Global Equity Research

01 December 2014

Equity Strategy
Year Ahead 2015 - Upside is not exhausted yet; Look
for a rotation in regional drivers
 Equities are managing to beat bonds yet again in 2014, for the 3rd year in a
row. Even in Europe, SXXP is posting a respectable 9% TR so far ytd. We
stay constructive into the next year as:
 1. Liquidity is not going away. G4 central bank balance sheet as a share of
GDP is likely to continue expanding. US credit growth is running at a
healthy 6%yoy pace. Money supply is accelerating in Eurozone and the
region’s credit cycle appears to be bottoming out.
 2. Global real GDP growth is expected by JPM to deliver 3.0% in 2015, vs
2.5% in 2014. In particular, we look for the turn in Eurozone’s fortunes
after a disappointing ‘14. The bottoming out in the region’s credit cycle
will matter, in our view, as will the lower Euro.
 3. Relative valuations continue to favour equities vs other asset classes.
 4. JPM is more hawkish on the Fed vs the street, but we believe the
potential start of Fed tightening is not likely to derail equities. Rate hikes
will commence only if the economy allows it, in our view, calling for a
change in leadership within equities. DXY is projected to strengthen further,
which is likely to keep commodity prices under pressure.
 Regionally, we believe Eurozone will outperform the US – as per our call
initiated two weeks ago. Earnings between the two regions should start
converging. We remain UW the UK due to the high commodity weight,
Defensive sector composition and the political uncertainty. We are OW
Japan on asset reflation. After entering 2014 with an UW EM stance, for
the 3rd year in a row, we see a more balanced EM performance in 2015. The
region is getting cheaper and policy flexibility will be greater, but lower
commodity prices, stronger USD, Fed rate hikes and structural concerns in
many EM countries are the headwinds, in our view.
 We highlight the following themes:
 1) Revisit the Eurozone recovery basket - OW JPDEER15. It is trading
again at P/E relative lows seen at the height of the Eurozone crisis, in the
summer of 2012.
 2) Beneficiaries of low for longer oil price - OW JPDECW15, including
Consumer Cyclicals – Transport, Airlines, Autos, Retail, Travel and Leisure.
Stocks hurt by low oil - UW JPDECL15, comprising of Energy, Oil capex,
selected Chemicals, Utilities and Capital Goods stocks.
 3) UK stocks at risk of increased political uncertainty - UW JPDEUKPU.
 4) Bond proxies which have rerated a lot and are sensitive to the rise in
bond yields - UW JPDERL15. We entered 2014 OW Pharma and Utilities vs
Cyclicals, but recommend the opposite stance into 2015. On the flipside, we
recommend a positive stance on Buybacks basket – OW JPDEBB15.
 5) Exporters basket in Eurozone – OW JPDEEX15.

Equity Strategy
Mislav Matejka, CFA

AC

(44-20) 7134-9741
mislav.matejka@jpmorgan.com
Bloomberg JPMA MATEJKA <GO>

Emmanuel Cau, CFA

AC

(44-20) 7134-9742
emmanuel.b.cau@jpmorgan.com
Bloomberg JPMA CAU <GO>

Prabhav Bhadani
(44-20) 7742-4404
prabhav.bhadani@jpmorgan.com
J.P. Morgan Securities plc

End ‘15 index target forecasts
Target
Current*
%
MSCI Europe
1,550
1,407
10%
MSCI Eurozone
215
190
13%
FTSE 100
7,200
6,731
7%
Source: Datastream, J.P. Morgan, Equity targets are
based on 2015E EPS integer and forecast end 2015
12m Fwd P/E multiple. *as at CoB 25th Nov

Sector recommendations
OW
Financials
Discretionary
Industrials

N
Energy
Materials
Technology
Telecoms
Source: J.P. Morgan

UW
Staples
Utilities
Healthcare

Liquidity is not going away - G4 central
bank balance sheet to keep expanding
35

30

25

20

15

10
07

08

09

10

11

12

13

14

15

16

17

G-4 Central Bank Balance sheet % of GDP, USD

Source: J.P. Morgan

Eurozone vs US earnings – the gap to
start closing
18

115

16

105

14

95

12

85
75

10

65

8

55

6

45

4

35

2

25
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

MSCI Eurozone 12m Fwd EPS (€)

MSCI US 12m Fwd EPS (rhs)

Source: IBES

See page 62 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Table of Contents
Equity Strategy: Year Ahead 2015 – Upside is not
exhausted yet; Look for a rotation in regional drivers ..........3
Energy - Neutral......................................................................26
Materials - Neutral ..................................................................28
Industrials - Overweight.........................................................32
Consumer Discretionary - Overweight .................................35
Consumer Staples -Underweight ..........................................40
Healthcare - Underweight ......................................................43
Financials - Overweight .........................................................45
IT - Neutral...............................................................................48
Telecoms – Neutral.................................................................50
Utilities - Underweight............................................................52
Top picks.................................................................................54
Least preferred .......................................................................55
Earnings ..................................................................................57
Valuations ...............................................................................58
Economic, Interest Rate and Exchange Rate Outlook ........60
Sector, Regional and Asset Class Allocations ....................61

2

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Equity Strategy: Year Ahead
2015 – Upside is not
exhausted yet; Look for a
rotation in regional drivers

All the key markets advanced, in local currency terms,
but some of these performances were hurt by the
appreciating USD.
Should one stay bullish for another year?
Figure 3: MSCI World
1800

Figure 1: Ytd total return of the key asset classes (in $ terms)
7.4%

8%

7.3%

1600

7.1%

1400

4.0%
3%

1200

0.3%

1000

-2%

800

-7%

600

-12%

400

-17%

200

-22%
Equities (MSCI
World)

High Grade
Credit

JPM Global Gvt JPM Global HY
Bond

Cash (3m)

-20.1%
S&P GSCI Index

Despite a wobble late in the year, equities are managing
to deliver another robust set of returns, outperforming
fixed income for the 3rd year in a row.
Figure 2: Ytd total returns of key regional equity markets
S&P500
IBEX
TOPIX

10%
8%

7%

CAC

79

82

85

88

91

94

97

00

03

06

09

12

Big picture, global equities have been rallying for six
years now, to be hovering at all time highs. It is clearly
tempting to project more muted market returns from
here. However, we believe that on balance the equity
backdrop will remain constructive, at least in the early
part of 2015.

Figure 4: Size of the Fed's balance sheet vs S&P500 performance

13%

MSCI World

76

1) Liquidity conditions to stay supportive

14%

7%

73

Source: Datastream

Source: Datastream, J.P. Morgan, as of 25th Nov ‘14

Eurostoxx50

70

MSCI World ($)

2014 YTD

FTSEMIB

0

5,000

2300

4,500

2100

4,000

1900

3,500

1700

3,000

1500

2,500

1300

2,000

1100

1,500

900

1,000

700

5%

MSCI EM

3%

DAX

3%

FTSE100

3%

500

500
08

09

10

11

12

Size of the Fed's balance sheet ($Bn)

0%

2%

13

14

S&P500 (rhs)

Source: Bloomberg

4%

6%

8%

10%

YTD Total Return, %
Source: Datastream, as of 25th Nov ‘14

12%

14%

16%

One of the main pushbacks to the continued constructive
view on the equity markets is the notion that the liquidity
regime is starting to deteriorate. Many see the end of
QE3 as a trigger to turn more cautious.

3

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 5: Aggregate G-4 central bank balance sheet as % of GDP
35

G-4 money supply is expanding at a stable 4% pace.
Within this, Eurozone is seeing some acceleration, while
the UK is the only region seeing an outright contraction.

30

Figure 8: US loan growth
25

25%
20%

20

15%
10%

15

5%
10
07

08

09

10

11

12

13

14

15

16

17

0%
-5%

G-4 Central Bank Balance sheet % of GDP, USD

-10%

Source: J.P. Morgan

-15%
51

We don’t subscribe to this. We note that the G4 central
bank balance sheet, as a share of GDP, is likely to
continue expanding at a similar pace to what was the case
prior to the end of Fed's purchases.
Figure 6: G-4 central banks’ balance sheet as % of GDP – country
breakdown

56

61

66

71

76

Recessions

81

86

91

96

01

06

11

Loans & Leases in Bank Credit (%yoy)

Source: FRB

Importantly, US credit growth appears to have
accelerated most recently.
Figure 9: US household leverage

90
80

25

70
60
50

20

40
30
20

15

10
0
07

08

09

10

11

12

Fed - Balance Sheet % of GDP

13

14

ECB

BoE

15

16

17

BoJ

10
60

Source: J.P. Morgan

The regional drivers of liquidity are shifting though. The
BOJ and the ECB will likely be leading this process
going forward, taking over from the Fed and BoE.
Figure 7: Money supply growth in G-4
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
10

11
Japan M2, %y/y

Source: Bloomberg

4

12
US M2

13
UK M4

14
Eurozone M3

G4

65

70

75

80

85

90

95

00

05

10

US Household Leverage, Ratio of liabilities to net wealth

Source: FRB

US consumer deleveraging is largely behind us. Courtesy
of the positive wealth effect, US household balance
sheets appear to be in good shape now, with the
liabilities/wealth ratio near lows relative to the trend.
They can easily absorb some increased leverage.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 10: Eurozone private loan growth

Our economists believe the global growth will firm up
somewhat, from a 2.5% pace in 2014 towards a 3.0% run
rate next year.

