FT Alphaville " Markets Live transcript 17 Jan 2012 Markets Live chat transcript for the chat ending at 12:08 on 17 Jan 2012. Should get in quick here Ever been to China Bryce Drifted North from Hong Kong .... Yeah - I get that impression. Here's what's driving the London market higher this morning... In the year of 2011, in face of complicated and volatile international environment and emerging challenges in the domestic economic development, the Central Party Committee and the State Council took scientific development as the theme and transformation of economic development mode as the mainline, firmly carried out the pro-active fiscal policy and prudent monetary policy And no, I didn't make that up In the year of 2011, in face of complicated and volatile international environment and emerging challenges in the domestic economic development, the Central Party Committee and the State Council took scientific development as the theme and transformation of economic development mode as the mainline, firmly carried out the pro-active fiscal policy and prudent monetary policy, continuously strengthened and improved macro control. What's the effect of this command economy stuff on our own dear market Bryce? And, as to specifics, GDP up 8.9 per cent y/y in Q4 compared to 9.1 in Q3. Slowing for the fourth consecutive quarter. Agricultural Production Went up Steadily while Grain Yield Increased for Eight Consecutive Years. But retaining the soft landing scenario. Industrial Production Realized a Steady and Rapid Growth with a Sustained Increase of Corporate Profits. Oh, and the GDP forecast has been revised upward to 8.5 per cent in 2012 and 8.7 per cent in 2013. Investment in Fixed Assets Kept a Fast Growth and Investment Structure Further Improved. So - have you used the China Take autotext yet? Real Estate Development Showed a Downward Trend with the Sales of Commercialized Buildings Falling Back. Worth reiterating, I feel. Those torch protesters remain vile, four years after the event. Sales on Domestic Markets Enjoyed a Steady Growth while Sales of Cars Dropped by a Large Margin. Imports and Exports Maintained a Rapid Growth while Foreign Trade Surplus Continued to Decline. Total Population Maintained a Slow Increase with Urban Population Exceeding Rural Population for the First Time. The external environment for China's economic development is rather complicated, while the contradictions and problems of uncertainty, incoordination and unsustainability in domestic economic development are still prominent. Hooray for the one child policy. And the untold misery it spreads. Anyway, want some comment on this one? Here's what UBS's honkers team makes of it all. China's economy has achieved a "soft landing" in 2011. GDP grew 8.9% y/y in Q4 2011, stronger than expected, bringing the annual GDP growth to 9.2%. After seasonal adjustment, we estimate that q/q growth in Q4 stabilized at about 8.5%. In December, the slowdown in export growth was modest (up 13.4% y/y), retail sales was strong (up 18.1% y/y, partly due to holiday demand), while weak property sector investment led to a further slowdown in total fixed asset investment (up 18.3% y/y). Industrial production grew 12.8% y/y in December. In retrospect, the government's macro policy stance in 2011 seemed to have been broadly appropriate. The government did not tighten too much, the economy did not slow sharply, there was no property sector collapse or debt crisis related to local government debt, and inflation did not get out of control. These were the big fears for most of 2011 - together with a slowing economy, liquidity tightening, and policy uncertainty, these fears helped to make China's stock market one of the worst performing in the world. In the event, the export slowdown was more gradual and modest, helped by a recovery in US consumer demand and resilience in the core economies of the euro zone. Perhaps most surprising is that property investment and construction stayed strong in 2011 for much longer than expected, helped by activity in smaller cities and in social housing. What about 2012? Most of the same concerns remain: How much will export growth slow? Will the property market collapse? Might the government react too slowly to support growth? Could the property sector and local government related debt lead to troubles in the financial sector? Our views on these subjects have been outlined in previous reports (see "2012 Outlook" 1 December 2011; "Can Social Housing Prevent A Hard Landing in China," 25 November 2011; and "The Ten questions everyone asks about China," 24 October 2011): we see export growth slowing sharply, we