RESEARCH WEEKLY GAME OF THRONES - Julius Baer Group · 10/24/2016 · Q3 2016 earnings season: A good start Emerging markets: Q3 earnings season has started Consumer Staples: Stay

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MONDAY, 24 OCTOBER 2016; 16:42 CET 1/22

RESEARCH WEEKLY GAME OF THRONES

CONTENT

Stories of the week

US economic data: Not good enough US elections : What if Trump wins?

And what if none of the two wins? Telecoms: The importance of

content Bonds: Consequences of the

proposed AT&T transaction Q3 2016 earnings season: A good

start Emerging markets: Q3 earnings

season has started Consumer Staples: Stay underweight Eurozone government bonds: Good

news from the Iberian peninsula Platinum and palladium: Bracing for

a slowdown

Ideas of the week

• Stock of the week: Rémy Cointreau

(Buy)

• Equities: Take profits from Fielmann

(Hold ) and NXP (Hold)

• Technical idea: Nasdaq100 (Buy)

Number of the week

20x vs 160x

Multiple of Time Warner’s earnings

AT&T is ready to pay now versus what

AOL actually paid for Time Warner’s

earnings sixteen years ago.

Finance Talk

Next Generation

EDITORIAL

• Content and security are the new software – see the news

from the last few days. Consumer staples are the most vul-

nerable bond proxies. And Donald may still win.

• Investors should buy the Nasdaq or, if hard-nosed, cyber-

security. Avoid all consumer staples but Remy Cointreau.

40 years ago success was about hardware, 20 years ago

about software – today it is about content and security. This

is the key take-away of AT&T’s bid for Time Warner and last

week’s hacker attacks on consumer franchises. For investors,

this means they have a hard time getting around the Nasdaq

100 – which is our technical analysts’ recommendation of the

week (for what feels like the hundredth time). We highlight

particular cybersecurity stocks for connoisseurs knowing this

is too ‘high-octane’ for many of our readers. Many of our

clients still feel like this is a repeat of the great bubble bo-

nanza at the start of the century. Deal valuations say: it is

not. Deal multiples have highly deflated when comparing

them to bubble years (see ‘number of the week’). For those

investors worrying about the bond quality of bidders (such as

AT&T), this would only be a concern if expected earnings

growth did not materialise, which we do not expect.

Speaking of bubbly: so-called ‘bond proxies’ fit the bill, i.e.

companies with such steady earnings investors tend to mix

them up with fixed income securities. Take the latest British

Tobacco bid for Reynolds American pricing the latter at 27

times earnings – almost a 35% premium to Time Warner. So

be careful about picking in the consumer space. Recent dis-

appointments in Nestle and Danone may not be one-offs.

The most attractive segment our consumer analysts find here

are names like Remy Cointreau (our stock of the week). Just

liquid affordable luxury that global consumers like to buy.

And gosh – only two weeks left until US election day. Hope-

fully they will get the counting right this time, and the Don-

ald will acknowledge the result. The smart money index (i.e.

prediction markets like Iowa Electronic Markets) sees Donald

down and out. Actually this is an eerie echo of the betting

quotes the very day before the Brexit vote – Donald’s odds of

becoming president have now traded down to the very same

10%. Hence we follow the ‘once bitten, twice shy’ rule and

only reluctantly lower the odds to 35%. Beware of shortfalls

of absolute majorities which could overturn a solid lead in

opinion polls for Hillary Clinton.

Christian Gattiker, CFA, CAIA

KEY DATES 24 October

October ‘flash’ PMIs

The preliminary readings of the pur-

chasing managers’ indices (PMI) for

Japan, the eurozone and the US have

surpassed expectations by far. They

support our view of on-going but

bumpy recovery.

26 to 28 October

US GDP and other macro data

Goods trade (Wed) as well as durable

goods orders (Thu) for September

and, as a highlight, the first estimate

for Q3 gross domestic product (GDP)

growth (Fri) are expected to rather

disappoint expectations (see page 4).

27 October

Nordic central banks

We expect both the Norges Bank and

the Riksbank to remain on hold. In line

with the European Central Bank, the

Swedes will likely wait until December

to decide about the conclusion of

their asset purchase programme.

27 October

UK GDP

Preliminary quarterly GDP growth for

Q3, the first quarter after the Brexit

vote, is expected at a moderate 0.3%.

A positive surprise following a remark-

ably favourable summer season

should keep the GBP firm and possibly

cause the Bank of England to post-

pone its planned November rate hike

to Q1 2017.

28 October

Japanese September data

After better data from the industrial

sector, Friday’s data is likely going to

show persistent weakness in consumer

spending. Moreover, inflation remains

at current lows, as deflationary yen

strength and higher energy prices

cancel each other out.

http://www.juliusbaer.com/financetalk

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RESEARCH WEEKLY | MONDAY, 24 OCTOBER 2016; 16:42 CET 2/22

MARKETS AT A GLANCE

Asset allocation (latest changes)

Currencies Bonds Equities Commodities

Views (3 months)

US dollar bullish High grade (USD) neutral United States neutral Crude oil bearish

Euro neutral Low grade (USD) bullish Eurozone neutral Cyclical metals bearish

Swiss franc neutral High yield (USD) bullish Switzerland neutral Gold neutral

British pound neutral Inflation protected bullish ˄ Japan neutral Agriculture neutral

Yen neutral EM hard currency bullish Emerging markets Asia bullish

Renminbi neutral EM local currency neutral EM Latam & EMEA neutral

Forecasts (closing price as at 09/08/2016, technical view/arrow1 and 3-month forecast)

EUR/USD 1.09 1.10 Treasuries (10y) 1.73 1.90 S&P 500 2141 2160 Crude oil 51.8 45.0

EUR/CHF 1.08 1.09 Bunds (10y) 0.01 0.20 Eurostoxx 50 3078 3075 Natural gas 2.99 2.80

USD/CHF 0.99 0.99 Swiss (10y) -0.49 -0.25 DAX 30 10711 10750 Aluminium 1620 1450

EUR/GBP 0.89 0.89 Japan (10) -0.05 0.00 CAC 40 4536 4550 Copper 4614 4600

USD/JPY 103.8 106.0 Corporate BBB* 172 150 FTSE 100 7020 7050 Gold 1266 1275

USD/CNY 6.77 6.75 Corp. high yield* 472 400 SMI 8035 8150 Silver 17.5 15.5

USD/BRL 3.16 3.55 JPM CEMBI* 340 320 Nikkei 225 17234 17300 Platinum 933 1075

AUD/USD 0.76 0.76 JPM EMBI* 356 330 MSCI EM’s 911 950 Palladium 624 650

Review (1 month and 6-month performance)

-3.0%-3%

1.04

1.06

1.08

1.10

1.12

1.14

1.16

Oct 15 Apr 16 Oct 16

EUR/USD

-0.6%

2.1%

1.25

1.50

1.75

2.00

2.25

2.50


Treasury (10-year, %) **

-1.1%

2.4%

1'800

1'900

2'000

2'100

2'200


S&P 500

3.5%

7.7%

250

275

300

325

350


Bloomberg Commodity Index

-0.6%

-1.5%

1.07

1.08

1.09

1.10

1.11

1.12


EUR/CHF

-0.6%

2.2%

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8


Bunds (10-year, %) **

1.6%

4.1%

8'000

9'000

10'000

11'000

12'000


DAX 30

13%15.2%

20

30

40

50

60


Crude oil (USD/barrel)

2.9%

-7%

90

100

110

120

130


USD/JPY

0.3%

1.5%

-0.8

-0.6

-0.4

-0.2

0.0

0.2


Swiss (10-year, %) **

-2.9%

-0.9%

7000

7500

8000

8500

9000

9500


SMI

-5.4%

2.7%

1000

1100

1200

1300

1400


Gold (USD/ounce)

1.5%

4.2%

6.2

6.3

6.4

6.5

6.6

6.7

6.8


USD/CNY

0.2%

5%

135

140

145

150

155


US Corporates BBB

-0.7%

7.8%

600

700

800

900

1000


MSCI Emerging Markets

-6%

1.6%

900

1000

1100

1200

1300


US REITs

Sources: Bloomberg Finance L.P., Julius Baer (˄/˅: upward/downward revision in the past two weeks, *in basis points)

1: Technical Analysis may be inconsistent with and reach different conclusions to fundamental analysis. = negative, = neutral, = positive.