14%
12%
10%

Figure 12: Oil price and retail sales volume, Global ex-Japan

8%
6%
4%
2%

-25

8

-20

7

0%

-15

-2%

-10

-4%
04

05

06

07

08

09

10

11

12

13

6
5

-5

14

4

0

Euro area Private Loan Growth (%yoy)

3

5

Source: ECB

2

10

Even in Eurozone, the credit growth appears to have
bottomed out, although it is still in negative territory.

15

1
11

12

13

Crude Oil Price, %3m/m (rs)

Figure 11: Eurozone M3

14

Global (ex-Japan) Real Retail Sales, %3m/m, saar (rhs)

Source: J.P. Morgan

3.5%

One of the important supports for this view is the boost
to global retail sales coming from lower energy prices.

3.0%
2.5%

Figure 13: Net oil imports % of GDP for the main regions

2.0%

India

6.3%

Sweden

1.5%

3.1%

South Africa
1.0%

3.1%

Eurozone

2.7%

Philippines

0.5%
Jan 13

Apr 13

Jul 13

Oct 13

Jan 14

Apr 14

Jul 14

Oct 14

2.4%

United States

Euro Area M3, %y/y

2.1%

Turkey

Source: ECB, Bloomberg

2.0%

New Zealand

0.8%

Switzerland

0.5%

Brazil

-0.4%

Canada

-2.3%

Mexico

2) Global growth to post gains near 3% pace

-4.6%

Russia
Norway

Table 1: JPM real GDP growth forecasts
2014e
2.5%
2.2%
0.9%
1.5%
0.4%
-0.3%
1.3%
3.0%
0.3%
4.1%
0.2%
0.6%
5.1%
7.4%

1.7%

United Kingdom

The pace of growth in Eurozone’s money supply has
been picking up since April. We think that this is an
important positive development.

Global
US
Eurozone
Germany
France
Italy
Spain
UK
Japan
EM
Brazil
Russia
India
China

2.4%

Japan

-9.4%
-10.4%

-15%

2015e
3.0%
3.0%
1.6%
1.7%
1.4%
0.8%
2.2%
2.8%
1.1%
4.2%
0.6%
-0.8%
6.0%
7.2%

-10%

-5%

0%

5%

10%

Net Crude imports % of GDP

Source: EIA, J.P. Morgan

Only a few countries will be at a disadvantage from the
potentially lower for longer oil price, but the vast
majority should stand to benefit.

Source: J.P. Morgan

5

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 14: Net oil imports % of GDP for Eurozone countries
Greece

Figure 16: G4 growth in money supply, house prices, wages and
credit, latest yoy%

6.9%

Belgium

4.0%
3.6%

5.4%

Netherlands

3.5%

4.9%

Slovakia

3.0%

4.8%

Portugal

4.3%

Spain
2.8%

Eurozone

2.7%

Germany

1.6%

1.5%
1.0%
0.5%

2.2%

France

2.5%

2.0%

3.6%

Italy

2.8%

2.5%

0.0%
G4 Money Supply

1.7%

G4 House prices

G4 Wages

G4 Credit Growth

Source: Bloomberg, J.P. Morgan
Austria

1.6%

Ireland

The deflation risk is clearly not insignificant as there are
a number of deflationary forces at work presently, Japan
and China included, but we believe the market should not
be assigning ever increasing probability to this outcome.
Wages, money supply, credit and house prices are all still
showing healthy rates of growth in G-4.

1.2%
0%

1%

2%

3%

4%

5%

6%

7%

8%

Net Crude imports % of GDP

Source: J.P. Morgan

Within Eurozone, the periphery is likely to benefit
relatively more from cheaper oil prices than the core.

Eurozone’s fortunes to improve in ‘15

Deflation scare to intensify in the near term, but
should be faded

Figure 17: Eurozone M1 growth vs PMI

Figure 15: US headline CPI vs oil price
3%

50%

2%
25%
1%
0%

0%

14%

50%

12%

40%

10%

30%

8%

20%

6%

10%

4%

0%

2%

-10%

0%

-20%

-1%
-25%
-2%
-3%

-50%
02

03

04

05

06

07

08

US headline CPI (%3mom)

09

10

11

12

13

14

Brent (%3mom,rhs)

Source: Bloomberg

The selloff in oil could potentially lead to an outright
negative inflation prints for a few months, but we would
fade the resulting deflationary scare.

6

-2%

-30%
99

00

01

02

03

04

05

06

07

EMU M1 %6mom (brought forward by 6m)

08

09

10

11

12

13

14

15

EMU PMI composite %6mom (rhs)

Source: ECB, Markit

The bearishness with respect to Eurozone’s growth
prospects has become universal again. In contrast, we
believe that some indicators are pointing to an
improvement in the region’s activity momentum ahead.
Eurozone M1 has bottomed out recently and it typically
leads the Euro PMIs.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 18: Eurozone Banks' ROE vs private loan growth

Figure 20: Peripheral spreads to Bunds

14%

20%

12%

18%

10%

16%
14%

8%

6.0

5.0

4.0

12%

6%

10%
4%

3.0

8%

2%

6%

0%

4%

-2%

2%

-4%

0%
99

00

01

02

03

04

05

06

07

08

09

Total credit to private sector - %y/y

10

11

12

13

14

2.0

1.0

0.0
07

08

09

10

11

12

Spanish 10y bond yield spread to bund

Eurozone banks ROE (%) - rhs

13

14

15

Italian 10y bond yield spread to bund

Source: Datastream, dotted lines show J.P. Morgan forecasts

Source: ECB, Datastream

Notably, peripheral spreads remain well behaved and are
likely to tighten further, in our view.

Credit growth is still outright negative in the region, but
we believe that the credit cycle could do better than the
widespread bearish sentiment would suggest. The TLTROs and potentially an outright sovereign QE will
help change that. Eurozone’s Banks should stand to be
major beneficiaries of any improvement in credit
dynamics.

Table 2: Eurozone GDP growth model from J.P. Morgan
Economists

Figure 19: Loan officer surveys - Eurozone banks are reporting
outright positive loan demand
50

70
60

40

50

30

40

20

30
20

10

10

0

0
-10

-10

%q/q saar
Real GDP
Impact from
Potential growth
Global cycle
Monetary policy
Fiscal policy
Exchange rate
Commodity prices
Credit
Sentiment
Sum of shocks
Residual

2010
2.4

‘11
0.7

‘12
-0.9

‘13
0.4

‘14e
0.9

‘15e
2.1

‘16e
2.0

0.9
0.4
0.9
1.0
0.2
-0.2
-0.5
0.2
3.0
-0.6

0.9
-0.2
0.8
-0.8
0.3
-0.5
-0.4
0.0
0.0
0.7

0.9
-0.3
0.8
-1.3
0.2
0.0
-0.8
-0.6
-1.1
0.2

0.9
0.1
1.1
-1.0
-0.1
0.0
-0.9
-0.3
-0.2
0.6

0.9
-0.1
1.1
-0.4
-0.4
0.2
-0.7
0.0
0.5
0.4

1.0
0.1
1.2
-0.2
0.2
0.1
-0.5
0.1
2.0
0.1

1.2
0.0
1.2
-0.2
0.3
0.0
-0.5
0.2
2.2
-0.2

Source: J.P. Morgan Economic Research

-20

-20

-30

-30

-40
-50

-40

Our economists believe the Eurozone will see a step up
in growth towards a 2% annualized pace next year.

-60

-50

-70
03

04

05

06

Corporate

07

08

09

10

Mortgage Lending, rhs

11

12

13

14

15

Consumer Credit, rhs

Source: ECB

The chart above clearly shows that there is a net positive
demand for credit in Eurozone. Typically, loan officer
surveys tended to lead the actual credit growth by 4-5
quarters.

They expect the drag from the weak global activity
backdrop to fade and turn into a small tailwind, as the US
hits its stride and EM growth holds in. The increased
flexibility in the application of the Stability and Growth
Pact means that the fiscal headwind should decline
further. The currency looks set to turn from a headwind
into a tailwind, while the private sector deleveraging
headwind continues to ease slightly, as the credit
environment improves further. Commodity prices should
be acting as a tailwind.

7

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 22: Equity P/E vs "P/E" of government bonds and of HG
credit, in the Eurozone and in the US

3) Equities are still attractively valued vs other asset
classes

120

Figure 21: MSCI World 12m Fwd P/E

100

18
17

80

16

60

15
14

40

13
12

20

11

0

10

03

9

04

8
03

04

05

06

07

MSCI World 12M Fwd P/E

08

09

10

Median since 03

11

12

+1 Stdev

13

05

06

07

08

09

MSCI Eurozone trailing P/E

14

10

11

12

Euro HG P/E

13

14

German Bunds P/E

70

-1 Stdev

Source: IBES

60

In absolute terms, global equities have shown a
significant P/E expansion over the past few years. This is
unnerving many.