see much weaker but not a collapse of property construction, we think policy will be supportive of growth, and do not see property downturn and local debt leading to systemic risk in the banking system in the near future. We would like to highlight two important differences this year compared with 2011. First, we think export and property slowdown will be more pronounced than in 2011. While currently US consumer demand seems to be improving and core euro zone economies seem to be resilient, we expect the ongoing financial de-leveraging and multiple rounds of fiscal tightening to weaken euro zone growth, and see uncertainty in the continued strength of US growth. Chinese government projects export growth to slow to 10% in 2012, but we are less optimistic, even though so far leading indicators from the US and Europe do not yet point to a sharp drop in export performance. While it is difficult to pinpoint the trough of export growth, we expect exports to bottom sometime in H1 2012. I'll LR that if anyone's keen. There's eight pages of it. FTSE up 47 points at 5704 or thereabouts. Rio Tinto PLC (RIO:LSE): Last: 3,684, up 94.5 (+2.63%), High: 3,700, Low: 3,633, Volume: 2.22m Bhp Billiton PLC (BLT:LSE): Last: 2,135, up 55 (+2.64%), High: 2,145, Low: 2,115, Volume: 3.01m Kazakhmys PLC (KAZ:LSE): Last: 1,093, up 26 (+2.44%), High: 1,104, Low: 1,085, Volume: 932.80k Vedanta Resources PLC (VED:LSE): Last: 1,097, up 23 (+2.14%), High: 1,107, Low: 1,093, Volume: 296.75k Antofagasta PLC (ANTO:LSE): Last: 1,327, up 26 (+2.00%), High: 1,337, Low: 1,320, Volume: 782.83k Xstrata PLC (XTA:LSE): Last: 1,094, up 21 (+1.96%), High: 1,105, Low: 1,090, Volume: 5.04m Burberry Group PLC (BRBY:LSE): Last: 1,296, down 4 (-0.31%), High: 1,320, Low: 1,253, Volume: 1.45m We'll come to that last one in a bit, I guess. In the meantime, also worth just touching on Billiton ....... Production report overnight Which is unlikely to provide many surprises. That's China-supplier BHP Billiton Mo - BP strong on the back of China And it'll be stuffed full of acquisitions, so the headline figures will look solid Here, once again, is UBS Export statistics for Port Hedland suggests shipments for BHP of ~44Mt (100% basis) in the quarter or ~176Mtpa run rate. We expect to see some issues in H2 FY 12 due to tie-ins associated with further expansions, which is likely to restrict saleable production compared to H1 FY 12. We are expecting +13% growth in Petroleum q/q or 58.3Mboe. This growth is driven by the first full quarters contribution from the Petrohawk acquisition. We are forecasting copper production growth of +20% compared to the September quarter which was impacted by industrial action at Escondida (in the Sep qtr) and maintenance outages at Pampa Norte and Olympic Dam. Nickel production at Cerro Matoso should reflect continued growth from return to production of the second furnace that was completed during the September quarter. QLD met coal should show further recovery from wet weather impacts, however industrial action may impact production. Hay Point port exports were -8% q/q for December. Shall we have a quick look at Misys? We shall, though I've not a huge amount to say .... Misys PLC (MSY:LSE): Last: 282.40, up 16.7 (+6.29%), High: 282.80, Low: 266.30, Volume: 287.24k There's got to be something behind that move There's bid gossip, that much we can say. Though I've no idea if that's a feedback loop from the move. I know one Japanese company looked seriously at Misys a while back Well, surprising name to me... They were conducting quiet due diligence a couple of years back But I've no idea how far it went Fidelity National Information Services pulled its bid on August 4 ..... So they'd still be locked out under TP rules. This stock is moving in front of our eyes Volume's not huge though .... And Misys is a volatile old stock at the best of times. Actually, can i withdraw taht stuff about NTT? I think i might have my facts in a twist It's like Johnny Rotten swearing at Reg Grundy. It's history now. The company NTT were looking at was.... Before we do, will just mention that Temenos is once again being connected to the Misys story ..... .... but, once again, I'd suggest that's just stabbing in the dark. Because I didn't think Temenos was in any shape to pay upwards of 300p for anything. Right - while we're on RAW ..... Hearing there's been some warm buying of Invensys in recent days. We all know the story there. Distressed valuation .... Siemens .... blah blah blah Though without the pension plan fixed, I'd be cautious on this one. Also, due diligence post that profit warning would surely be a nightmare. Anyway, I