4

4248

6Money market (confirmed)

Equities (confirmed)

Alternatives (confirmed)

Profile ‘EUR Balanced’, in %

Bonds (confirmed)


MATTERS OF DEBATE

Economic outlook

Risk positioning*

Market sentiment

pressure points

Economic cycle

Source: Julius Baer

• Leading indicators recovered in September, signalling that the

August slump in global momentum was only temporary.

• Weakness prevails among structurally or politically burdened

emerging markets.

• Abating drag from the USD is brightening up the US outlook.

The door is open for a Fed rate hike after the elections.

• Eurozone growth looks to be more robust in late 2016 and 2017.

The European Central Bank could nevertheless stick to its bias

towards further policy easing until deflation risks fully ebb off.

• The Brexit roadmap, with negotiations to begin as of March

2017, suggests postponed weakness to hit the UK in mid 2017.

• The Bank of Japan’s new yield curve targeting rolls out the

carpet for new fiscal measures to boost consumption.

• China’s intensified fiscal stimulus successfully revived momen-

tum, expanding stability into H2 2016.

• Switzerland continues to shrug off recession risks stemming

from a strong franc, allowing growth to remain positive.

• Overcapacities and low commodity prices keep reflation con-

tained, limiting the recovery of inflation rates in 2016 and 2017.

• Accommodative monetary policies continue to prevail and rate-

hike expectations remain scaled back in most economies.

David A. Meier

Forecasts Real growth Inflation

(year-on-year, %) 2015 2016E 2017E 2015 2016E 2017E

World 3.2 3.0 3.3 2.8 3.0 3.0

United States 2.6 1.5 1.8 0.1 1.2 1.6

Eurozone 1.9 1.7 1.6 0.0 0.2 1.5

Germany 1.7 2.0 1.5 0.1 0.3 2.1

United Kingdom 2.2 1.9 0.7 0.1 0.7 1.5

Switzerland 0.8 1.7 1.5 -1.1 -0.4 0.2

Japan 0.5 0.7 1.1 0.8 -0.4 0.0

China 6.9 6.4 6.2 1.4 2.0 2.0

Brazil -3.8 -3.5 0.0 9.3 9.0 5.5

Source: Julius Baer, E = Estimates

* The risk positioning illustrates our general stance towards risk assets such

as equities and corporate bonds within an investment portfolio based on

our assessment of the economic outlook and market sentiment.

Central bank exit strategies

The US central bank (Fed) is shifting to a brisker rhetoric regard-

ing interest-rate normalisation as US economic data continues to

beat expectations. Rate-hike expectations have moved consider-

ably forward, with the market anticipating the next hike already in

December 2016. Other major central banks have little choice than

to keep an accommodative stance for longer. The Bank of Eng-

land has loosened monetary policy in response to the Brexit refer-

endum. Negative interest rates in the eurozone, Japan and Swit-

zerland suggest that any exit from loose monetary policy is far

away.

David Kohl

Fiscal reflation on the rise

The combination of central banks running out of options to

stimulate growth and governments simultaneously imposing

fiscal austerity measures has fuelled concerns over globalisation

pressure in more and more economies. Frustration levels among

private households are rising, which is challenging the legitimacy

of the ruling political parties and spurring radical factions. Instead

of prioritising structural reforms, which tend to hurt many in the

short term, the ruling authorities are increasingly eroding fiscal

austerity for deficit and even debt-financed spending. Major

examples are China and Japan. Both US presidential candidates

argue for additional fiscal stimulus and the new British govern-

ment is expected to implement fiscal reflation measures to allevi-

ate negative post-Brexit impacts. Even in the eurozone periphery

and in France, facing presidential elections next year, the pres-

sure is on to undo the fiscal stability pact constraints.

Janwillem Acket

Chinese growth and reforms

Slowing productivity growth and resulting necessary reforms have

led to lower economic growth, leaving the property and manufac-

turing sectors most affected. The envisioned 6.5% yearly growth

over the next five years appears very ambitious and will come at

the cost of increasing the existing high debt burden further.

Reaching 6.5%-7% growth this year requires constant fiscal sup-

port as headwinds from overcapacity can only be reduced slowly.

Reform momentum will remain moderate, with gradual progress

in the areas of financial liberalisation and the internationalisation

of the renminbi, financial regulation and consolidation of state-

owned enterprises.

Susan Joho

Other financial market pressure points

Middle East and diminishing petrodollar flows:

The outlook of low oil prices for longer is a challenging one for

most petro nations. Pledged economic reforms and the opening

to global capital markets only partially rein in ballooning budget

deficits.

Norbert Rücker

Risk-off(cautious)

Risk-on (constructive)

World

US

Eurozone

China

Germany

Japan

UK

Brazil

Switzerland

businesscycle

potentialgrowth rate

regions

countries

Emerging Asia

Advanced Economies

Emerging EuropeEmerging Americas


STORIES OF THE WEEK

US economic data: Not good enough

• Recent US economic data has been mixed and exaggerated

expectations for this week’s GDP reading create the potential

for disappointment.

• Such a mixed US economic outlook allows the Federal Reserve

(Fed) to refrain from hiking rates in December; meanwhile the

US dollar will be able to defend its strength.

Recent US economic data came in mixed. While the Philadelphia

Fed business outlook surprised positively, housing starts were

pretty weak. At the same time building permits were strong, while

the Empire State manufacturing survey weakened, together with

disappointing industrial production and capacity utilisation data.

This week the advanced GDP reading for the third quarter will be

released. Market expectations of 2.5%-2.7% annualised quarterly

growth appear too high, preparing the ground for disappoint-

ment. Both the Atlanta and the New York Fed have published

real-time GDP estimates, which are considerably lower at 2.0%

and 2.2%. We expect a GDP growth rate of 2.3%, with a risk to

the downside.

The lack of convincing positive US economic data surprises allows

only for a either stronger US dollar or a Fed rate hike.

______

A disappointing outcome would reduce expectations that the Fed

will increase its target range for the Fed funds rate on 14 Decem-

ber. The Dollar Index, which has appreciated by more than 4.5%

in the last two months, would at least temporarily lose an im-

portant tailwind. Still, rate-hiking speculation will remain noticea-

ble, though not for the December meeting but for the January or

March meeting in 2017, which should be enough to keep the

dollar well supported. Any political uncertainty surrounding the

US presidential elections would create additional USD support,

while reducing the probability of a December rate hike. The lack

of convincing positive US economic data surprises allows only for

one factor to materialise, either a stronger US dollar or a Fed rate

hike. We expect the former for the coming weeks.

David Kohl

The short episode of positive US economic data surprises is over

Source: Citi, Julius Baer

US elections : What if Trump wins? And what if none of the

two wins?

• Taking account of last week’s final TV debate and the latest

polls, our economists adjusted the probabilities for a Clinton

victory to 65% from 55% and for Trump to 35% from 45%.

• Polls also agree that Clinton is likely to be the 45th president.

But should we trust the polls this time? Will the polls get it

wrong in the US election as they did in the Brexit vote?

Scenario 1: Trump is going to be the next President

In the latest polls, Clinton gets 47% of the vote versus Trump’s

38%. According to the FiveThirtyEight Senate forecast model,

Clinton has an 87.3% chance of winning the presidency.

But if we have learned anything from Brexit, it is that polls are not

as accurate as we think. After the Brexit vote, many young people

expressed their anger via social media. But here is the paradox:

Many young people who supported the ‘remain’ side did not end

up voting. Statistics show that younger voters are more likely to

vote for Democrats than for Republicans in this election cycle,

which thus does not bode well for the Clinton campaign.

Scenario 2: None of the two will be the next president

The Electoral College requires that in order to be elected Presi-

dent a candidate must win a majority of the votes. Right now, a

Presidential candidate has to win 270 electoral votes to be elected

President. Clinton has 267 electoral votes, Trump has 266, and

Gary Johnson, a libertarian presidential candidate and a former

two-term Republican governor of New Mexico, has New Mexico’s

five. Were Johnson to win another State (for instance Alaska)

neither candidate would get the necessary 270 Electoral votes.