50
40
30

Table 3: Equities Bonds yield gap for main regions
Euro Div yield vs.
10-year Govt yield
HG corporate
HY corporate
UK Div yield vs.
10-year Govt yield
HG corporate
HY corporate
US Div yield vs.
10-year Govt yield
HG corporate
HY corporate

20

Current
1.6%
1.9%
-3.0%

Median
-1.1%
-1.2%
-4.7%

vs median, bps
270
306
167

1.6%
0.7%
-3.8%

-2.9%
-2.1%
-5.2%

451
283
138

-1.1%
-1.3%
-3.7%

-3.8%
-4.9%
-7.7%

271
353
397

10
03

04

05

06

07

08

09

MSCI US trailing P/E

10

11

US HG P/E

12

13

14

US Bond P/E

Source: Datastream, J.P. Morgan

The “P/E” that credit and government bonds are trading
on remains dramatically above the P/E of equities.
Figure 23: Cumulative mutual fund flows into equities and bonds

Source: Datastream, J.P. Morgan
1600

Still, relative to the fixed income, equities continue to
trade attractively, in our view.

1400
1200
1000
800
600
400
200
0
-200
00

01

02

03

04

05

06

07

08

09

Cumulative fund flows into equities ($ bn)

10

11

12

13

14

Bonds

Source: ICI, Bloomberg

In addition, despite the strong performance over the past
few years, equities remain relatively underowned vs
fixed income in investor portfolios. We have not yet
witnessed a wholesale rotation out of fixed income and
into equities.
8

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Table 4: J.P. Morgan bond yield forecasts
1Q15
2.55
2.20
1.00
0.40

US
UK
Germany
Japan

Table 5: EUR/USD target: baseline and alternative scenarios

2Q15
2.70
2.40
1.15
0.40

3Q15
2.75
2.50
1.20
0.45

4Q15
2.80
2.65
1.25
0.50

Source: J.P. Morgan Fixed Income research

Our fixed income strategists expect rising bond yields
next year, which, if it materializes, should cap bond
returns.
4) Fed policy normalization not to be a problem for
stocks - it should drive a change in market leadership

0.75
0.7
0.54

0.50
0.39

0.3

0.23
0.13

sheet size (trn)

150

175

200

225

250

275

300

325

350

€ 2.000

1.28

1.26

1.24

1.23

1.21

1.19

1.17

1.16

1.14

€ 2.250

1.26

1.24

1.23

1.21

1.19

1.17

1.16

1.14

1.12

€ 2.500

1.24

1.23

1.21

1.19

1.17

1.16

1.14

1.12

1.10

€ 2.750

1.23

1.21

1.19

1.17

1.16

1.14

1.12

1.10

1.09

€ 3.000

1.21

1.19

1.17

1.16

1.14

1.12

1.10

1.09

1.07

€ 3.250

1.19

1.17

1.16

1.14

1.12

1.10

1.09

1.07

1.05

€ 3.500

1.17

1.16

1.14

1.12

1.10

1.09

1.07

1.05

1.03

€ 3.750

1.16

1.14

1.12

1.10

1.09

1.07

1.05

1.03

1.02

€ 4.000

1.14

1.12

1.10

1.09

1.07

1.05

1.03

1.02

1.00

While we don’t believe equities will be hurt by hikes, the
USD is likely to continue strengthening vs a broad range
of currencies. Our FX strategists project further
EUR/USD weakness next year to 1.18, as the spread and
the balance sheet differential between Fed and ECB
looks set to widen.

1.00

0.9

0.5

US - Euro 5-yr spreads (basis points)

ECB balance

Source: J.P. Morgan Fx Strategy

Figure 24: Fed fund rates with JPM forecasts vs market pricing
1.1

Based on a regression model relating EUR/USD to relative balance sheet
growth and Euro-US 5-yr rate spreads (EUR/USD = 1.3647 –
0.0016*[Fed minus ECB balance sheet growth in %] + 0.0007*[5-yr
spreads in basis points]). Weekly data since 2010. R-sq of 54%

0.14

Figure 26: Commodity index vs DXY

0.1

60%

-0.1
Q1 '15

Q2 '15

Fed Funds rate (%) - JPM Forecast

Q3 '15

-20%

Q4 '15
-15%

Market implied rate - probability weighted

40%

Source: J.P. Morgan

-10%
20%

JPM expects the Fed to start raising rates in June. This is
more hawkish than the consensus which is currently
projecting the start of tightening for Q4 of next year.
Figure 25: S&P500 performance around the first Fed hike in the
cycle
106

-5%

0%

0%

5%
-20%
10%
-40%
15%

-60%

20%
02

03

04

05

06

07

08

09

10

11

12

13

14

104
JPM commodity index %yoy

102

DXY %yoy (rhs, rs)

Source: J.P. Morgan, Bloomberg

100
98

The prospect of further dollar appreciation suggests that
commodity prices will remain under pressure.

96
94
92
90
88
-12m

-9m

-6m

-3m

0m

3m

6m

9m

12m

S&P500 performance around Fed rate hike

Source: Datastream, J.P. Morgan, Since 1970

Our work suggests that equities experienced a small
setback as the start of tightening, but they would recover
all the losses quickly and tended to post new cycle highs
within 12 months of the first hike.

9

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 27: Global Cyclicals vs Defensives and US bond yields

Figure 28: Eurozone vs US EPS
50%

25%

40%

5%

-5%

105

20%

14

95

10%

12

85

0%

10

-10%

8

-20%

6

-30%

-15%

-40%
-25%

-50%
07

08

09

10

11

Cyclicals rel to Defensives (%3mom)

12

13

14

115

16

30%
15%

18

75
65
55
45

4

35

2

25
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

15

MSCI Eurozone 12m Fwd EPS (€)

US 10y Bdy %3mom (rhs)

MSCI US 12m Fwd EPS (rhs)

Source: Datastream, J.P. Morgan

Source: IBES

If US rates were to start moving higher, we believe that
the equity market would likely witness a rotation in
sector leadership. The chart above suggests that there is
an extremely tight link between the relative performance
of Cyclical and Defensive sectors and the direction of
bond yields. This year Defensives outperformed because
yields fell. The opposite could work next year.

One of the key considerations for the earnings outlook
next year is whether the gap between the US and
Eurozone earnings will start to close. We believe that it
will.

Earnings outlook – Looking for the gap
between Eurozone and the US to start
closing
Table 6: IBES estimates for '15 EPS growth in the main regions

MSCI World
S&P500
MSCI Europe
MSCI Eurozone
MSCI UK
MSCI Japan
MSCI EM

EPS %yoy
14e
5.8%
7.8%
4.0%
7.2%
0.3%
6.9%
2.9%

Figure 29: Labor compensation vs corporate profits share of GDP
14%

58%

13%
57%
12%
56%
11%

10%

55%

9%

15e
10.2%
9.6%
11.1%
16.4%
4.2%
12.1%
11.4%

54%
8%
53%
7%

6%

52%
72

75

78

81

84

87

Corporate profits share of GDP

90

93

96

99

02

05

08

11

14

US employee compensation share of GDP (rhs)

Source: IBES

Source: BEA

Current IBES estimates are for 10-12% EPS growth for
the main regions in 2015. Eurozone is the outlier with
16% EPS growth expected, but we note that the median
EPS growth projection at the stock level is lower, at
11.5%.

On the one hand, the US might see some increasing cost
pressure. We note that there is a clear inverse historical
relationship between the profit share and the wage share
of GDP.

10

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 30: US actual profit share of GDP vs forecast derived from
wage share of GDP projection

Table 8: Timing of the peak in margins, peak in US equities and
the start of recessions

13%
12%
11%
10%
9%
8%
7%
6%
5%
82

85

88

91

US corporate profits / GDP

94

97

00

03

06

09

12

15

Profits/GDP derived from compensation/GDP projections

Source: BEA, J.P. Morgan

Assuming the rising economic cost index and a further
fall in unemployment rate, along with JPM forecast of
4.4% nominal GDP growth in 2015, it is possible that
profit share of GDP moves somewhat lower.
Table 7: US margins and EPS growth in different GDP growth
regimes
US Real GDP
%yoy
<-3%
-3% to -2%
-2% to -1%
-1% to 0%
0% to 1%
1% to 2%
2% to 3%
3% to 4%
4% to 5%
>5%

Profit Margins, yoy,
bps
-16
-103
-84
10
-44
0
55
51
20
76

S&P 500 EPS
%yoy
-85%
-11%
-6%
-4%
-40%
8%
8%
15%
16%
23%

Source: NIPA, Shiller, J.P. Morgan. *Data since 1980

We believe that some deceleration in margins will not be
problematic for equities provided that real GDP growth
delivers 2.5% or higher next year. An initial rise in wages
should not immediately be seen as a negative, in our
view, as it makes the economy appear more balanced and
there would still be a positive topline support.

