January 29, 2018 / 1:50 PM / a month ago

LIVE MARKETS-With bond yields rising, is it time for value investing?

    * European shares dip after flat start
    * Heavy earnings week begins
    * AMS soars after raising outlook, doubling revenue
    * Sanofi buys Ablynx for 3.9 bln euros, Ablynx +20%

    Jan 29 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on
Messenger to share your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net 
 
 
    WITH BOND YIELDS RISING, IS IT TIME FOR VALUE INVESTING? (1335 GMT)
    Value investors have had less to celebrate than growth investors for many years, as you can
see from this chart that shows MSCI global growth stocks far outpacing MSCI global value. 
 
    Is the performance gap set to reverse as recovering European economies and falling youth
unemployment nudge bond yields higher? Years of low rates have left investors comfortable to
hold growth stocks offering merely a promise of future profits. Higher bond yields usually
encourage investors to favour current cash flows to distant ones. 
    JP Morgan global equity strategists say bond yields are moving higher for the right reasons
-- a strong growth backdrop and tightening labour market. So it should not be seen as a problem
from an equity point of view. Even if yields move higher due to inflation picking up, they say
“equities could act as a good hedge -- as their earnings benefit from improving pricing power,
stronger top-line growth and there is a potential for an asset rotation." 
    Some are still cautious on the idea of a rotation to value stocks. "The jury is still out in
terms of growth vs value - is value going to come back into favour? That is under
investigation," says Gregory Perdon, Co-Chief Investment Officer at Arbuthnot Latham. He favours
financial stocks in Europe, especially Italian financials, as "it's a sector that will finally
start to shine. It's been difficult for them to make money when interest rates are low.” 
(Tom Pfeiffer and Helen Reid)
    ****
    
    BUNKERING DOWN FOR A TRADE WAR? BUY YEN (1251 GMT)
    Trade skirmishes, mostly played out through the imposition of protective tariffs, usually
don't merit investors' attention. But the market is starting to make nervous noises about the
U.S. government's increasingly aggressive trade stance, especially with the NAFTA renegotiations
looming.
    "It's not obvious that stocks paid much attention to the two greatest trade conflicts of the
past three decades," write JPM analysts. But could this time be different?
    They're pretty sanguine: "The Trump Administration could double or triple the average number
of trade enforcement claims without harming risky markets more than intra-week, since the
baseline for trade remedies is so low."
    They recommend investors stick to their guns and, if they're feeling cautious, buy yen as a
hedge.
    "If risky markets overreact to a flurry of U.S. trade sanctions or Chinese retaliation due
to very high valuations, the yen benefits."
    NAFTA remains the biggest potential trade speedbump. JPM recommends underweighting the peso
and Mexican equities, on the possibility the renegotiations could be delayed by the Mexican
general election.
    (Helen Reid)
    ******    
    
    RISK APPETITE DROVE 1 TRILLION EUROS INTO EUROPEAN FUNDS LAST YEAR (1222 GMT)
    It's a good sign for the European fund industry: over the course of last year assets under
management increased from 9.4 trillion euros to 10.4 trillion, according to Lipper data.
    This was also an all-time high in terms of AUM for Europe's fund industry.
    Bond funds were the best-selling asset type for 2017, though Global Equity was the winner
among long-term mutual funds.
    Question now is - will 2018 see more of the same?
 
    (Kit Rees)
    *****
    
    BUND MILESTONE WEIGHS ON INCOME STOCKS (1200 GMT)
    The benchmark German five-year bond yield just turned positive for the first time since 2015
and the 10-year U.S. treasury yield is at its highest since early 2014. The equity
market seems to be following the usual pattern of selling solid dividend payers -- consumer
staples, utilities, telecoms -- when fixed-income yields start looking more attractive. 
    All those categories have helped propel the STOXX 600 lower in late morning
trading, while banks whose business benefits from higher rates are up. 
    However, JPMorgan sees a sustained pick-up in bond yields as very important for the Euro
zone's performance: "A sustained pickup in yields is required for Eurozone equities to perform
better again ... If bond yields keep moving higher, as we expect, value should work and thus
help the performance of the European market." 
    (Tom Pfeiffer)
    *****
    
    STRONG EARNINGS NEEDED TO BUOY STOXX 600 ABOVE 400 (1119 GMT)
    What could push the STOXX 600 sustainably above the 400-point level? It's flirted with it
previously but never held out at those altitudes for long.
    Earnings are the key, JP Morgan analysts say. "Poor profitability was a major drag on Euro
zone performance in the current upcycle," they note. European earnings per share haven't yet
reached their pre-crisis 2008 levels while MSCI World earnings surpassed those highs long ago
(see chart).
    But earnings beat expectations last year and should do so again in 2018, JPM says. Euro zone
earnings are highly geared to GDP, which the bank's economists see growing 2.9 percent this
year.
    On top of that valuations aren't demanding, relatively speaking. Both the STOXX
price-to-earnings and price-to-book multiples relative to MSCI World are lower than at each of
the past three market peaks, JPM notes.
    JPM has a year-end target of 430 for the STOXX 600, betting on the 'sustained breakout'
above 400 which has for so long eluded the index. Their one note of caution? "FX is a wild
card..."
 