mention it solely under the raw disclaimer. Invensys PLC (ISYS:LSE): Last: 186.70, up 3.7 (+2.02%), High: 188.90, Low: 183.70, Volume: 1.81m Let's turn to something more grounded in fact. Or, rather, how about some Europe? Let's do a bit on Greece This popped up earlier A rather surprising flash to cross the Borg machine. it seems Fitch have been holding some European credit outlook events London paris and Frankfurt last week Milan tomorrow and then Madrid on thurs Well, this seems to be a reheated discussion about this... Fitch: Greek 50% Haircut Would Keep Sovereign's Rating Low Fitch Ratings-London-28 October 2011: Fitch Ratings says an EU invitation to private investors in Greek government debt to exchange their bonds for new debt with a 50% lower notional value would likely result in a post-default rating in the "B" category or lower depending on private creditor participation. Greece would still have a large amount of debt outstanding, its growth prospects are weak and its willingness to implement structural reforms may dissipate. That would restrict the potential for economic transformation and could undermine future public debt sustainability. The exact amount of public debt Greece would have after a voluntary bond exchange will depend on the details of the debt exchange, creditors" participation rate and any contingent liabilities in both the Greek financial and non-financial public sector. Yesterday's EU communique states that an ambitious reform programme coupled with deeper private-sector involvement should secure a reduction in Greece's public debt/GDP ratio to 120% by 2020. Based on a preliminary analysis, we believe that this reduction in Greek public debt implies a participation rate of about 85% on an estimated EUR210bn of private holdings of Greek government bonds (GGB). It's circa 3 months old That's the trouble with this bloody euro crisis ....... except we don't have time to learn to play jazz piano. It's all most disagreeable. What's happening out there anyway? Pretty quiet on the credit market front germany has widened..... We've avoided shops so far That can last no longer. So ... where to begin. DVD players or raincoats? Burberry Group PLC (BRBY:LSE): Last: 1,294, down 6 (-0.46%), High: 1,320, Low: 1,253, Volume: 1.48m Nothing much wrong with the figures. Mildly cautious outlook statement Which should have been in the price. Mild fall in the price Yeah - been lower, but there really does seem to be nothing much in the statement to shock. China, needless to say, is counteracting weakness elsewhere. And Burberry's Facebook fan base increased to over 10 million. you know Andrew Betts wears Burberry also Does he really. He can afford it now. Wore it for his first pitch to the FT We hired him on the spot. Some previous would be supplier had quoted us some thing like 300k to build the site I said that was ridiculous So I got Assanka in and said "think in terms of 50k" And he said: Well, i can give you an estimate straight away And i said, ok, what is it? I guess you can work that way when you're owner operator. Not any more. A Betts is an FT employee now True. The slide starts here. Anyway, since we're on this Burberry's results are self explanatory and boring So instead I'll control-V this Merrill note Turning negative on the luxxes. In our latest report Is it any different this time, we argued that near-turn Risk/Reward was not appealing for Luxury Goods. Recent data points prompt us to adopt a more negative view on the sector. We do not expect Q4/FY2011 earnings season to be disappointing, but would take advantage of potential overshoots to alleviate exposure before the deceleration becomes more tangible. As a result, we downgrade the sector from Neutral to Underweight. We view earnings downside as significant if the economy deteriorates further, but this call is not ours to make. Asian consumption onshore and offshore does mitigate earnings downside risk in our view. So does EUR weakness against JPY, USD and CNY. Our estimates are only modestly below consensus but we still view risk as tilted to the downside. Moreover, we expect sentiment on the sector to be determined by the weakest quarter of the year, not the average. One disappointing quarter would suffice in our view for investors to start questioning consensus estimates and multiples. We would expect these concerns to prompt a de-rating from current 60% premium to the MSCI Europe (long-term avg. is 30%). ah, that's interesting Luxury companies are currently geared for growth and they are investing accordingly. Between 2009 and 2011, we estimate that aggregate capital expenditures have