Profit
Margins
peak
Nov-48
Nov-50
May-55
May-59
Feb-66
Feb-73
Aug-77
Feb-81
Nov-88
Aug-97
Aug-06
Average
Median

S&P500
Peak
Jun-48
Jan-53
Aug-56
Jan-60
Nov-68
Jan-73
Feb-80
Nov-80
Jul-90
Sep-00
Oct-07

Recession
Start
Nov-48
Jul-53
Aug-57
Apr-60
Dec-69
Nov-73
Jan-80
Jul-81
Jul-90
Mar-01
Dec-07

# of quarters
S&P500 peaks
after the peak
in profit
margins
-2
9
5
3
11
-1
10
-1
7
12
5
5
5

# of quarters
Recession
starts after
the peak in
profit
margins
0
11
9
4
16
3
10
2
7
15
5
7
7

Source: NBER, BEA, J.P. Morgan

In our framework, the outlook for US profit margins is
crucial. We have never had a downturn starting before
the margins peaked. However, once margins have
peaked, we note that the risk reward for stocks becomes
less attractive and the likelihood of significant activity
slowdown increases. Assuming margins have peaked in
Q4 ’13, the peak in equity market for this cycle could
materialize sometime in 2H ’15.
Table 9: Eurozone margins and EPS growth in different GDP
growth regimes
Eurozone Real GDP,
%y/y
<-3%
-3% to -2%
-2% to -1%
-1% to 0%
0% to 1%
1% to 2%
2% to 3%
3% to 4%
>4

Profit margins, yoy
bps
-453
-211
-145
-115
-44
65
100
56
87

MSCI Eurozone EPS
, %y/y
-46%
-31%
-11%
-21%
4%
14%
14%
25%
12%

Source: Datastream, IBES

For Eurozone, we have argued for the past four years that
consensus EPS projections at the start of the year were
likely to be missed. For 2015 though, we believe that
double-digit earnings growth could materialise in the
region. Typically, greater than 1% real GDP growth
delivery calls for double digit EPS growth and margin
expansion.

11

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 31: Eurozone EPS growth vs GDP growth

Figure 33: UK EPS model

6%

4%

40%

60%

30%

50%

20%

40%
30%

2%
10%

20%

0%

0%

-2%

-10%

0%

-20%

-10%

-4%
-30%

10%

-20%
-30%

-6%

-40%

-8%

-50%
92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

-40%
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

16

UK EPS %yoy

Eurozone Real GDP %yoy (consensus forecast for '14 and '15)
MSCI Eurozone 12m Fwd EPS %yoy (rhs)

Model Predicted EPS %yoy

Source: Datastream, J.P. Morgan

Source: IBES, J.P. Morgan

JPM forecast of 1.6% Eurozone real GDP growth in
2015, if achieved, would be consistent with strong double
digit EPS delivery.
Figure 32: Europe relative to US EPS vs EUR/USD
40%

In the UK, we expect earnings to remain under relatively
greater pressure. Our economists' forecast of near trend
GDP growth points to a strong top-line delivery by UK
companies, but we note that the UK market is heavily
weighted in commodities and defensive sectors, which
will likely be a drag.

-30%

Table 10: J.P. Morgan index targets for 2015

30%
-20%
20%
-10%
10%
0%

0%

MSCI Europe
MSCI EMU
FTSE 100

Dec '15
Target Current
1,550
1,407
215
190
7,200
6,731

%
Target
upside
P/E
10%
14.0
13%
14.0
7%
13.0

14e
EPS
10%
12%
6%

15e
EPS
13%
13%
10%

Source: Datastream, J.P. Morgan, as at CoB 25th November

-10%
10%
-20%
20%
-30%
-40%

30%
96

97

98

99

00

01

02

03

04

05

06

07

Europe Fwd earnings rel to US (ex-Financials, %yoy)

08

09

10

11

12

13

14

15

EUR/USD (%yoy, rhs,rs)

Source: IBES, J.P. Morgan

The prospect of a weaker euro next year should be an
additional tailwind for Eurozone earnings, as the region
derives around 45% of its revenues from abroad. There
was historically a strong inverse relationship between the
relative performance of Eurozone earnings to US ones
and the EUR/USD.

12

Our base case is for 13% price return for MSCI Eurozone
next year. This is driven by a rebound in the earnings
growth to low double-digit territory and a stable P/E
multiple.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 36: Shares outstanding in Eurozone and US ETF's

Regional allocation
OW Eurozone vs the US

275,000

350,000

265,000

340,000

Figure 34: Performance of Eurozone relative to US equities

255,000

330,000

245,000

320,000

235,000

310,000

225,000

300,000

100

215,000

290,000

96

205,000

280,000

195,000

270,000

108
104

92

185,000
Jan-14

88

260,000
Feb-14 Mar-14

84

Apr-14

May-14

Jun-14

Jul-14

Aug-14

iShares MSCI EMU ETF - shares outstanding

Sep-14

Oct-14

Nov-14

Dec-14

iShares S&P500 (rhs)

Source: Bloomberg

80
Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

ETF data shows that investors have unwound most of
their bets on Eurozone and returned back to the US.

MSCI Eurozone rel to MSCI US ($)

Source: Datastream

Figure 37: MSCI Eurozone 12m Fwd P/E relative to US

We reversed our preference for US over Eurozone on
17th November. One of the reasons for this move was the
particularly poor performance of Eurozone this year; it
lost 22% relative to the US in dollar terms, to be trading
again below summer of '12 lows.

0.95
0.90
0.85
0.80
0.75

Figure 35: Net US buying of European equities

0.70

60
50

0.65

40

03

04

05

06

07

08

09

10

11

12

13

14

30

MSCI Eurozone 12m Fwd P/E rel to US

20

median

+1stdev

-1stdev

Source: IBES

10
0
-10
-20
-30
-40
01

02

03

04

05

06

07

08

09

10

11

12

US investors net buying of European equities ($Bn)

Source: US Treasury, J.P. Morgan

Positioning became much cleaner, as seen in huge
outflows out of the region most recently.

13

14

Given the significant underperformance, Eurozone
valuations improved on forward P/E metrics and are now
in line with historical relatives vs the US.
Figure 38: MSCI Eurozone P/B relative to US
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
81

83

85

87

89

91

93

95

MSCI Eurozone P/Book rel to US

97

99

01

median

03

05

07

+1stdev

09

11

13

-1stdev

Source: Datastream

The valuation metrics which are not based on short term
earnings dynamics, such as cycle-adjusted P/E or the
P/B, continue to show that Eurozone is attractively
priced.
13

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 39: US vs Eurozone ROE differential

OW Japan

9%

Figure 41: BOJ balance sheet % of GDP

7%
85

5%

75

3%
65

1%

55

-1%

45

-3%

35
25

-5%
75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13
15
07

08

09

10

11

US minus Eurozone ROE

12

13

14

15

16

17

BoJ Balance Sheet % of GDP

Source: Datastream

Source: BOJ, J.P. Morgan

Another consideration is that relative profitability trends
between Eurozone and the US are at extremes. The ROE
differential was never this wide for long. It is likely to
start closing, in our view.

The first key pillar behind our OW stance on Japan is the
aggressive BOJ action, which is likely to expand the size
of its balance sheet to close to the 5x the GDP ratio.
Figure 42: Topix vs Yen

Table 11: Projected ECB balance sheet expansion
4Q14
275
250
60
28
50
145
35
227
123

€bn
TLTRO
3Y LTRO – outstanding
1W
3M
New ABS/covered
Unsterilized SMP
Covered bonds (old 1 and 2)
Excess liquidity
Cum. Net increase in b/s

1H15
500
0
30
25
150
135
30
329
225

2H15
600
0
20
10
250
120
20
554
450

End 2016
700
0
20
10
400
70
20
854
750

1700

125

1500

115

1300

105

1100

95

900

85

700

Source: J.P. Morgan Fixed Income research

75
11

12

13

14

Topix

In addition, while we believe Fed is done with money
printing, ECB is just embarking on it.

15

16

JPY/USD (rhs)

Source: Datastream, doted line shows J.P. Morgan Yen forecast

Figure 40: Fed vs ECB balance sheet as % of GDP
30

35

25

30

20

25

This could result in further JPY weakness, which is
traditionally a tailwind for Japanese equities.
Figure 43: Japan total and scheduled wages
6
4

15

20

10

15

5

10
07

08

09

10

11

12

13

Fed - Balance Sheet % of GDP

14

15

16

0
-2

17

ECB

Source: J.P. Morgan

The policy stance between the two central banks will be
converging, which should support Eurozone over the US
equities.
14

2

-4
-6
91

93

95

97

99

01

Japan total wages, %y/y

Source: MHLW

03

05

07

09

Scheduled wages, %y/y

11

13

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

The second key support is the rising evidence of
improving inflationary expectations, of credit growth and
wage growth.

UW UK
We have been UW UK equities for two years now and
remain so into 2015.

Figure 44: Japan Price to Book relative
Table 13: MSCI UK and World sector weights

0.9

0.8

0.7

0.6

0.5
00

01

02

03

04

05

06

07

MSCI Japan P/Book rel to MSCI World

08

09

10

Median

11

12

+1stdev

13

14
- 1stdev

UK
16%
16%
9%
23%
5%
5%
10%
8%
6%
1%
25%
36%

Energy
Staples
Materials
Financials
Telecoms
Utilities
Health Care
Discretionary
Industrials
IT
Cyclicals
Defensives

World
9%
10%
5%
21%
3%
3%
13%
12%
11%
13%
41%
29%

Source: Datastream, MSCI
Source: Datastream

Furthermore, Japanese equities appear attractively priced
on various valuation measures.
Table 12: GPIF asset allocation
Domestic bonds
Domestic equities
Foreign bonds
Foreign equities
Money market
Total

Previous target
60%
12%
11%
12%
5%
100%

New target
40%
25%
14%
16%
5%
100%

Source: J.P. Morgan

What is also relevant, in our view, is that the demand –
supply dynamics will be supportive of Japanese equities
vs other asset classes.