 
    (Helen Reid)
    *****
    
    IT'S NOT GOING TO BE A HAPPY VALENTINE'S FOR EUROPEAN FIRMS (1101 GMT)
    Sometimes you've got to break up to make up, at least with your shareholders - BAML's credit
strategists are expecting to see an increase in Europe's big conglomerates slimming down this
year.
    "We believe that the corporate "break up" theme is likely to grow in prominence this year as
activist investors continue to warm to Europe, and rising equity markets expose the
inefficiencies of big conglomerate companies," write BAML's credit strategists.
    BAML cites recent examples of Continental and Thyssenkrupp, pointing to
Germany, France and the Netherlands as having the greatest share of conglomerates - thus the
most likely areas to watch for corporate divorces.
    (Kit Rees)
    *****
    
    CHIPMAKER SHARES PARE GAINS AFTER NIKKEI IPHONE REPORT (1045 GMT)
    The euphoria among European chip stocks after the blow-out guidance from AMS just
faded a little after Nikkei Asian Review said Apple had told suppliers it will halve
its Q1 production target for the flagship iPhone X to 20 million units from 40 million envisaged
in November. Nikkei did not disclose the source for its report. Link: s.nikkei.com/2njmW
    Dialog Semiconductor, STMicroelectronics, Infineon and IQE
 have given up a chunk of their earlier gains. 
    AMS is still up 18 percent, with analysts speculating that the Austrian company's upgraded
guidance is driven partly by prospects for new business with smartphone makers beside Apple. 
    (Tom Pfeiffer)
    ****
    
    
    AMS SEEN FROM THE STREET (1015 GMT)
    A 25 percent surge in ams has made the chipmaker the main focus in Europe's share
trading this morning. The outstanding move comes after a surprisingly solid update that could
help ease worries over the sustainability of a rally in richly valued tech stocks in a week
where results from Facebook, Amazon and Apple will put the sector back
at the fore of investors minds. We'll tell you more about tech but meanwhile here's a quick
recap of sell-side vies on ams' results.
    Baader Bank: "ams referred to a range of sales pipeline opportunities in smartphone and
consumer applications (3D, optical and spectral sensing) that were clearly coming into view....
Accordingly, the current valuation corresponds with a significant discount to the peer group
average of about 14x, reflecting the single customer risk with Apple."
    UBS: "ams AG pre announced Q4 results with revenues expected to reach €470.3m vs UBSe €460m
and cons €456.5m driven by 3D sensing and advanced light sensing (we believe Apple)."
    ZKB: "Guidance for 2019 has been increased considerably from EUR 1.5 bn to EUR 2.2 bn.
Significantly visible growth opportunities in smartphone and consumer applications were put
forward as the reason"  
    Tech stocks remain the biggest sectoral gainers in Europe over the last 12 months but their
rally has stalled as investors switched into banks and autos as the new year started.     
 
    (Danilo Masoni)
    *****
    
    WHAT YOU NEED TO KNOW BEFORE EUROPE OPENS 
        Hedge fund Elliott Management buys stake in UK pay-TV group Sky
        MEDIA-Novo Nordisk is planning to raise bid for Belgian Ablynx- Bloomberg  
    GKN received several approaches for business after Melrose bid- FT 
    Roche wins FDA's breakthrough therapy label for autism drug
    Apple component supplier AMS doubles 2017 revenue, raises outlook 
    German industrial workers to stage 24-hour strikes
    Banco BPM could be part of new wave of banking mergers - CEO  
    Spain's Bankia posts a Q4 loss of 235 mln euros after BMN integration 
    Provident Financial former execs sue lender over "unfair dismissal" 
    ACS/Hochtief consortium picked for L.A. airport rail project 
    Deutsche Bank to hike bonuses to more than 1 bln euros for 2017 - FAS 
    France's Engie acquires Brazil's ACS
    Israeli investor secures 22.5 pct stake in Germany's TLG Immobilien 

    
    MORNING CALL: EUROPEAN STOCKS TO RISE AS HEAVY EARNINGS WEEK BEGINS (0718 GMT)
    Good morning and welcome to Live Markets. 
    Futures indicate a strong start for European stocks as a heavy week for corporate earnings
begins. Investors are scrutinising this earnings season closely as a test of the foundations of
the stellar run-up in equities, and to see whether last year's impressive earnings recovery has
legs.
    In Asian trading the bull run continued, buoyed by strong earnings. Meanwhile the dollar
managed to edge up from lows but remains under pressure. 
    (Helen Reid)
    *****

    
 (Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)
  
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