With no candidate possessing an Electoral College majority, the

election would go to the House of Representatives, with Clinton,

Trump and Johnson all eligible to receive votes. The House of

Representatives is currently dominated by Republicans and it is

very unlikely that they would pick Hillary as the new President.

But would they vote for Trump as the new President in this sce-

nario?

Conclusion:

When it comes to the sectors, should either Clinton or Trump win,

the Aerospace & Defence and Infrastructure sectors are set to

outperform. Both candidates support the Aerospace & Defence

industry. Hillary Clinton wants to maintain the current high mili-

tary standard. Donald Trump, however, wants to “make the mili-

tary so big, powerful and strong that no one will mess with the

US”. And both US presidential candidates want to further increase

federal infrastructure spending. So, stick to companies that are

operating in these sectors. Buy-rated stocks include Honeywell,

American Electric Power, Ingersoll-Rand, Microchip Technology

and United Technologies. Should neither Clinton nor Trump win,

uncertainty will prevail again, which would not be supportive for

markets and lead to higher volatility.

Sanja Tesic

Corporate rating summary:

Honeywell, (Buy, Price/Target: USD108.96/124.00)

American Electric Power, (Buy, Price/Target: USD62.48/76.00)

Ingersoll-Rand, (Buy, Price/Target: USD73.62/74.00)

Microchip Technology, (Buy, Price/Target: USD59.50/72.00)

United Technologies, (Buy, Price/Target: USD98.67/120.00)

F A J A O D F A J A O D F A J A O D

2014 2015 2016

-80

-60

-40

-20

0

20

40

60

80

Index


Telecoms: The importance of content

• AT&T is acquiring Time Warner for USD85.4bn. The deal is

subject to regulatory approval.

• The deal emphasizes the importance of content for telecom-

munication operators as a means of differentiation in an in-

creasingly competitive market.

AT&T has confirmed that it is acquiring Time Warner for

USD85.4bn, or USD107.50 per share, which represents a 20%

premium to Friday’s closing price. We see risks from potential

regulatory pushbacks as the new AT&T would be one of the larg-

est vertically integrated players in the US media and telecommu-

nications industry. The US telecommunications industry is be-

coming increasingly competitive, driven by aggressive pricing

from smaller players such as T-Mobile as well as by the an-

nounced entry of cable operators into the wireless business.

These developments put the high profitability and cash genera-

tion capabilities of the incumbent telecom players such as AT&T

and Verizon at risk. Through Time Warner, the new AT&T would

have access to valuable media content such as CNN and HBO

and also to the Studio business Warner Bros. This would allow

AT&T to differentiate its offering and leverage its existing wire-

less, PayTV and broadband distribution platforms.

Access to both video content and distribution platforms

is important to all players in the industry.

______

Access to both video content and distribution platforms is im-

portant to all players in the industry. This deal is not the first one

of its kind: In 2013, cable operator Comcast acquired NBC Uni-

versal, providing it with media content and in July 2016, Verizon

announced that it would buy the core assets of Yahoo!. In Europe,

we have seen investments by telecommunication and cable oper-

ators particularly into sports content: Liberty Media (not covered)

has bought the Formula 1 rights and BT Group and Telefonica

both own TV rights for football. We expect this trend to continue

and a combination of CBS and Viacom could be the next possible

deal on the agenda. We believe that investments into media are

necessary for telecom companies to differentiate themselves and

to sustain their market shares going forward. However, we see the

risk profile of telecom companies increasing, given growing expo-

sure to the advertising market and to content cost inflation.

Barbara Elbel

Corporate rating summary

AT&T (Hold, Price/Target: USD37.49/43.00)

BT Group (Buy, Price/Target: GBp380.00/480.00)

Comcast (Buy, Price/Target: USD64.06/75.00)

CBS (Buy, Price/Target: USD57.66/62.00)

T-Mobile (Buy, Price/Target: USD46.75/51.00)

Telefonica (Hold, Price/Target: EUR9.11/8.50)

Time Warner (Buy – under review, Price/Target: USD89.48/86.00)

Verizon (Hold, Price/Target: USD48.20/50.00)

Viacom (Hold, Price/Target:37.51/41.00)

Yahoo! (Buy, Price/Target: USD42.17/42.00)

Bonds: Consequences of the proposed AT&T transaction

• In a deal announced on Saturday, AT&T agreed to pay

USD85.4bn to acquire Time Warner.

• Acquiring Time Warner will keep AT&T’s strong cash-flow

generation and will also a difersify its revenue mix in our view.

AT&T announced that it would buy Time Warner (both not cov-

ered as issuers) for a total consideration of USD85.4bn, which

also includes Time Warner’s net debt. The purchase price will be

financed with own shares, cash and new debt. AT&T has an 18-

month committed unsecured debt bridge facility of US40bn. The

deal is expected to close before year-end 2017 and annual syner-

gies are estimated at USD1bn within three years. By the end of

2018, the US group expects net debt to adjusted EBITDA to be in

the range of 2.5x. However, there is a lack of detail regarding the

calculation of this leverage. AT&T expects to maintain a strong

balance sheet and is committed to keeping a strong investment-

grade rating which currently stands at Baa1/BBB+/A-

(Moody’s/S&P/Fitch). The deal will likely increase AT&T’s out-

standing debt considerably from around US125bn to about

USD190bn, with AT&T already being the largest non-financial

corporate issuer in the US.

Bondholders can be affected in different ways from a merger.

But leverage and cash generation are key.

______

These are the facts we have received so far about the transaction.

Bondholders can now be affected in different ways. Most im-

portant is the future cash-flow generation which determines the

ability to pay coupons and to pay back bonds. With the same

attention, bond investors need to look at the leverage. An in-

crease of leverage raises the default risk of a company which

finally also affects the rating of a company. AT&T said on Sunday

that they expect to preserve their investment grade-rating and

management was highlighting the sound balance sheet and

strong cash generation. In our view, AT&T’s rating should stay in

the investment-grade area due to the reasons highlighted by the

company. Also beneficial in our view is the diversification of the

revenue mix as 40% of earnings should come from the entertain-

ment business in future.

Christian Dubs


Q3 2016 earnings season: A good start

From what we can see so far, US companies had a good

quarter, clearly beating expectations.

A positive trend in earnings growth underpins our more

constructive view for earnings growth in 2017.

This week and next week will be the busiest ones in the US earn-

ings season with 290 companies reporting their interim results. So

far, almost 28% of the S&P 500 companies (with regard to market

capitalisation) have reported better-than-expected results. As we

have outlined in the preview, a flat earnings growth outcome is in

the cards. Based on the companies having reported so far, sales

have grown by 2.2% y/y (against the forecast of 1.2%) while

quarterly earnings are up 4.7% y/y (forecast was -2.3%). As a

consequence, the earnings surprise indicator is currently on al-

most record-high levels. Taking a look at the recent development

of quarterly earnings shows a positive momentum. While earnings

growth figures for the whole year 2016 might not end far from

zero yet, our forecast of a better 2017 are supported by the cur-

rent trend. We are now expecting a growth figure of just above

7%, compared to 12% expected by consensus.

For the time being, the US earnings season

is well ahead of expectations.

______

From a sector perspective, it can be stated that all sectors have

beaten expectations so far (see chart below). However, it is pre-

dominantly the cyclical segment that is positively surprising.

Financials are in the lead, followed by consumer discretionary and

information technology. The lowest beats come from industrials,

telecom and healthcare for the time being.

European earnings are at the very beginning of their reporting

season with only 6% having reported so far. Sales are positive but

slightly behind expectations while the quarterly earnings growth

of 1.7% y/y beats expectations.

Christoph Riniker, CEFA

Cyclical sectors in the lead

Source: Datastream, Julius Baer; C.Discr = Consumer discretionary

Emerging markets: Q3 earnings season has started

• The Q3 earnings season has started in emerging markets. The

next seven days will be decisive as China, Indonesia and Mexico

will set expectations for the rest of emerging markets.

• We believe in improving earnings dynamics and remain Over-

weight emerging markets, with a focus on emerging Asia.