The following pushbacks are relevant, in our view:
1) UK is almost 2x more weighted in commodity sectors
than World markets, and we believe commodities will
remain under pressure for the foreseeable future.
2) General elections next May are unlikely to provide a
market friendly result, irrespective of who gets into
power.
3) UK is heavily weighted in Defensives. If we are right
that bond yields start to move higher, there should be a
sector leadership change, away from defensives.
Table 14: Relative performance of UK vs Eurozone equities
around the first BOE rate hike
MSCI UK vs Eurozone performance*
-12m

-6m

-3m

-1m

+1m

+3m

+6m

+12m

May-75

0.2%

31.8%

23.1%

14.8%

10.4%

0.2%

18.5%

30.4%

Nov-77

50.0%

10.8%

8.3%

-6.2%

-5.5%

-13.4%

-16.3%

-37.8%

Sep-81

44.0%

24.8%

12.1%

3.5%

-14.1%

-8.3%

-3.5%

15.5%

May-84

12.7%

12.4%

4.7%

4.4%

-6.0%

3.4%

8.5%

12.4%

Jun-88

-6.3%

9.5%

0.4%

1.1%

3.2%

0.5%

-13.0%

6.4%

Sep-94

-0.1%

-0.9%

7.3%

4.3%

-0.9%

-0.5%

-0.5%

6.5%

Oct-96

-5.1%

-0.2%

5.6%

-3.5%

0.2%

-4.9%

-16.1%

-19.4%

Sep-99

0.8%

-5.3%

-2.5%

-3.3%

-2.7%

-9.5%

-40.6%

-30.4%

Nov-03

1.3%

-3.7%

-1.2%

-3.1%

-0.8%

-6.5%

-3.1%

-2.3%

Average

10.8%

8.8%

6.4%

1.3%

-1.8%

-4.3%

-7.4%

-2.1%

Median

0.8%

9.5%

5.6%

1.1%

-0.9%

-4.9%

-3.5%

6.4%

% positive

67%

56%

78%

56%

33%

33%

22%

56%

Source: Datastream ,* using Datastream indices before 1994

4) UK is likely to see some tightening next year, which
could result in a stronger GBP vs Euro. The rate hikes
typically meant UK underperforms Eurozone equities.
15

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 47: EM CPI vs Oil price

Neutral EM vs DM

2.5%

40%

Figure 45: MSCI EM vs DM price relative

30%
2.0%

100

20%

95

1.5%

10%

90
0%

1.0%

85

-10%

80
0.5%

-20%

75
70

0.0%

-30%
10

11

12

13

14

65

EM CPI (%3mom)

60
Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Brent (%3mom, rhs)

Source: Bloomberg, J.P. Morgan

MSCI EM vs DM, $

Source: Datastream

We were underweight EM equities for as long as 3 years
until May ‘14, at which point we closed our bearish
stance. Since May, EM initially showed a somewhat
better performance, but have rolled over again most
recently.
Entering into 2015, we advise a neutral stance between
EM and DM. On the positive side we highlight:

The fall in commodity prices is likely to feed into the
lower inflation across the EM space. This should allow
for greater policy flexibility, and potentially lead to rate
cuts.
Among the headwinds we highlight that:
Figure 48: EM vs DM GDP growth differential
7%
6%

Figure 46: MSCI EM vs DM 12m Fwd P/E

5%

1.1

4%

1.0
0.9

3%

0.8

2%

0.7

1%
01

02

03

04

05

06

07

08

09

10

11

12

13

14

0.6

EM minus DM real GDP growth %yoy
0.5

Source: J.P. Morgan, dotted line shows JPM forecasts
0.4
95

96

97

98

99

00

01

02

MSCI EM vs DM 12m Fwd PE

03

04

05
Median

06

07

08

09

+1 stdev

10

11

12

13

-1 Stdev

Source: IBES

EM valuations have improved a lot after the dramatic
underperformance over the past few years.

16

14

EM growth rates are still likely to continue decelerating
vs the DM, although we note that the consensus view
appears to be already bearish in this regard.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 49: China total social financing % of GDP

Figure 51: NBS China house price index
14%
12%

210

10%

190

8%
6%

170

4%
2%

150

0%
-2%

130

-4%
08

110
03

04

05

06

07

08

09

10

11

12

13

Source: PBOC, J.P. Morgan Economics

The imbalances in China, which we have been
highlighting for a long while do not appear to be going
away. Credit excess is a problem. The policymakers
decided most recently to “kick the can down the road
some way”, but the problem is not being fundamentally
addressed, in our view.
Figure 50: China gross fixed investment % of GDP

45%

40%

35%

30%

25%
1990

1995

2000

2005

11

12

13

14

70 City Average House Prices Index, %oya

Most agree that FAI being such a high proportion of GDP is
unsustainable and look for the consumer to take over. The
problem is that house prices are falling now in most key
cities => wealth effect is working against this rebalancing.

Themes for 2015
1) Eurozone recovery basket is cheap again
Table 15: J.P. Morgan '15 Eurozone recovery basket – JPDEER15 <index>

50%

1985

10

Source: NBS, J.P. Morgan

China stock of total social financing, % of GDP

1980

09

14

2010

Chinese Fixed Capital Formation as % of GDP

Source: CEIC

The excessive FAI and the resulting overcapacity in
many industries, as well as no pricing power for
corporate and therefore weak profitability, remain the
key issues.

Ticker
CABK SM
G IM
ATL IM
MS IM
AGS BB
INGA NA
GLE FP
DG FP
ENEL IM
AC FP
HMB SS
SEV FP
UCG IM
CA FP
RAND NA
RNO FP
TIT IM
ALV GR
MEO GR
SGO FP
EZJ LN
UG FP
CAP FP
PRY IM
DPW GR
REP SM
ADEN VX
BOSS GR
TKA GR
AGL IM
TOD IM
SIE GR
AGN NA
IFX GR
LR FP
HEI GR

Name
CAIXABANK S.A
GENERALI ASSIC
ATLANTIA SPA
MEDIASET SPA
AGEAS
ING GROEP NV
SOC GENERALE SA
VINCI SA
ENEL SPA
ACCOR SA
HENNES & MAURI-B
SUEZ ENVIRONNEME
UNICREDIT SPA
CARREFOUR SA
RANDSTAD HOLDING
RENAULT SA
TELECOM ITALIA S
ALLIANZ SE-VINK
METRO AG
SAINT GOBAIN
EASYJET PLC
PEUGEOT SA
CAP GEMINI
PRYSMIAN SPA
DEUTSCHE POST-RG
REPSOL SA
ADECCO SA-REG
HUGO BOSS -ORD
THYSSENKRUPP AG
AUTOGRILL SPA
TOD'S SPA
SIEMENS AG-REG
AEGON NV
INFINEON TECH
LEGRAND SA
HEIDELBERGCEMENT

Country
Spain
Italy
Italy
Italy
Belgium
Netherlands
France
France
Italy
France
Sweden
France
Italy
France
Netherlands
France
Italy
Germany
Germany
France
Britain
France
France
Italy
Germany
Spain
Switzerland
Germany
Germany
Italy
Italy
Germany
Netherlands
Germany
France
Germany

Sector
Financials
Financials
Industrials
Discretionary
Financials
Financials
Financials
Industrials
Utilities
Discretionary
Discretionary
Utilities
Financials
Staples
Industrials
Discretionary
Telecoms
Financials
Staples
Industrials
Industrials
Discretionary
IT
Industrials
Industrials
Energy
Industrials
Discretionary
Materials
Discretionary
Discretionary
Industrials
Financials
IT
Industrials
Materials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

17

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

We update our Eurozone recovery basket and believe that
it is again becoming an attractive area to invest in.

2) Buy the winners and sell the losers from the lower
for longer oil prices

We screened for stocks which have significant domestic
exposure (>30%) and are most positively correlated to
Euro area PMIs. We confirmed the list with our sector
analysts and checked for other names that are most
geared to a recovery in the Euro area. We excluded
stocks where our analysts have an UW rating and the
ones that don’t meet our liquidity criteria.

Table 16: J.P. Morgan oil prices forecasts

Figure 52: Relative performance of the Eurozone recovery basket
118

($/BBL)
Spot
2014
1Q15
2Q15
3Q15
4Q15
2015
2016
LT

Brent
78.3
100.3
75.0
80.0
85.0
88.0
82.0
87.8
90.0

Y/Y Chg, %
-8%

-18%
7%

WTI
74.1
93.7
72.0
76.0
80.0
81.0
77.3
80.8
80.0

Y/Y Chg, %
-4%

-18%
5%

Source: J.P. Morgan Commodity research, as of COB 25th November

116

Oil prices have fallen sharply, with WTI and Brent down
25-30% from their June highs. Our commodity analysts
expect oil price to remain under pressure and crucially,
’15 and ’16 averages to remain near current levels,
expecting no rebound at all.

114
112
110
108
106
104
102
100
Jan 13

Apr 13

Jul 13

Oct 13

Jan 14

Apr 14

Jul 14

Oct 14

Eurozone recovery basket relative

Source: Bloomberg, J.P. Morgan

The basket had a strong run in ‘13, but it rolled over this
year, as the earnings growth didn’t deliver.
Figure 53: Eurozone recovery basket P/E relative
1.1

1.0

0.9

0.8
03

04

05

06

07

08

09

Eurozone recovery basket median 12m Fwd PE relative

10
Median

11

12
+1 Stdev

13

14
-1 Stdev

Source: IBES, J.P. Morgan

The basket is trading attractively again, at the P/E
relative lows. In fact, its’ P/E is lower relative to the
market than it was at the height of the Eurozone crisis, in
the summer of 2012.