increased by 82%. By contrast, in 2008, capital expenditures were flattish, production capacity utilization was high, retail expansion was shy. Capital expenditure commitments cannot be easily unwound and Luxury companies have more limited room to cut costs in our view this time round. Worse yet, they may not even be willing to. Forced to arbitrage between potentially jeopardizing medium-term growth prospects in Emerging Markets or disappointing markets near-term, we would expect many to opt for the latter. And here's their stock view. We believe that we are about to enter the fourth phase of our Luxury Investment clock, Soft (our baseline scenario) or Hard landing. We downgrade Richemont to Underperform (PO of CHF45, prev. Buy), PPR to Underperform (PO €100, prev Neutral) and TOD's to Underperform (PO €60, prev Neutral). We also turn Neutral on LVMH (PO €120, prev Buy) and Swatch Group (PO CHF395 prev. Buy). Our only Buy rated stock is Dior (PO €112, prev. Neutral). We also upgrade Hermès from Underperform to Neutral (PO €265). Are they properly factoring in China here, i wonder? (@Swedes: tried it. Didn't.) Are any of us properly factoring in China? Tis a mystery to ponder. And, while we do, how about looking at Dixons. Where the "last man standing" idea's gaining a little credibility. Dixons Retail PLC (DXNS:LSE): Last: 11.46, up 1.57 (+15.87%), High: 11.54, Low: 10.51, Volume: 9.27m After they didn't totally wipe out over Christmas. Actually, I've got to say - one thing I noticed coming back from the US...... Currys is far far far better than it used to be Bizarre thing for me to say, i know US electronics retail's terrible, though. Obv - I'm comparing with Best Buy in the US That's the thing in the US. You know in the US - in New York - if you buy something you have to queue up to leave the shop - showing the security guard your receipt and the goods They don't have security tags It's like the 1980s or earlier I particularly like the Jewish-owned shops where you queue at one counter to order the goods, then queue at another counter to pay, then queue at a third counter to get your goods. While the boxes are shunted around the store on pulleys. Dixons beginning to capitalise as capacity exits its markets: Whether in the UK or the Nordics, Dixons is beginning to exert its dominance. Following a number of very difficult years for electricals retailers, the operational improvements at Dixons are starting to make life very difficult for its competitors. Capacity has started to exit and the remaining independent players appear to be finding the market very difficult. The result was a LfL fall of 5% across the group, a better than expected performance. Weaker sales in Southern Europe, particularly Italy, were to be expected but a stronger exit rate of +2% LfL across the group in January is moderately encouraging. Gross margins more stable as competitors exit: We are also encouraged by the fact that gross margins are flat across the group with the 40bps improvement in UK gross margins being offset by a more modest decline in Elkjop (-60bps). In combination with cost savings of £60m for the year as a whole, Dixons should be able to hold 2012 forecasts in the range of £60m-£75m pre tax. It is a relief not to be changing our forecasts and we expect the shares to continue to bounce as a result. Work to reduce stocks helps cashflow: We have long been admirers of the operational improvement that John Browett has brought to this business. Our caution has all been driven by the weakness of demand in its core market and the tight nature of the group's covenant headroom. That said, the fact that availability has improved across the business and that stock levels are down 7% year on year gives us confidence that cashflow from operations has improved and that Dixons faces no dilution to Q4 gross margins from forced clearance activity. Dixons more likely to pass covenant test in 2012: The combination of better trading and tight control of both capital and costs means that Dixons is now more likely to pass its covenant test in July 2012 and as a result we move our recommendation from SELL to HOLD. No doubt trading will remain difficult in both the UK and Italy but we can be confident in this management's ability to cut costs further in 2012/13. Online growth continues to benefit from improvements to the "Reserve and Collect" offering and we expect this to differentiate Dixons from its competition. With real growth now starting to come through in its services business "KNOWHOW," we expect Dixons to continue to gain market share. Similarly, profit growth is likely to benefit from the higher