The Q3 reporting season in emerging markets has started and we

are about to see a busy schedule over the next seven days in

which companies will be reporting their sales and earnings num-

bers. As can be seen from the table underneath, China, Indonesia

and Mexico will have largely concluded their Q3 reporting season

a week from now and set expectations for the rest of emerging

markets. Our outlook for the Q3 earnings season is positive and

we expect earnings growth to slowly recover. Our reasons to

become more positive are, first and foremost, the base effect and

improving profitability which is reflected in a higher return on

equity and profit margin. Our key finding is that emerging market

profitability is not only slowly recovering on a standalone basis

but also relative to the MSCI All Country World index. Second,

the groundwork for an earnings recovery was laid a bit more than

twelve months ago when the Chinese government took various

bold measures to reflate the economy with positive effects on the

rest of emerging markets. As these stimulus measures slowly feed

through the economy, sentiment in China has significantly im-

proved, lifting other emerging markets as well. Third, purchasing

managers’ indices have been rising in various countries and most

importantly producer price deflation has stopped falling, support-

ing an earnings recovery.

To conclude: We believe in improving earnings dynamics and

remain Overweight emerging markets with a focus on emerging

Asia or India, Taiwan1, Indonesia, Malaysia, Vietnam2 and China.

When it comes to China, our favourite sectors with an Over-

weight rating are energy, industrials, IT, telecom and healthcare.

Heinz Rüttimann, CAIA

Emerging markets Q3 reportings over the next seven days

Source: Bloomberg Finance L.P., Julius Baer

1 Taiwan: Julius Baer’s offering in local markets is restricted.

2 Vietnam, Colombia: Julius Baer makes no offering in local markets.

0%

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4%

6%

8%

10%

12%

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Gewinnwachstum USA: Report - Erwartung

Country Total Reporting % totalnext 7days

China 307 296 96%

Turkey 40 12 38%

Indonesia 34 34 100%

Malaysia 30 6 30%

Mexico 35 34 100%

Colombia 12 4 58%

Brazil 58 21 40%

Russia 24 10 42%

Philippines 29 6 24%

Poland 30 7 23%

Taiwan 88 25 31%

South Korea 74 50 66%

Thailand 49 14 29%

Chile 23 8 35%

India 50 29 58%

Rest 53 n.a. n.a.

Total 936 556 61%


Consumer Staples: Stay underweight

• Disappointing earnings and valuation pressure in the food and

home & personal care segment keep sector rotation alive.

• We continue to underweight the overall consumer staples sec-

tors where we only see a few company-specific self-help stories.

We continue to be more positive on spirits and food retail.

European food companies and home & personal care stocks so far

continue to miss on low expectations. Nestle (organic sales

growth +3.2% vs. consensus +3.8%), Unilever (volume growth

-0.4% vs. consensus of +0.6%), Reckitt Benckiser (organic sales

growth +2% vs. consensus of +3%) and also Danone (+2.1% vs.

consensus +2.2%) missed market expectations. In addition to that

Nestle cut its full-year sales growth guidance from 4.2% to 3.5%.

In absolute terms these misses may look small but for the high-

quality consumer staples space they are tangible, especially as

they come against estimates which had already been lowered

ahead of the earnings season. While there were various company-

specific reasons for the misses we also see some major sector-

specific issues: 1) Much worse volume declines in the emerging

markets, mainly Brazil but also Russia and China, 2) weak pricing

in the developed world, particularly in Europe. This will primarily

impact the short-term outlook but we also expect further down-

ward revisions for FY 2017. This should continue to weigh on the

consumer staples sector where valuations are still close to record

highs (21x forward EPS vs. historical average of 17x and upper

end of valuation range at 22x). Given the interest-rate sensitivity

of the sector, the potential for rising interest rates against the

background of increasing inflation expectations represent a seri-

ous potential headwind for the staples sector. As a result of this

we reiterate our Underweight rating on the consumer staples

sector, particularly on the food and home & personal care seg-

ment. Within the global food sector we recommend focusing on

self-help stories like Unilever and Nestle. We also continue to like

the sprits segment where fundamentals have clearly improved

over the past 12 months due to improved demand in China and

the US as well as in other regions of the world. The overall spirits

segment should continue to benefit from earnings upside revi-

sions. Last but not least we remain Neutral on the food retail

space which has heavily underperformed the rest of the consumer

staples universe for more than a decade. Here we see attractive

valuations and a number of attractive turnaround stories.

Patrik Lang, CFA


Nestle (Buy, Price/Target: CHF73.15/88)

Unilever (Buy, Price/Target: EUR39.14/44)

Reckitt Benckiser (Hold, Price/Target: GBp7,235/7,500)

Danone (Buy, Price/Target: EUR63.47/72)

Eurozone government bonds: Good news from the Iberian

peninsula

• Portugal’s central bank can continue purchasing its government

debt, which is supportive for the bonds.

• Spain likely to avoid renewed parliamentary election, but bonds

are already richly valued.

Good news for the finance minister of Portugal on Friday: DBRS

Ltd, the Canadian rating agency, confirmed Portugal’s sovereign

credit rating of BBB (low). Since the other three rating agencies

which the European Central Bank takes into consideration –

namely Moody’s, S&P and Fitch –have all downgraded Portugal to

non-investment grade, Portugal’s central bank would have had to

stop buying the bonds otherwise. Thanks to the blessing from

DBRS, it now can continue to purchase about EUR 1 billion of

government bonds a month.

The DBRS decision has been of paramount importance for Portu-

gal. Concerns of a downgrade had weighed on the market in

recent weeks. With the rating decision out, yields will trend lower

over time. Within the European monetary union, Portugal offers

the highest yield of any Hold-rated issuer.

With the latest rating decision, a big cliff was avoided

for Portugal’s government debt.

______

Spain (Hold/Opportunistic) is likely to avoid snap elections, the

third in a year. The Socialist Party has seemingly given up oppos-

ing a new term of Mariano Rajoy, leader of the People’s Party.

Spain enjoys one of the highest growth rates within the monetary

union but also one of the highest fiscal imbalances. Due to the

latter, we do not see much room for further convergence of bond

yields. As a matter of fact, Spanish government bond yields are

currently trading like A-rated issuers with solid fundamentals

according to calculations by Moody’s, compared to a sovereign

credit rating of Baa2. In other words, Spain’s government debt is

already expensive.

Markus Allenspach

Portuguese yields: Low, but still better than Spain or Germany

Source: Datastream, Julius Baer


Portugal (Hold/Speculative)

Spain (Hold/Opportunistic)

Germany (Hold/Conservative)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2008 2009 2010 2011 2012 2013 2014 2015 2016

5-year yield

Portugal Spain Germany


Platinum and palladium: Bracing for a slowdown

• Platinum and palladium prices have come under renewed pres-

sure as investors brace for a slowdown in global car sales.

• While we recommend staying on the sidelines for the time be-

ing, the platinum/gold ratio still looks attractive.

Since summer, platinum and palladium prices have come under

renewed pressure. Platinum has declined 20% to USD 940 per

ounce while palladium is down 15% to USD 630 per ounce. Be-

yond a stronger US dollar, we believe investors have been the key

drivers behind the declines as they are bracing for a slowdown in

global car sales. Platinum is mainly used in catalysts of diesel-

fuelled cars, making up close to 40% of total demand. With al-

most 80%, palladium has an even higher exposure to catalysts

and is almost exclusively used in gasoline-fuelled cars.

Following a weak 2015, car sales have recovered impressively this

year, primarily driven by China and Europe. Since September last

year, sales growth in China benefited from a cut in purchase

taxes. It is yet unclear whether these cuts will be prolonged, re-

duced or run out as planned by the end of the year. Sales should

be lower in any case next year as consumers brought forward

purchases. In Europe, sales continue to grow dynamically, sup-

ported by some remaining pent-up demand and the sound eco-

nomic backdrop. As sales are slowly but surely approaching the

boom-year levels, growth should be more moderate over the

coming years. Meanwhile, sales in the United States are trending

sideways on close-to-record levels. Due to the length of the re-

covery and the matureness of the market, this does not come as a

surprise. Given the solid economic outlook, we expect the side-

ways trend to continue and see only a limited risk of a major slow-

down. Overall, global car sales growth should come down from

close to 5% year-to-date towards 2% next year.