We see the fall in oil and in other commodity prices as a
welcome development for final demand, as it boosts real
disposable incomes and purchasing power. At the sector
level, lower oil is a headwind for Commodity equities,
selected Industrials, Chemicals and UK Utilities. On the
flipside, it is a positive for Consumer Cyclicals Transport, Airlines, Autos, Retail, Travel and Leisure.
Table 17: J.P. Morgan basket of the beneficiaries of lower
oil/commodity prices – JPDECW15 <index>
Ticker
DAI GR
ABI BB
BMW GR
SAB LN
CFR VX
DPW GR
PHIA NA
HMB SS
ITX SM
LHA GR
HOLN VX
HEIA NA
IAG LN
ATL IM
HEI GR
ASC LN
ELUXB SS
SKFB SS
PNDORA DC
LG FP
AF FP
GKN LN
PRY IM
ZC FP

Name
DAIMLER AG
ANHEUSER-BUSCH I
BAYER MOTOREN WK
SABMILLER PLC
CIE FINANCI-REG
DEUTSCHE POST-RG
KONINKLIJKE PHIL
HENNES & MAURI-B
INDITEX
DEUTSCHE LUFT-RG
HOLCIM LTD-REG
HEINEKEN NV
INTL CONS AIRLIN
ATLANTIA SPA
HEIDELBERGCEMENT
ASOS PLC
ELECTROLUX AB-B
SKF AB- B SHARES
PANDORA A/S
LAFARGE SA
AIR FRANCE-KLM
GKN PLC
PRYSMIAN SPA
ZODIAC AEROSPACE

Country
Germany
Belgium
Germany
Britain
Switzerland
Germany
Netherlands
Sweden
Spain
Germany
Switzerland
Netherlands
Britain
Italy
Germany
Britain
Sweden
Sweden
Denmark
France
France
Britain
Italy
France

Sector
Discretionary
Staples
Discretionary
Staples
Discretionary
Industrials
Industrials
Discretionary
Discretionary
Industrials
Materials
Staples
Industrials
Industrials
Materials
Discretionary
Discretionary
Industrials
Discretionary
Materials
Industrials
Discretionary
Industrials
Industrials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

18

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

We advise to go long the basket of stocks that that should
fundamentally benefit from lower oil and commodity
prices, according to our analysts. We excluded stocks
where our analysts have an UW rating and the ones that
don’t meet our liquidity criteria.
Table 18: J.P. Morgan basket of the stocks hurt by lower
oil/commodity prices - JPDECL15 <index>

3) Sell the UK stocks that could be hurt by increased
political uncertainty
Figure 54: UK General Elections polls
41%

39%

37%

Ticker
BP/ LN
BAS GY
ENI IM
GLEN LN
GSZ FP
BG/ LN
BLT LN
ABBN VX
STAN LN
EOAN GR
DNB NO
AAL LN
ATCOA SS
SSE LN
MAERSKB DC
CNA LN
RWE GR
SOLB BB
HEXAB SS
CARLB DC
GALP PL
BNZL LN
ALFA SS
SMIN LN
WEIR LN
BALN VX
AGK LN
VK FP
LXS GR
DNO NO
SSABA SS

Name
BP PLC
BASF SE
ENI SPA
GLENCORE PLC
GDF SUEZ
BG GROUP PLC
BHP BILLITON PLC
ABB LTD-REG
STANDARD CHARTER
E.ON SE
DNB ASA
ANGLO AMER PLC
ATLAS COPCO-A
SSE PLC
AP MOELLER-B
CENTRICA PLC
RWE AG
SOLVAY SA-A
HEXAGON AB-B
CARLSBERG-B
GALP ENERGIA
BUNZL PLC
ALFA LAVAL AB
SMITHS GRP PLC
WEIR GROUP PLC
BALOISE HOL-REG
AGGREKO PLC
VALLOUREC
LANXESS AG
DNO ASA
SSAB-A

Country
Britain
Germany
Italy
Switzerland
France
Britain
Australia
Switzerland
Britain
Germany
Norway
Britain
Sweden
Britain
Denmark
Britain
Germany
Belgium
Sweden
Denmark
Portugal
Britain
Sweden
Britain
Britain
Switzerland
Britain
France
Germany
Norway
Sweden

Sector
Energy
Materials
Energy
Materials
Utilities
Energy
Materials
Industrials
Financials
Utilities
Financials
Materials
Industrials
Utilities
Industrials
Utilities
Utilities
Materials
IT
Staples
Energy
Industrials
Industrials
Industrials
Industrials
Financials
Industrials
Industrials
Materials
Energy
Materials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

Against it, we would go short the basket of stocks that
are likely to be hurt by a low oil and commodity price
environment, according to our sector analysts. This is in
particular the case for oil capex names. We excluded
stocks that don’t meet our liquidity criteria.

35%

Labour: 34%

33%

31%
Conservatives: 30%
29%
Jan 14

Feb 14

Mar 14

Apr 14

May 14

Jun 14

Conservatives

Jul 14

Aug 14

Sep 14

Oct 14

Nov 14

Labour

Source: Polling companies, J.P. Morgan. *If more than one poll was carried out on the
same day the aggregate weighted by the number of respondents has been used

Political uncertainty looks set to increase ahead of next
year's General Elections in the UK. The latest polls show
a narrow gap between Labour and the Conservatives.
Table 19: J.P. Morgan basket of the stocks that could be hurt by
increasing political uncertainty in the UK - JPDEUKPU <index>
Ticker
AZN LN
LLOY LN
IMT LN
RBS LN
SSE LN
CNA LN
BAB LN
CPI LN
WMH LN
BKG LN
HSBA LN
PRU LN
BARC LN
LGEN LN

Name
ASTRAZENECA PLC
LLOYDS BANKING
IMPERIAL TOBACCO
ROYAL BK SCOTLAN
SSE PLC
CENTRICA PLC
BABCOCK INTL GRP
CAPITA PLC
WILLIAM HILL
BERKELEY GROUP
HSBC HLDGS PLC
PRUDENTIAL PLC
BARCLAYS PLC
LEGAL & GEN GRP

Sector
Health Care
Financials
Staples
Financials
Utilities
Utilities
Industrials
Industrials
Discretionary
Discretionary
Financials
Financials
Financials
Financials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

We advise to go short the basket of UK stocks, which
according to our analysts are likely to face headwinds
stemming from an uncertain political environment - in
particular, the general elections expected next May and
potentially a referendum on EU exit in 2017. We
excluded stocks that don’t meet our liquidity criteria.

19

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

If Labour were to assume government, we find the
sectors most negatively impacted would be Banks due to
a potential drive for greater competition in the sector,
Utilities from a possible 20-month energy price freeze,
Business Services due to potentially less outsourcing and
renegotiation of past contracts and Homebuilders from
weaker margins.
The referendum on EU exit appears to be conditional on
the Conservative government winning next year's
elections, among other considerations. Banks, especially
wholesale names, would be negatively impacted by this
uncertainty, in our view.
The impact on individual stocks will vary depending on
the different election outcomes, but we think that most
UK stocks which are sensitive to elections will be under
pressure over the next few months as we anticipate that
the election result will be highly unpredictable until right
before polling day, and headline risk will be elevated for
a while.
4) Bond proxies appear stretched, but might be still
benefitting from continued inflows – Sell expensive
bond proxies to buy cheap ones and keep buying
Buyback plays
Figure 55: J.P. Morgan global CPI forecast
2.7%

2.5%

2.3%

2.1%

1.9%

1.7%
Jan-13

Jul-13

Jan-14

Global CPI %yoy

Jul-14

Jan-15

Jul-15

JPM forecats

Source: J.P. Morgan

Our economists expect global inflation to move lower
over the coming months, largely due to the falling
commodity prices. As base effects dissipate, inflation
should start to rebound in 2H '15.