participation of service within the sales mix. We move to HOLD. Ok - that's enough Dixons. (Jarvis2009 - please - got to a best Buy in the US. They are plain awful. It's jsut that they are allowed to ahve a near monopoly in places like manhattan) What's driving RBS, other than china obv Well.... other than China It seems they've finally got shot of the aviation capital bit. Fetched a pretty penny Which is good news in the scheme of things, albeit quite small beer to the scale of their problems. Consortium led by Sumitomo Mitsui paid $7.3bn. It's been for sale since Feb 2009 And it's gone for a fractional premium to gross assets. RBS currently trading at 25.27 @Jarvis: this may stun you to learn, but we sometimes view the world as consumers as well as investors. As said before, it's a small positive. Will turn to Deutsche for the specifics. We broadly estimate that the $300m gain on sale adds 0.2p or 1% to TNAV at end FY2011 of 52.1p. The gain plus release of RWAs adds 8bps to our forecast end 2011 B2 core tier 1 of 10.6%. It is more difficult to say what the earnings and book multiples paid are, but assuming that the buyer runs the same capital and funding structure as RBS appears to have (based on our read of the main operating company's financials for 2010), we appear to have a deal on 1.5-1.8x book and 6-7x 2011 earnings. The sale is expected to close before the end of 3Q12, subject to regulatory approvals. If the transaction conditions precedent are not satisfied by 14 Sept 2012, either party may terminate the deal. The fact that the consortium will fund the business itself over time allows RBS to reduce its funding requirements by $7bn. We expect deleveraging to continue to surprise positively, with banks finding buyers for decent assets, and with sellers generally in a more commanding position given an ability to use 1%-cost 3 year funding through the ECB's LTRO programme. We wrote in detail about deleveraging and funding in our outlook note last week ("2012 Outlook - Intermission"). We expect the UK banks to find themselves very long liquidity in 2013/2014, a net positive for shareholders and for the economy. We have RBS trading at 0.5x 2012 TNAV of 53p and on 5.6x 2012 Core EPS. Retain Buy. Other movers amongst the banks? Unicredit recover continues? And in the UK, all is relatively quiet. Barclays PLC (BARC:LSE): Last: 201.25, up 2.15 (+1.08%), High: 204.60, Low: 199.75, Volume: 17.78m Lloyds Banking Group plc (LLOY:LSE): Last: 29.95, up 0.488 (+1.66%), High: 30.26, Low: 29.69, Volume: 66.09m Seen this Mervyn king snaps? Think hes at a treasury select committe Quote: central banks must go further down the road of dispensing with reliance on rating agencies James Mac has just made the comment that Merv's forecasting is obviously so much better... Actually,w hat is he saying?? Another snap: UK banks will be very well advised to improve resilience of their balance sheets That's how a Mafia don speaks. You'd be very well advised to sort yourself out, or something might happen to your nice bank. And now he's Confucius. He's doing impressions. Good on Merv. Keep things lively. He's also having a specific go at John Hourican - and his 4.3m bonus Perhaps he'll do Mr Toad of Toad Hall next. And your classic travel-and-arrive smallcap story. Drilling in Puntland, Somalia. Confirmed this morning that it spudded a well Because it was up 20% yesterday Basically, the world and his dog bought on expectation of the RNS Which could only really say one thing Given they hadn't started drilling yet. And now they've started drilling. You have to love smallcaps. Is this really a penny dreadful drilling in Puntland? It falls into the "not for widows or orphans" category And, on that basis alone, we get to quote Fox Davies Capital Range Resources (LON:RRL) (BUY, 27p) together with its joint venture partners, Horn Petroleum Corporation (TSX: HRN) and Red Emperor Resources (LON: RMP), today announced the spudding of the Shabeel-1 well on the Dharoor Block in Puntland, Somalia. Horn Petroleum, the well operator, is currently preparing to drill ahead to a total planned maximum depth of 3,800 metres. Drilling operations have also commenced on the Shabeel North-1 well with the setting of the 30 inch surface casing and the drilling of a 50 meter pilot hole. The Sakson 501 rig will be used to drill both wells which are expected to take approximately 90 days each for drilling and evaluation. These two wells satisfy the first exploration period minimum work obligations of the Production Sharing Contracts for both the Dharoor and Nugaal Blocks. They are the first oil exploration wells to be drilled in