14/04/2016
Hold (initiation of coverage) Since 26/02/2016
China Overseas Land & Investment Buy (initiation of coverage) Since 14/01/2011
KWG Property Buy Since 30/06/2016
Rating system for fixed income research
Buy Within its risk category, the issuer is highly recommended due to its financial and business condition (strong balance sheet, income state-
ment, cash flow and good position in the industry). Debt instruments of the issuer are regarded as an attractive investment from a
risk/return perspective.
Hold Maintain position based on stable credit fundamentals and/or average expected return characteristics within peer group.
Sell The rating is changed to Sell, depending on a significant deterioration in the fundamental data of the issuer in relation to the industry
peers. The investment is no longer justified from a risk/return perspective for the relevant category.
Frequency of issuer rating updates
An update on each issuer will be provided semi-annually, on a rating change or on an ad-hoc basis.
Fixed income market segment ratings
Attractive Segments that are expected to yield a return that is above the ten-year historical average.
Neutral Segments that are expected to yield a return that is in line with the ten-year historical average.
Unattractive Segments that are expected to yield a return that is below the ten-year historical average.
Risk categories for fixed income research
Conservative Supranational issuers, top-rated sovereign issuers and bodies that are directly and fully guaranteed by these institu-
tions. These issuers are most likely to preserve their top rating throughout the business cycle.
Quality Sovereigns and corporate issuers that are very likely to service and repay debt within a five-year credit scenario. They
are likely to preserve their investment-grade rating throughout a normal business cycle.
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 13/16
Opportunistic Issuers that are quite likely to service and repay debt within the five-year credit scenario. Such issuers have an attractive
risk/return profile in the current credit scenario but are subject to rating downgrade risk and, thus, might be exchanged
periodically.
Speculative Sub-investment-grade issuers in Europe and the USA as well as local issuers in emerging markets. Issuers are likely to
service and repay debt in the current credit scenario. Investors must note that these issuers are subject to a higher
downgrade and default frequency and that an active management of these positions is crucial.
Credit rating definition
Credit ratings used in our publications follow the definitions and systematic of Moody's (www.moodys.com).
Moody’s Standard & Poor's Fitch/IBCA Credit rating definition
Aaa AAA AAA Obligations rated Aaa are judged to be of the highest quality, with minimal
credit risk.
Aa1
Aa2
Aa3
AA+
AA
AA-
AA
AA-
Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
Investment-
grade
A1
A2
A3
A+
A
A-
A+
A
A-
Obligations rated A are considered upper-medium grade and are subject to low
credit risk.
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.
Ba1
Ba2
Ba3
BB+
BB
BB-
BB+
BB
BB-
Obligations rated Ba are judged to have speculative elements and are subject
to substantial credit risk.
Non-
B1
B2
B3
B+
B
B-
B+
B
B-
Obligations rated B are considered speculative and are subject to high credit
risk.
investment-
grade
Caa1
Caa2
Caa3
CCC+
CCC
CCC-
CCC+
CCC
CCC-
Obligations rated Caa are judged to be of poor standing and are subject to very
high credit risk.
Ca CC
C
CC+
CC
CC-
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C D DDD Obligations rated C are the lowest rated class of bonds and are typically in
default, with little prospect for recovery of principal or interest.
Technical analysis
The information and opinions expressed were produced by Julius Baer Technical Analysis as of date of writing and are subject to change without notice. Julius
Baer conducts primary technical analysis aimed at creating value through investment recommendations. Technical Analysis uses historic market prices in order
to assess market conditions. The historic data is analysed by chart reading i.e. by following chart patterns and interpreting indicators calculated from historic
price movements. Technical Analysis may be inconsistent with and reach different conclusions to fundamental analysis. It may vary at any time due
to the different tools used to assess market conditions and recommendations. Besides individual investment recommendations, Technical Analysis also publish-
es technical indicator readings, which are mechanically calculated and only provide additional information to large sets of data, and are not intended as invest-
ment recommendations. These tables show current trends on an absolute price or relative basis using up, flat and downward pointing arrows. At the same time,
support and resistance levels might be displayed which are calculated using Bollinger Bands.
Frequently used abbreviations
C Closing price H High price L Low price
ST Short-term (2-8 weeks) MT Medium-term (8-26 weeks) LT Long-term (> 26 weeks)
MAV Moving average
Bollinger-band The middle Bollinger band is a 20 day simple moving average, the higher and lower bands are calculated as a 20-day simple moving aver-
age plus or minus two standard deviations on a 20-day period.
Momentum Momentum is derived from different rate of change calculations based on the underlying instrument.
RSI Relative strength index is a leading momentum indicator of prices, showing the strength of a stock by monitoring changes in closing prices
in a 9-day period.
Rating system for global technical analysis (absolute)
Buy Expected to advance by at least 10% in the coming 3-12 months, unless otherwise stated.
Hold Expected to perform in line (±5%) in the coming 3-12 months, unless otherwise stated.
Reduce Expected to decline by at least 10% in the coming 3-12 months, unless otherwise stated.
Rating system for global technical analysis (relative)
Overweight Expected to outperform its benchmark by at least 5% in the coming 3-12 months, unless otherwise stated.
Neutral Expected to perform in line (±5%) against its benchmark in the coming 3-12 months, unless otherwise stated.
DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 14/16
Underweight Expected to underperform its benchmark by at least 5% in the coming 3-12 months, unless otherwise stated.
For the history of Technical Analysis equity recommendations over the previous 12 months please view the document at:
http://www.juliusbaer.com/tech-analysis-recom-history
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DAILY WIRE | THURSDAY, 02 MARCH 2017; 08:54 CET 16/16
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