Figure 56: Dividend yield relative of European Defensives* to the
broader market
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

European Defensives dividend yield rel to the market

10

11

12

13

14

median

Source: Datastream, * Staples, Healthcare, Telecoms, Utilities

The traditional defensive bond proxies have already
benefited from the search for yield theme, as bond yields
fell, and are starting to appear expensive. The aggregate
dividend yield of all 4 defensive sectors in Europe is
nowadays barely higher than the one of the overall market.
Table 20: J.P. Morgan basket of expensive "bond proxies" –
JPDERL15 <index>
Ticker
DLG LN
SWEDA SS
ZURN VX
DL NA
EDP PL
TEF SM
SSE LN
GSK LN
TEL2B SS
VOD LN
ENG SM
IMT LN
UL NA
BELG BB
HNR1 GR
NG/ LN
ZIGGO NA
SL/ LN
ORA FP
BATS LN
SVT LN
UU/ LN
SCMN VX
UNA NA
NESN VX
BT/A LN
ASSAB SS

Name
DIRECT LINE INSU
SWEDBANK AB-A
ZURICH INSURANCE
DELTA LLOYD NV
EDP
TELEFONICA
SSE PLC
GLAXOSMITHKLINE
TELE2 AB-B SHS
VODAFONE GROUP
ENAGAS SA
IMPERIAL TOBACCO
UNIBAIL-RODAMCO
BELGACOM SA
HANNOVER RUECK S
NATIONAL GRID PL
ZIGGO NV
STANDARD LIFE
ORANGE
BRIT AMER TOBACC
SEVERN TRENT
UNITED UTILITIES
SWISSCOM AG-REG
UNILEVER NV-CVA
NESTLE SA-REG
BT GROUP PLC
ASSA ABLOY AB-B

Country
Britain
Sweden
Switzerland
Netherlands
Portugal
Spain
Britain
Britain
Sweden
Britain
Spain
Britain
France
Belgium
Germany
Britain
Netherlands
Britain
France
Britain
Britain
Britain
Switzerland
Britain
Switzerland
Britain
Sweden

Sector
Financials
Financials
Financials
Financials
Utilities
Telecoms
Utilities
Health Care
Telecoms
Telecoms
Utilities
Staples
Financials
Telecoms
Financials
Utilities
Telecoms
Financials
Telecoms
Staples
Utilities
Utilities
Telecoms
Staples
Staples
Telecoms
Industrials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

We advise to go short the basket of expensive “bond
proxies”. We screened for names with dividend yield
greater than 3%, which have outperformed the market
and rerated YTD. We also filtered for stocks that are
expensive on P/E and P/B compared to the 10Y historical
median. We excluded stocks that don’t meet our liquidity
criteria.
20

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 57: P/E relative of expensive bond proxies

Figure 58: P/E relative sustainable dividend yield plays

1.2

1.15

1.1

1.10

1.0

1.05

0.9

1.00

0.8

0.95

0.7
05

06

07

08

09

10

Reflation Losers vs Market Median - 12m Fwd P/E

11

12

Median

13
Median

14
Median

0.90
05

06

07

08

09

10

Sustainable Dividend Plays vs Market Median- 12m Fwd P/E

11

12

Median

13
+1 Stdev

14
-1 Stdev

Source: Datastream, J.P. Morgan

Source: Datastream, J.P. Morgan

The basket is currently trading at a 12% P/E premium to
historical relatives.

The basket appears attractively valued, currently trading
at a 5% P/E discount to historical relatives.

Table 21: J.P. Morgan basket of sustainable yield plays –
JPDEDP15 <index>

Table 22: J.P. Morgan basket of buyback stocks – JPDEBB15
<index>

Ticker
MUV2 GR
CO FP
AMFW LN
SESG FP
PSON LN
ADN LN
NXT LN
TEC FP
SKY LN
SIE GR
PHIA NA
DSM NA
CRH ID
GIVN VX
WPP LN
UMI BB
KINVB SS
SGE LN
ROG VX
BOKA NA

Ticker
PNDORA DC
AGS BB
NESN VX
MUV2 GR
TEL NO
ADEN VX
NOK1V FH
PHIA NA
GN DC
NOVOB DC
SGE LN
SIE GR
NOVN VX
IFX GR
ASML NA
REL LN
WPP LN
ABBN VX
SAN FP
GSK LN
YAR NO
ADS GR
AGN NA
AMS SM
SOON VX

Name
MUENCHENER RUE-R
CASINO GUICHARD
AMEC FOSTER WHEE
SES
PEARSON PLC
ABERDEEN ASSET
NEXT PLC
TECHNIP SA
SKY PLC
SIEMENS AG-REG
KONINKLIJKE PHIL
DSM (KONIN)
CRH PLC
GIVAUDAN-REG
WPP PLC
UMICORE
KINNEVIK-B SHS
SAGE GROUP
ROCHE HLDG-GENUS
BOSKALIS WES

Country
Germany
France
Britain
Luxembourg
Britain
Britain
Britain
France
Britain
Germany
Netherlands
Netherlands
Ireland
Switzerland
Britain
Belgium
Sweden
Britain
Switzerland
Netherlands

Sector
Financials
Staples
Energy
Discretionary
Discretionary
Financials
Discretionary
Energy
Discretionary
Industrials
Industrials
Materials
Materials
Materials
Discretionary
Materials
Financials
IT
Health Care
Industrials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

Against it, we would go long the basket of sustainable,
growing and high dividend yielding names. We screened
for stocks which have shown sustainable dividend
growth since 2006 and have a 15e dividend yield greater
than 3%. We also filtered the non-financials for positive
free cash flow and strong balance sheet (positive '15e
FCF yield and ‘15e net debt to equity less than 1.5). We
excluded stocks where our analysts have an UW rating
and the ones that don’t meet our liquidity criteria.

Name
PANDORA A/S
AGEAS
NESTLE SA-REG
MUENCHENER RUE-R
TELENOR ASA
ADECCO SA-REG
NOKIA OYJ
KONINKLIJKE PHIL
GN STORE NORD
NOVO NORDISK-B
SAGE GROUP
SIEMENS AG-REG
NOVARTIS AG-REG
INFINEON TECH
ASML HOLDING NV
REED ELSEVIER PL
WPP PLC
ABB LTD-REG
SANOFI
GLAXOSMITHKLINE
YARA INTL ASA
ADIDAS AG
AEGON NV
AMADEUS IT HOLDI
SONOVA HOLDING A

Country
Denmark
Belgium
Switzerland
Germany
Norway
Switzerland
Finland
Netherlands
Denmark
Denmark
Britain
Germany
Switzerland
Germany
Netherlands
Britain
Britain
Switzerland
France
Britain
Norway
Germany
Netherlands
Spain
Switzerland

Sector
Discretionary
Financials
Staples
Financials
Telecoms
Industrials
IT
Industrials
Health Care
Health Care
IT
Industrials
Health Care
IT
IT
Discretionary
Discretionary
Industrials
Health Care
Health Care
Materials
Discretionary
Financials
IT
Health Care

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

We refresh our basket of European stocks that are
conducting or are expected to do share buybacks,
according to our analysts. It outperformed by 3% ytd and
we believe that these stocks will continue to find support.
We excluded stocks where our analysts have an UW
rating and the ones that don’t meet our liquidity criteria.

21

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

5) Sell US exporters to buy Eurozone and Japanese
ones
Table 23: J.P. Morgan FX forecasts
vs U$
EUR
JPY
GBP
DXY

Dec-14
1.25
119
1.56
88.1

Mar-15
1.22
120
1.53
89.9

Jun-15
1.20
123
1.51
91.3

Sep-15
1.18
125
1.51
92.3

Dec-15
1.18
128
1.53
92.3

Source: J.P. Morgan FX research

Our FX strategists expect USD to appreciate against all
the major currencies next year.
Table 24: US exporters to be hurt by the stronger dollar

Ticker
AFL US
AGCO US
BDX US
BWA US
CE US
CCE US
CL US
COP US
DISCA US
EBAY US
FCX US
HAIN US
HAR US
JNJ US
JOY US
MGA US
MCD US
MDLZ US
NEM US
NUS US
OII US
PLL US
PG US
PRU US
RL US
SLB US
STJ US
SPLS US
TUP US
UTX US

Name
AFLAC
AGCO
BECTON DICKINSON
BORGWARNER INC
CELANESE CORP-SERIES A
COCA COLA ENTS.
COLGATE-PALM.
CONOCOPHILLIPS
DISCOVERY COMMS.'A'
EBAY
FREEPORT-MCMORAN INC
HAIN CELESTIAL GP.
HARMAN INTERNATIONAL
JOHNSON & JOHNSON
JOY GLOBAL INC
MAGNA INTERNATIONAL INC
MCDONALDS
MONDELEZ INTERNATIONAL
NEWMONT MINING CORP
NU SKIN ENTERPRISES 'A'
OCEANEERING INTL INC
PALL CORP
PROCTER & GAMBLE
PRUDENTIAL FINL.
RALPH LAUREN CL.A
SCHLUMBERGER LTD
ST.JUDE MEDICAL
STAPLES
TUPPERWARE BRANDS
UNITED TECHNOLOGIES

Sector
Financials
Industrials
Health Care
Discretionary
Materials
Staples
Staples
Energy
Discretionary
IT
Materials
Staples
Discretionary
Health Care
Industrials
Discretionary
Discretionary
Staples
Materials
Staples
Energy
Industrials
Staples
Financials
Discretionary
Energy
Health Care
Discretionary
Discretionary
Industrials

NonDomestic
Sales, %
76%
74%
58%
74%
72%
70%
82%
75%
45%
52%
55%
37%
70%
55%
57%
76%
69%
80%
100%
88%
66%
100%
61%
46%
33%
69%
53%
30%
75%
43%

Source: Bloomberg, J.P. Morgan

We list in the above table the US names that derive a
significant part of their revenues from abroad and which
will likely be hurt by a strong dollar, according to our
sector analysts.