over 20 years in the country. The Shabeel and Shabeel North prospects are located on a Jurassic aged rift system which is part of the same system that has proven to be highly productive in the Masila and Shabwa Basins in Yemen that contain an estimated 6 billion barrels of oil. Both prospects are very large fault block prospects with internal estimates of Prospective Resources of over 300 million barrels of oil (mean 100% basis), with Range's 20% attributable interest being over 60 million barrels. Source rocks are expected to be rich Jurassic Kimmeridgian shales in the deep portion of the rift immediately down dip from the Shabeel prospects. Reservoirs are expected to be sandstones and carbonates of the Lower Cretaceous and Jurassic systems analogous to Yemen. Taking a quick trip to Puntland, I notice they even have their own online news service - http://allpuntland.com/ Oh, and since the rabble are keen ... Here's some comment on Afren before we wind up. Nately - yes, in Norway The pan African explorer that lost its atlas and turned up on Kurdistan. Not a stock that we've been big fans of in the past, but have to admit that today's drilling news looks very positive for AFR. The Okoro East exploration well has encountered 167 metres of net oil pay in excellent quality reservoir sands, which I imagine will confirm pre-drill estimates of 25 million barrels. AFR's working interest is an initial 90%, falling to 50% once costs have been recovered, hence an effective economic interest of around 70-80%. If confirmed commercial (which seems likely given its proximity to the producing Okoro field), this could be worth around 10p/share assuming an NPV of $9/barrel. Our current NAV for AFR is 77p/share, so even adjusting this after today's discovery, the shares still look quite punchy at yesterday's close of 115p/share. Ultimately I think the group's large debt position could still become a problem in the future, but nevertheless it's tough to go against it for the time being. And, hang on, let me find some more. Okoro East discovery opens up new exploration dimension for Afren. In addition to finding oil in the shallower Tertiary sands Afren is successful in discovering oil in the deeper unexplored horst block structure that could provide longer term exploration upside within the Okoro field. Although production tests over the next few weeks will be important in proving the overall reserve potential (157mmboe mean and 329mmboe P10 gross oil-inplace), we de-risk the mean resource potential from 20% to 66.7%, increase the recovery rate from 20% to 30% and include the P10 upside (risked at 33%) to arrive at our new TP of 148p (from 130p). We reiterate our O/P. Attractive fast-track development potential. The Okoro East discovery (at least part of it) can likely be monetised quickly using the two available slots on the existing Okoro platform, but the final test results will determine the overall development plan. The initial reservoir quality has been encouraging - light oil (c30o API), high net to gross (549ft net / 580ft gross pay), good porosities (c30%), multi-Darci permeability ranges and no oil-water contact. We look forward to Afren's update on the exploration programme on 23rd January. Up to 14 wells in 2012, worth 32p/sh on our risked NAV with a blue sky upside of 173p/sh, offer a balance of high-risk, high-impact exploration (Keta in Ghana, OPL30 in Nigeria) and lower risk exploration/appraisal (Jebel Simrit wells in the Kurdish region of Iraq, Ebok/Okwok/OML115 wells in Nigeria). Quick scratch around to see if there's anything else to mention. No info whatsoever on this very old reheat of the GKN bid rumour .... GKN PLC (GKN:LSE): Last: 207.40, up 4.7 (+2.32%), High: 210.70, Low: 204.22, Volume: 3.45m ... other than to note that it turned up in the Mail this morning. Misys now coming off the top, volume still not outstanding .... Misys PLC (MSY:LSE): Last: 286.70, up 21 (+7.90%), High: 289.30, Low: 266.30, Volume: 486.97k Oh, and had a couple of people mention that odd Finnish nickel thing Talvivaaran Kaivososakeyhtio Oyj (TALV:LSE): Last: 319.50, up 12.6 (+4.11%), High: 324.80, Low: 307.10, Volume: 412.16k Which has been flying recently on steady volume Though there's very little liquidity, and it's come down a long way. Talvivaaran Kaivososakeyhtio Oyj So ..... well .... if we can say any more than that we will. For now, however, should we close this? Talvivaaran Kaivososakeyhtio Oyj has webcams on its assets We've over run in fact Cheers everyone over on the right This entry was posted by Paul Murphy on Tuesday, January 17th, 2012 at 10:59 and is filed under Uncategorized.