Even at a lower growth rate, platinum and palladium demand

should continue to increase and the markets should remain un-

dersupplied. That said, the demand outlook remains less compel-

ling for platinum due to its exposure to the diesel technology,

which remains under scrutiny from the emission scandal. While

undersupply should support the medium to longer-term funda-

mental outlook for both metals, short-term negative news related

to a slowdown in car sales should weigh on market sentiment and

lead to investor selling, keeping prices under pressure. We main-

tain a neutral view on platinum and palladium but recommend

staying on the sidelines as long as there is no stabilisation in

investment demand – despite current low price levels. We regard

prices below USD 900 per ounce of platinum and below USD 600

per ounce of palladium as attractive entry opportunities, assum-

ing that the fundamental backdrop does not deteriorate beyond

our expectations. What still looks attractive is the platinum/gold

ratio, which hit new record lows as of late. Such a steep discount

of platinum to gold is not justified in our view.

Carsten Menke, CFA


INVESTMENT IDEAS

short term

medium term

long term

Trading ideas Key ideas Thematic ideas

• Stock of the week: Rémy Cointreau (Buy)

• Equities: Take profits from Fielmann (Hold)

and NXP (Hold)

• Bonds: Latest issues of Citigroup (Hold), Bank

of America (Hold), Goldman Sachs (Buy),

Morgan Stanley (Buy), Credit Agricole (Buy),

Unicredit (Hold) and BBVA (Buy)

• Currencies: Emerging market carry trade

• Commodities: Long platinum/Short gold

• Technical idea: Nasdaq100 (Buy)

• Equities: Brexit beneficiaries (Buy)

• Equities: Quality (Buy)

• Equities: Emerging Asia (Buy)

• Equities: US Infrastructure (Buy)

• Bonds: US high yield (Buy)

• Bonds: Emerging market hard currency (Buy)

• Bonds: TIPS (Buy)

• Bonds: Subordinated bank bonds (Buy)

• Technical idea: S&P 500 (Buy)

• Technical idea: US Treasuries 10-year (Buy)

• Digital Disruption: Cybersecurity (Buy)

• Arising Asia: Asia Tourism (Buy)

• Feeding the World: Animal Health (Buy)

• Digital Disruption: FinTech (Buy)

• Arising Asia: Asia’s youth (Buy)

• Shifting Lifestyles: Genomics 2.0 (Buy)

• Digital Disruption: Automation & Robotics

(Buy)

• Shifting Lifestyles: Digital Health (Buy)

Stock of the week

Remy Cointreau: The right spirit

Remy Cointreau (Buy, Price/Target: EUR78/90) is the fastest-

growing European beverage stock due to its strong exposure to

deluxe cognac (75% of sales) in Asia (40%) and the US (40%). We

expect mid-teen annual earnings growth over the coming 3-5

years due to high single-digit earnings growth and margin im-

provements (EBIT margin 17% vs. historical peak of 21% and peer

group close to 30%). Valuation based on P/E relative to the Euro-

pean beverage sector is in line with the 15-year historical average

(30% premium, which is well-justified in light of the growth per-

spectives). We expect a share price performance in line with

earnings growth

Patrik Lang, CFA


Equities

Fielmann: Downgrade to Hold – switch to Grandvision

We continue to expect a double-digit shareholder return (driven

by mid-single-digit revenue growth, further margin improvements

and a dividend yield of ca. 2.5%) on the shares of Fielmann, the

leading optician retailer in Germany. Also we see the rationale for

high valuation multiples (owing to factors such as above-average

quality and outstanding structural growth opportunities such as

an ageing population). However, we identify limited further

upside potential for the shares following their strong performance

(+13% since our initiation end of May). We have therefore down-

graded our rating from Buy to Hold and recommend investors

switch to Grandvision (Buy, Price/Target: EUR24.40/28.5), which

offers similar earnings growth dynamics but at more attractive

valuation levels (i.e. P/E 2017 of 23.7x vs. ca. 33.1x)

We have downgraded our rating on Fielmann from Buy to

Hold due to valuation reasons and recommend investors

switch positions to Grandvision.

Patrick Jnglin, CFA

Equities

NXP: Downgrade to Hold on rumoured takeover rally

We downgrade NXP (Hold, Price/Target: USD 101.7/98.0) to

Hold as our price target has been exceeded on the back of a ru-

moured takeover bid by Qualcomm (Hold, Price/Target:

USD67.9/59.0). Given Qualcomm’s pressure in its existing smart-

phone business and the general trend in semiconductors to ex-

ploit economies of scale by merging production facilities, a deal is

rather likely, especially as NXP is one of the few pure plays on

automotive semiconductors, which is a field with significant

growth potential. We assume that the takeover premium will be in

the range of roughly 30%-40% to NXP’s average share price of

the last six months (USD85), which would mathematically lead to

a takeover price of USD110 to USD120. Due to NXP’s large mar-

ket capitalisation of USD36bn, we see a counterbid as rather

unlikely given the limited group of potential buyers. We would

therefore take profit.

Michael Studer, PhD

40

50

60

70

80

90

100

110

Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

EUR


Strategic equity calls

North America Europe Rest of the World

Energy overweight Chevron, Hess Eni, Royal Dutch Shell

Materials neutral Sherwin-Williams Company Smurfit Kappa Toray Industries

Industrials underweight Ingersoll-Rand, Stanley Black & Decker,

United Technologies

Assa Abloy, Schneider Electric China Everbright International, China

State Construction International, CK

Hutchison, Sydney Airport

Consumer

discretionary

neutral Comcast, Home Depot Compass Group, Daimler, WPP Group Ctrip.com, Fuyao Glass, Sony Corpora-

tion

Consumer

staples

underweight CVS Health Corporation, Kroger,

PepsiCo

Ahold Delhaize, Associated British

Foods, Diageo

Dairy Farm International

Healthcare overweight Celgene, Eli Lilly, Incyte, Medtronic,

Pfizer, Zimmer Biomet

Fresenius Medical Care, Sanofi, Smith

& Nephew

CSPC Pharmaceutical, Shanghai Fosun

Pharmaceuticals-H

Financials neutral Affiliated Managers Group, Marsh &

McLennan, S&P Global, Wells Fargo

Axa, Helvetia, Munich Re, Societe

Generale

AIA Group, Ping An Insurance-H

Real estate neutral Simon Property Unibail-Rodamco

Information

technology

overweight Adobe Systems, Akamai Technologies,

Alphabet Inc., Cognizant Technology

Solutions, Facebook, Visa

SAP Baidu, BOC Aviation, Broadcom Lim-

ited, Tencent Holdings

Telecom neutral T-Mobile Orange China Mobile

Utilities underweight NextEra Energy Iberdrola Beijing Enterprises Water, China Re-

sources Gas

Changes as per

24 October 2016

Additions: Daimler, Diageo

Deletions: Danone

Fixed Income

Fixed Income: Latest bonds of covered issuers

Financial institutions were quite actively issuing new bonds last

week in order to benefit once again from low financing costs.

Citigroup issued a AUD300m floater and AUD250m of fixed-term

debt, EUR2.75bn split up in different maturities, and a USD3bn

domestic bond, all of them as senior unsecured debt. Bank of

America issued exclusively domestic bonds: a USD500m floater

and a total of USD4.5bn fixed-term debt. Two further US banks,

Goldman Sachs and Morgan Stanley, issued EUR1bn and a do-

mestic USD2.5bn floater, respectively. In Europe but still within

the financial sector, Credit Agricole issued ca. EUR680m of sub-

ordinated debt, whereas Unicredit and BBVA issued EUR1bn

fixed-interest bearing and a EUR2bn floater of unsecured debt,

respectively.

Dario Messi


Citigroup (Hold/Opportunistic)

Bank of America (Hold/Opportunistic)

Goldman Sachs (Buy/Opportunistic)

Morgan Stanley (Buy/Opportunistic)

Credit Agricole (Buy/Opportunistic)

Unicredit (Hold/Opportunistic)

BBVA (Buy/Opportunistic)

Fixed Income Idea initiation: October 2016

TIPS: From nominal to real rate risks

Nominal risks are increasing in the bond market, triggered by an

improving economic outlook, stabilised energy prices, general

changes in central bank rhetoric and a possible end of austerity.

This difficult environment for bond markets calls for a transition

plan for the nominal normalisation period, where yields as well as

inflation are on upward pressure. We therefore see Treasury infla-

tion-protected securities (TIPS) as a valuable alternative to the

nominal counterparts. This bond segment allows to be exposed to

the more stable real rate rather than to nominal rate risks, and

should therefore have an advantage over traditional Treasuries.

From a valuation perspective, we currently see rather cheap infla-

tion protection as the 5-year break-even inflation rate is still low,

signalling that there are no excessive inflation expectations in the

TIPS market.

Dario Messi


Equity Strategy Idea initiation: September 2016

US Infrastructure

Infrastructure is an international necessity, typically involving e.g.

the movement of goods and people, water processing and pro-

vision, energy generation and supply and communication sys-

tems. It is not just an emerging market issue as the developed

world also needs to maintain and develop new infrastructure to

accommodate its growing population. Consequently both US

presidential candidates want to further increase federal infra-

structure spending by USD275bn over five years in the case of

Hillary Clinton and “substantially” in the words of Donald Trump

(“one of the biggest projects this country has ever undertaken”).



American Electric Power (Buy, Price/Target: USD62.48/76)

Ingersoll-Rand (Buy, Price/Target: USD65.76/74)

PPG Industries (Hold, Price/Target: USD92.38/100)

Equities Idea initiation: July 2016

Brexit beneficiaries

The referendum decision to leave the European Union may heavi-

ly impact the growth perspectives of the UK. Nevertheless, the

impact on the majority of stocks we cover and on their growth

prospects should be limited given that many UK companies have

a globally well-diversified footprint and derive only a low-to-mid-

single-digit percentage of their sales from the UK. With many of

these companies also having a disproportionately high cost base

in the UK, they should benefit from a positive impact on their

GBP-denominated sales and earnings. By sector, we particularly

see no major negative impact in general for UK consumer staples,

healthcare, business services and utilities equities we cover.

Britta Simon, CEFA


British American Tobacco (Buy, Price/Target: GBp4666/5300)

Compass Group (Buy, Price/Target: GBp1485/1600)

Experian (Buy, Price/Target: GBp1582/1600)

InterContinental (Buy, Price/Target: GBp3160/3400)

Intertek (Buy, Price/Target: GBp3501/3830)

Pennon Group (Buy, Price/Target: GBp846/960)

Shire (Buy, Price/Target: GBp5053/5750)

Smith & Nephew (Buy, Price/Target: GBp1222/1385)

Vodafone Group (Buy, Price/Target: GBp223.55/260)

WPP Group (Buy, Price/Target: GBp1749/2000)

Fixed Income Idea initiation: June 2016

Emerging market hard-currency bonds

We still hold an Overweight stance on emerging market (EM)

hard-currency bonds. While the segment does not look cheap

relative to fundamentals and commodity price levels, inflows into

it remain very strong due to the lack of high-yielding assets glob-

ally. We believe that as long as emerging market fundamentals

remain stable and bonds continue to offer substantial spreads

over zero-yielding core government bonds, performance will be

supported by further inflows. Furthermore, under our base-case

scenario of moderate global growth and gradually increasing

government bond yields, EM corporate bonds should outperform

as the credit-spread compression should help absorb the impact

of higher core yields.

Alejandro Hardziej

Equity Strategy Idea initiation: March 2016

Emerging markets: Focus on Asia

The time has come to be tactically more optimistic and we have

upgraded emerging markets from neutral to overweight. Our top-

down investment rationale is that first, the US central bank will

not raise rates for the time being, second, more funds will flow

from Europe to emerging markets and third, the earnings recov-

ery in emerging markets will continue while valuations are attrac-

tive. We expect the MSCI Emerging Markets and in particular

emerging Asia to perform well over the next six months. We rec-

ommend investors buy into either a broad-based emerging Asia

investment vehicle or into one of our Asia overweight calls, which

are Taiwan*, China, Indonesia, Malaysia, India and Vietnam**.

Heinz Rüttimann, CAIA

* Taiwan: Julius Baer’s offering in local markets is restricted

** Vietnam: Julius Baer makes no offering in local markets

Currencies Idea initiation: March 2016

GBP: Maintain pound exposure hedged due to Brexit

After surprising stability in the first post-referendum phase, re-

cent fears of a “hard Brexit”, meaning that the UK would willingly

lose access to the EU single market in order to secure an inde-

pendent immigration policy, have caused record lows of the

pound sterling in this decade. Investors who had hedged pound

exposure have been rewarded. With the presented timetable

suggesting separation negotiations to begin after March 2017, we

expect the pound to rather tend sideways over the next three

months, with additional stability possibly offered by a less ag-

gressive Bank of England. In the long term, however, political

uncertainties will keep volatility elevated and have the potential

to damage foreign direct investments, which will shift the mar-

ket’s focus on the UK’s twin deficit, in particular the huge current

account deficit. Our 12-month EUR/GBP forecast of 0.94 sug-

gests keeping pound exposure hedged.

David A. Meier


Equity Strategy Idea initiation: February 2016

Quality

Quality as an investment style started to outperform the overall

market again a few months ago. On the back of increased

investor uncertainty and elevated volatility, this completely

makes sense. As we have outlined previously, the current market

environment calls for further adding quality to equity portfolios.

Furthermore, we believe that from a European perspective a

constructive outlook for the USD calls for more international sales

exposure. Overall our view of a muted but volatile outlook still

persists. Against this backdrop we have implemented a number of

rating changes, combining the various aspects of influence.


Fixed Income Idea initiation: September 2015

US high-yield bonds: Still adequate spread compensation

The US high-yield market with its strong bias towards commodi-

ty-related issuers has rebounded strongly since mid-February,

albeit from exceptionally low levels. Fears over the growth slow-

down in China and its negative impact on commodity prices have

abated and led to strong short covering of traders’ positions.

Also, reassuring data in regard to the overall economic environ-

ment in the US have helped the segment to perform well over the

past months. The segment has been quite resilient and the result

of the Brexit referendum and fluctuations in the price of oil have

led to only limited spread widening, keeping investors well-

compensated for a potential surge of defaults. Although leverage

has increased, sector outlooks remain stable. We maintain our

expectations for acceleration of nominal growth and higher reve-

nues in the segment.

Eirini Tsekeridou

Next Generation Idea initiation: September 2015

Cybersecurity: DDoS attack crashes US internet

Last Friday a major cyberattack has heavily impacted US online

providers. Hackers launched a massive distributed denial-of-

service (DDoS) attack using a botnet of millions of hacked every-

day devices (e.g. web-based toasters and cameras). This ‘zombie

network’ then overloaded the servers of an internet infrastructure

company with malicious traffic. The financial damage to internet

providers can be substantial, which leads corporates to seek pro-

tection. We therefore see cybersecurity vendors benefiting from

rising IT security spending. Akamai Technologies in our view is a

key beneficiary of such attack headlines, as it offers protection

from such DDoS attacks as a leading cloud services provider of

online content.

Fabiano Vallesi


Akamai Technologies (Buy, Price/Target: USD57.67/63)

Technical idea*

Don’t think twice – it’s all right: Buy the Nasdaq 100

Since 2006, the Nasdaq 100 has been a steady outperformer

versus the MSCI World. As seen on the chart, the trend has been

9% per year with manageable drawdowns. Looking at the long-

term momentum, we see a potential bottoming in Q1 2017,

which implies further advances and a push above the all-time

highs of the year 2000. Therefore recommend investors buy the

Nasdaq 100.

Mensur Pocinci, MFTA

Nasdaq 100 (NDX) – monthly line chart


* Technical Analysis may be inconsistent with and reach different conclu-

sions to fundamental analysis.

NEXT GENERATION Initiation: January 2014/Update

Arising Asia: Asian tourism: New destinations

Chinese tourism growth remains the key story of the global travel

market, despite short-term headwinds. Chinese travellers are

shifting focus across geographies and segments, owing to evolv-

ing tastes. We therefore favour beneficiaries of this shift to re-

gional Asian and domestic Chinese travel. We see regional Asian

and domestic Chinese plays in infrastructure (particularly air-

ports), accommodation (hotels), consumer goods retailers and

online travel portals as well as medical tourism, which should all

benefit from this continued growth in Chinese tourism spending.

Alberto Perucchini, Fabiano Vallesi


Ctrip.com (Buy, Price/Target: USD47.61/51.5)

Japan Airport Terminal (Buy, Price/Target: JPY3900/4600)

Treasury Wine Estates (Buy, Price/Target: AUD11.48/11.5)

2010 2020

0

10

1.5

2.0

2.5

3.0

Nasdaq 100

rel. to

MSCI World

Momentum


NEXT GENERATION Idea initiation: August 2016

Feeding the World: Animal Health

The structural growth in animal health is underpinned by a global

middle class’s increasing appetite for proteins such as meat and

dairy products. Intensifying production methods are heightening

the economic, environmental and social sensitivities to animal

health. For producers, healthier livestock boost profitability by

increasing feed efficiency which also lessens the ecological im-

pacts through reducing animal headcounts, resource inputs and

waste outputs. Given that several demand drivers are propelling

the growth in animal health solutions, the sector enjoys very

attractive industry dynamics with the dominant players exhibiting

strong competitive advantages and high barriers to entry.

Warren Kreyzig, Terence McManus, PhD


Eli Lilly (Buy, Price/Target: USD78.25/94)

Merck (Hold, Price/Target: USD61.2/65)

Sanofi (Buy, Price/Target: EUR69.2/81)

Zoetis (Buy, Price/Target: USD50.94/57)

NEXT GENERATION Idea initiation: August 2016

Digital Disruption: FinTech

The global financial industry is embarking on a new cycle of inno-

vation. We believe the continuing co-evolution of finance and

technology is providing an opportunity-filled investment land-

scape, with ‘FinTech’ (financial technology) evolving quickly.

From a risk/return perspective, we favour payment networks,

payments processors, and solutions providers (software & infor-

mation) to financial companies, which we see as benefiting from

the underlying structural drivers. Avoid marketplace lenders for

now.

Fabiano Vallesi


MSCI (Buy, Price/Target: USD82.9/95)

MasterCard (Buy, Price/Target: USD102.85/110)

PayPal Holdings (Buy, Price/Target: USD44.15/52)

NEXT GENERATION Idea initiation: July 2016

Arising Asia: Asia’s youth

Emerging Asia’s working-age population, particularly the millen-

nials born between 1980 and the late 1990s, will contribute 26%

of global consumption growth over the next 15 years. With close

to 800 million increasingly affluent millennials living in China and

India today, it is evident that the tastes and preferences of these

digital natives will matter enormously in shaping the future of

consumption. We highlight six key trends for investors to focus

on in order to benefit from their enhanced expenditure: 1) premi-

um goods, 2) digital commerce, 3) media & entertainment, 4)

travel & tourism, 5) digital finance, and 6) fitness & sportswear.



Alibaba (Buy, Price/Target: USD103.94/108)

China Mobile (Buy, Price/Target: HKD91.7/110)

Ping An Insurance (Buy, Price/Target: HKD 40.2/49)

NEXT GENERATION Idea initiation: June 2016

Shifting lifestyles: Genomics 2.0

Genomics 2.0: Understanding the source of life. We believe we

are at the start of a potential paradigm shift for healthcare inno-

vation in terms of diagnostics, drug discovery, and precision

medicine. Genome sequencing technologies are leading this

change, which are becoming much more rapid and affordable. In

this transition phase, we have identified several structural growth

areas where genomics will have a large impact such as oncology,

rare diseases, reproductive health and consumer genomics. How-

ever, many barriers need to be overcome: the Big Data challenge,

regulation, and the reimbursement framework. Early in this race,

we favour key genomics technology players and early adopters.



Illumina (Buy, Price/Target: USD141.8/170)

Laboratory Corporation of America (Buy, Price/Target: USD138.76/155)

Qiagen (Buy, Price/Target: USD25.8/30)

NEXT GENERATION Idea initiation: May 2016

Digital Disruption: Automation & robotics

Advances in robotics technology are supporting increased auto-

mation outside the automotive industry, with robots becoming

increasingly affordable, flexible, smart and interconnected. In

addition, rising labour costs and quality requirements in emerging

economies are driving a transition to automation systems over

raw manpower, with China emerging as the market to watch for

industrial robots. To gain exposure to this trend, we favour the

large, global incumbent players in the automation space (to the

detriment of local upstarts) as well as niche leaders in automation

software and robo-surgery.



Intuitive Surgical (Buy, Price/Target: USD678.02/765)

Hitachi (Buy, Price/Target: JPY523.9/500)

Honeywell (Buy, Price/Target: USD108.96/124)

NEXT GENERATION Idea initiation: January 2016

Shifting Lifestyles: Digital Health

Throughout the world, a significant and growing portion of GDP

is spent on healthcare. Some of many drivers of this relentless

growth in spending come from the mounting occurrence of

chronic diseases and shift to ageing demographic triggering

increased demand for healthcare. Digital health, though still in

early stages of development, has the potential to wedge itself into

a static system that has been averse to change potentially im-

proving the quality of medical care while reducing costs. We see

tangible growth potential in the fields of healthcare IT, remote

patient monitoring, telehealth and genomics applications.

Fabiano Vallesi


Cerner (Buy, Price/Target: USD58.46/75)

Cognizant Technology Solutions (Buy, Price/Target: USD49.71/57)

Medtronic (Buy, Price/Target: USD83.91/94)


IMPORTANT LEGAL INFORMATION

This publication 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 irregu-

larly or in response to important events.

IMPRINT

Authors Christian Gattiker, Head of Research, [email protected] 1)

Janwillem Acket, Chief Economist, [email protected] 1)

Susan Joho, Economic Research, [email protected] 1)

David Kohl, Head of Currency Research, [email protected] 2)

David A. Meier, Economic Research, [email protected] 1)

Christoph Riniker, Head of Strategy Research, [email protected] 1)

Alberto Perucchini, Strategy Research, [email protected] 1)

Heinz Rüttimann, Strategy Research, [email protected] 1)

Fabiano Vallesi, Strategy Research & Next Generation, [email protected] 1)

Markus Allenspach, Head of Fixed Income Research, [email protected] 1)

Christian Dubs, Fixed Income Research, [email protected] 1)

Alejandro Hardziej, Fixed Income Research, [email protected] 1)

Dario Messi, Fixed Income Research, [email protected] 1)

Eirini Tsekeridou, Fixed Income Research, [email protected] 1)

Patrik Lang, Head of Equity Research, [email protected] 1)

Barbara Elbel, Equity Research, [email protected] 1)

Patrick Jnglin, 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)

Norbert Rücker, Head of Commodity Research, [email protected] 1)

Warren Kreyzig, Commodity Research, [email protected] 1)

Carsten Menke, Commodity Research, [email protected] 1)

Mensur Pocinci, Head of Technical Analysis, [email protected] 1)

Sanja Tesic, Cross Asset Analysis, [email protected] 1)

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).

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 securi-

ties. 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 Based on notifications received by Julius Baer Group Ltd. Bank of America Corporation holds 3.76 % of the voting rights in Julius Baer Group Ltd. as per

18 February 2016.

Equity research

Frequently used abbreviations


CAGR Compound annual growth

rate

EPS Earnings per share P/B Price-to-book value

DCF Discounted cash flow EV Enterprise value P/E Price-to-earnings ratio

EBIT Earnings before interest and

taxes

FCF Free cash flow PEG P/E divided by year-on-year EPS

growth

EBITDA Earnings before interest, taxes,

depreciation and amortisation

MV Market value ROE Return on equity

Consensus

rating

Consensus rating indicates 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 consensus target is the

average price to which analysts

expect the security to rise.

FY Fiscal year

Equity rating allocation as of 24/10/2016

Buy 31.8% Hold 64.3% Reduce 3.9%

Julius Baer does not provide investment banking services to the companies covered by Research.

Equity rating history as of 24/10/2016

Company Rating History

Adobe Systems Buy (initiation of coverage) Since 19/12/2012

Affiliated Managers Group Buy (initiation of coverage) Since 24/04/2015

Ahold Delhaize Buy (initiation of coverage) Since 03/08/2016

AIA Group Buy Since 19/03/2013

Akamai Technologies Buy Since 15/03/2016

Hold (initiation of coverage) Since 23/02/2015

Alibaba Buy (initiation of coverage) Since 18/06/2015

Alphabet Inc. Buy (initiation of coverage) Since 18/10/2010

American Electric Power Buy (initiation of coverage) Since 16/06/2016

Assa Abloy Buy Since 17/07/2015

Associated British Foods Buy (initiation of coverage) Since 19/09/2012

AT&T Hold Since 30/07/2012

Axa Buy Since 18/06/2007

Baidu Buy (initiation of coverage) Since 13/12/2013

Beijing Enterprises Water Buy Since 06/04/2015

BOC Aviation Buy (initiation of coverage) Since 12/10/2016

British American Tobacco Buy (initiation of coverage) Since 09/10/2014

Broadcom Limited Buy (initiation of coverage) Since 26/06/2014

BT Group Buy (initiation of coverage) Since 30/11/2015

CBS Corporation Buy (initiation of coverage) Since 11/03/2016

Celgene Buy (initiation of coverage) Since 06/02/2012

Cerner Buy (initiation of coverage) Since 28/06/2016

Chevron Buy Since 01/07/2016

Hold Since 05/02/2013

China Everbright International Buy (initiation of coverage) Since 31/03/2014

China Mobile Buy Since 21/08/2015

China Resources Gas Buy Since 19/04/2013

China State Construction International Buy (initiation of coverage) Since 18/12/2015

CK Hutchison Buy Since 05/08/2014

Cognizant Technology Solutions Buy (initiation of coverage) Since 23/06/2014

Comcast Buy (initiation of coverage) Since 01/04/2015

Compass Group Buy (initiation of coverage) Since 01/10/2015

CSPC Pharmaceutical Buy Since 29/08/2016


Ctrip.com Buy (initiation of coverage) Since 15/12/2013

CVS Health Corporation Buy Since 18/02/2015

Daimler Buy Since 07/10/2016


Dairy Farm International Buy (initiation of coverage) Since 06/06/2016

Danone Buy Since 17/10/2014

Diageo Buy Since 16/08/2016


Eli Lilly Buy Since 26/10/2015


Eni Buy Since 03/10/2016



Experian Buy (initiation of coverage) Since 17/06/2016

Facebook Buy (initiation of coverage) Since 23/09/2015

Fielmann Hold Since 21/10/2016

Buy (initiation of coverage) Since 26/05/2016

Fresenius Medical Care Buy (initiation of coverage) Since 24/02/2006

Fuyao Glass Hold (initiation of coverage) Since 04/05/2016

GrandVision Buy (initiation of coverage) Since 04/10/2016

Helvetia Buy (initiation of coverage) Since 26/09/2007

Hess Buy Since 01/07/2016


Hitachi Buy (initiation of coverage) Since 17/12/2014

Home Depot Buy Since 25/02/2010

Honeywell Buy Since 20/10/2014

Iberdrola Buy Since 12/10/2016


Illumina Buy (initiation of coverage) Since 01/04/2015

Incyte Buy Since 22/07/2016


Ingersoll-Rand Buy (initiation of coverage) Since 25/09/2015

InterContinental Buy (initiation of coverage) Since 22/03/2016

Intertek Buy (initiation of coverage) Since 10/06/2016

Intuitive Surgical Buy Since 01/05/2015

Japan Airport Terminal Buy (initiation of coverage) Since 17/03/2016

Kroger Buy (initiation of coverage) Since 07/12/2015

Laboratory Corporation of America Buy (initiation of coverage) Since 02/06/2016

Marsh & McLennan Buy (initiation of coverage) Since 21/06/2016

Mastercard Buy (initiation of coverage) Since 04/05/2011

Medtronic Buy Since 08/09/2014

Merck Hold Since 22/12/2015

Buy Since 11/05/2010

Microchip Technology Buy (initiation of coverage) Since 08/12/2015

MSCI Buy (initiation of coverage) Since 30/03/2016

Munich Re Buy Since 19/11/2013

Nestlé Buy Since 20/08/2015

NextEra Energy Buy (initiation of coverage) Since 11/01/2016

NXP Semiconductors Hold Since 20/10/2016


Orange Buy Since 29/04/2015

PayPal Holdings Buy Since 12/10/2016


Pennon Group Buy (initiation of coverage) Since 29/01/2016

PepsiCo Buy (initiation of coverage) Since 09/12/2014

Pfizer Buy Since 18/09/2008

Ping An Insurance-H Buy Since 07/09/2015

PPG Industries Hold Since 11/10/2016


QIAGEN Buy Since 02/06/2016


Reckitt Benckiser Hold Since 22/07/2016

Buy Since 11/12/2015


Remy Cointreau Buy (initiation of coverage) Since 31/08/2016

Royal Dutch Shell Buy (initiation of coverage) Since 05/02/2013

S&P Global Buy (initiation of coverage) Since 24/05/2016

Sanofi Buy Since 03/11/2015


SAP Buy Since 06/01/2006

Schneider Electric Buy Since 30/10/2015


Shanghai Fosun Pharmaceuticals-H Buy (initiation of coverage) Since 27/03/2014

Sherwin-Williams Company Buy Since 17/07/2015

Shire Buy Since 30/10/2014

Simon Property Buy (initiation of coverage) Since 08/10/2012

Smith & Nephew Buy Since 05/02/2016


Smurfit Kappa Buy (initiation of coverage) Since 24/12/2015

Societe Generale Buy Since 19/12/2012


Sony Corporation Buy (initiation of coverage) Since 17/12/2014

Stanley Black & Decker Buy (initiation of coverage) Since 11/11/2015

Sydney Airport Buy Since 21/09/2016


Telefonica Hold Since 29/07/2011

Tencent Holdings Buy Since 27/09/2013

Time Warner Buy (initiation of coverage) Since 03/03/2016

T-Mobile Buy (initiation of coverage) Since 23/06/2016

Toray Industries Buy (initiation of coverage) Since 22/01/2016

Treasury Wine Estates Buy (initiation of coverage) Since 13/04/2016

Unibail-Rodamco Buy (initiation of coverage) Since 28/06/2010

Unilever Buy Since 31/10/2012

United Technologies Buy Since 23/09/2009

Verizon Communications Hold Since 04/05/2007

Viacom Hold (initiation of coverage) Since 04/03/2016

Visa Buy (initiation of coverage) Since 02/12/2014

Vodafone Group Buy Since 26/02/2016


Wells Fargo Buy Since 27/10/2010

WPP Group Buy (initiation of coverage) Since 08/08/2007

Yahoo! Buy (initiation of coverage) Since 06/10/2015

Zimmer Biomet Buy Since 29/01/2016


Zoetis Buy (initiation of coverage) Since 11/03/2016

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.

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

performance 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


FCF Free cash flow CFI Cash flow from investing EBIT Earnings before interest and

taxes

CFO Cash flow from operation FFO Funds from operation EBITDA Earnings before interest, taxes,

depreciation and amortisation

CFF Cash flow from financing RCF Retained cash flow EM Emerging Markets

Issuer rating allocation as of 24/10/2016

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 24/10/2016

Issuer Rating History

Bank of America Hold (initiation of coverage) Since 09/03/2015

BBVA Buy Since 23/01/2013

Citigroup Hold (initiation of coverage) Since 12/03/2015

Credit Agricole Buy (initiation of coverage) Since 13/08/2009

Goldman Sachs Buy (initiation of coverage) Since 17/07/2009

Morgan Stanley Buy (initiation of coverage) Since 21/07/2009

Unicredit Hold Since 10/11/2011

Germany Hold Since 12/05/2016


Portugal Hold (initiation of coverage) Since 20/03/2015

Spain Hold (initiation of coverage) Since 03/06/2015

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

statement, 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.

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 medi-

um-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 calcu-

lated 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 publishes technical indicator readings, which are mechanically calculated and only provide additional information to large sets of

data, and are not intended as investment 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.


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

average 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.

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

DISCLAIMER

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