22

Table 25: J.P. Morgan basket of Euro exporters – JPDEEX15
<index>
Ticker
ASML NA
LUX IM
STM IM
REN NA
WRT1V FH
MC FP
GIVN VX
ZC FP
PUB FP
OR FP
RI FP
MT NA
DAI GR
AIR FP
UCB BB
CFR VX
BAYN GR
DSY FP
SW FP
AH NA
SAF FP
G1A GY
BMW GR
BNR GR
AKZA NA
CRH ID

Name
ASML HOLDING NV
LUXOTTICA GROUP
STMICROELECTRONI
REED ELSEVIER
WARTSILA OYJ ABP
LVMH MOET HENNES
GIVAUDAN-REG
ZODIAC AEROSPACE
PUBLICIS GROUPE
L'OREAL
PERNOD RICARD SA
ARCELORMITTAL
DAIMLER AG
AIRBUS GROUP NV
UCB SA
CIE FINANCI-REG
BAYER AG-REG
DASSAULT SYSTEME
SODEXO
AHOLD NV
SAFRAN SA
GEA GROUP AG
BAYER MOTOREN WK
BRENNTAG AG
AKZO NOBEL
CRH PLC

Country
Netherlands
Italy
Switzerland
Britain
Finland
France
Switzerland
France
France
France
France
Luxembourg
Germany
France
Belgium
Switzerland
Germany
France
France
Netherlands
France
Germany
Germany
Germany
Netherlands
Ireland

Sector
IT
Discretionary
IT
Discretionary
Industrials
Discretionary
Materials
Industrials
Discretionary
Staples
Staples
Materials
Discretionary
Industrials
Health Care
Discretionary
Health Care
IT
Discretionary
Staples
Industrials
Industrials
Discretionary
Industrials
Materials
Materials

Source: Bloomberg, J.P. Morgan, all stocks are equally weighted in the basket

On the flipside, Euro exporters are likely to benefit from
a weaker EUR/USD. We advise to go long the basket of
stocks that should benefit the most, according to our
sector analysts. We screened for stocks with significant
international exposure (>50%) and which are the most
negatively correlated to the Euro. We confirmed the list
with our sector analysts and checked for other names that
are likely to benefit the most from a weaker Euro. We
excluded stocks where our analysts have an UW rating
and the ones that don’t meet our liquidity criteria.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Table 26: Japanese exporters to benefit from the weaker Yen
Ticker
6857 JP
7259 JP
6113 JP
5201 JP
7762 JP
6902 JP
6702 JP
6305 JP
6473 JP
7276 JP
6503 JP
6268 JP
5991 JP
7201 JP
6471 JP
7733 JP
6753 JP
9984 JP
6758 JP
5802 JP
6762 JP
8035 JP

Name
ADVANTEST
AISIN SEIKI
AMADA
ASAHI GLASS
CITIZEN HDG.
DENSO
FUJITSU
HITACHI CON.MCH.
JTEKT
KOITO MANUFACTURING
MITSUBISHI ELECTRIC
NABTESCO
NHK SPRING
NISSAN MOTOR
NSK
OLYMPUS
SHARP
SOFTBANK
SONY
SUMITOMO ELECTRIC
TDK
TOKYO ELECTRON

Sector
IT
Discretionary
Industrials
Industrials
IT
Discretionary
IT
Industrials
Industrials
Discretionary
Industrials
Industrials
Discretionary
Discretionary
Industrials
Health Care
Discretionary
Telecoms
Discretionary
Discretionary
IT
IT

Non domestic
sales, %
89%
47%
53%
69%
66%
54%
38%
71%
60%
55%
33%
43%
46%
78%
62%
53%
61%
40%
72%
55%
90%
60%

Source: Bloomberg, J.P. Morgan

Likewise, a weaker Yen will be a strong positive for
Japanese exporters. We list in the above table the
Japanese names that are likely to benefit the most from
this.
Table 27: J.P. Morgan Strategy thematic baskets for 2015
Name
Eurozone recovery
Winners from lower oil prices
Losers from lower oil prices
UK political uncertainty
Expensive bond proxies
Sustainable yield plays
Buyback stocks
Eurozone exporters

Ticker
JPDEER15
JPDECW15
JPDECL15
JPDEUKPU
JPDERL15
JPDEDP15
JPDEBB15
JPDEEX15

Recommendation
Buy
Buy
Sell
Sell
Sell
Buy
Buy
Buy

Source: J.P. Morgan, Bloomberg

23

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 60: Cyclicals 12m Fwd P/E relative to Defensives

Sector Allocation

1.5

Table 28: European sector allocation
Sector
Financials
Discretionary
Industrials
Energy
Materials
Technology
Telecoms
Staples
Utilities
Healthcare

1.4

JPM Recommendation
Overweight
Overweight
Overweight
Neutral
Neutral
Neutral
Neutral
Underweight
Underweight
Underweight

1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
95

96

97

98

99

00

01

02

03

04

05

06

Europe Cyclicals 12m Fwd P/E rel to Defensives

07

08

average

09

10

11

12

+1stdev

13

14
-1stdev

Source: J.P. Morgan

Source: IBES

We started 2014 with an UW stance on Chemicals,
Industrials, Mining, Luxury, Retail, Energy and other
Cyclicals, while we had a relative preference for Pharma
and Utilities. We started to reverse this stance from the
mid year and entering 2015 we have a preference for
Cyclicals and Financials over Defensives and over
commodity sectors.

In our view, Cyclicals are offering an attractive riskreward at present. Relative to Defensives, they are
currently trading at the cheapest P/E multiple since
Q1’09. In a sense, their P/E multiples are already
consistent with the start of recessions, as was the case in
’01 and ’08. If the recession does not materialize next
year, as is the JPM view, the relative derating of
Cyclicals has gone too far, in our view.

OW Cyclicals vs Defensives

Figure 61: Global Cyclicals vs Defensives and US bond yields

Figure 59: Cyclicals price relative to Defensives

50%
25%

100

40%
30%

98

15%

20%

96

10%
5%

0%

94

-10%

-5%

92

-20%

90

-30%

-15%

88

-40%
-25%

86
Jan 14

Apr 14

Europe Cyclicals rel to Defensives

Jul 14

Oct 14

US Cyclicals rel to Defensives

Source: Datastream

Cyclicals have lagged Defensives by 930bp in Europe
ytd and by 510bp in the US. Most recently though,
Cyclicals have started to perform better, which we
believe will continue into next year.

24

-50%
07

08

09

10

11

Cyclicals rel to Defensives (%3mom)

12

13

14

15

US 10y Bdy %3mom (rhs)

Source: Datastream, J.P. Morgan

As outlined earlier, a potential move up in bond yields
would likely induce a change in market leadership. There
was historically a strong positive correlation between the
relative performance of Cyclicals vs Defensives and the
direction of bond yields.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Table 29: Eurozone sectors' 15e EPS growth IBES projections

Figure 62: Cyclicals relative to Defensives vs IFO
40%

20%

30%

15%

20%

10%

10%

5%

0%

0%

-10%

-5%

-20%

-10%

-30%

-15%

-40%

-20%
99

00

01

02

03

04

05

06

07

08

09

10

11

Europe Cyclicals rel to Defensives (%6mom)

12

13

14

15

MSCI Eurozone
Energy
Materials
Industrials
Discretionary
Staples
Healthcare
Financials
IT
Telecoms
Utilities

2015e EPS
Weighted
16.4%
7.9%
18.1%
15.2%
14.2%
11.2%
9.1%
27.6%
21.2%
8.6%
4.5%

Median
11.5%
10.0%
20.3%
14.0%
13.0%
11.5%
10.4%
15.7%
17.8%
6.2%
4.4%

Source: IBES

IFO (%6mom, rhs)

Source: Datastream

In addition, our expectation of a pickup in Eurozone and
in global activity momentum also points to a better
relative performance of Cyclicals vs Defensives. We note
that the latest rebound in German IFO and in French
Insee surveys is a positive development in this regard.

In Eurozone, we expect domestic cyclicals and exporters
to deliver better than consensus projected earnings
growth next year. On the flipside, commodity producers
and capex-related names, Staples and Utilities will likely
face significant earnings pressure, resulting in potential
estimate downgrades, in our view.
Table 30: US sectors' 15e EPS growth

Figure 63: Cyclicals 12m Fwd EPS relative to Defensives vs Euro
real GDP growth
5%
20%
3%
10%
1%
0%
-1%

-10%

-3%

-20%

-5%

-30%

MSCI US
Energy
Materials
Industrials
Discretionary
Staples
Healthcare
Financials
IT
Telecoms
Utilities

2015e EPS
Weighted
9.9%
-1.2%
13.9%
9.7%
17.3%
6.8%
10.5%
14.8%
10.0%
7.2%
3.5%

Median
9.6%
4.5%
12.6%
12.0%
13.2%
7.7%
10.2%
7.2%
11.7%
8.8%
4.9%

Source: IBES
-40%

-7%
96

97

98

99

00

01

02

03

04

05

06

07

Cyclicals rel to Defensives 12m FwdEPS %6mom

08

09

10

11

12

13

14

15

Euro Area GDP growth (rhs)

Source: IBES, J.P. Morgan, dotted line shows J.P. Morgan GDP forecast for 2015

The relative EPS momentum of Cyclicals vs Defensives
should accelerate next year, as activity improves.

In the US, we believe that consumer cyclicals will likely
benefit from a pickup in consumer spending due to lower
gasoline prices, improving wage growth and greater
labour market visibility. On the flipside, Oil companies
and Staples' earnings could be under more pressure due
to the fall in commodity prices. Tech earnings could also
be hurt by the stronger USD.

25

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Our commodity analysts believe the oil price will remain
under pressure. Importantly, the forecasts assume no
significant rebound in oil price from current levels over
the medium term. WTI and Brent are expected to average
$77 and $82, respectively in ’15.

Energy - Neutral
Table 31: Energy sector snapshot
15e
Allocation
Europe
Energy
Oil & Gas
Equipment & Svs

Ytd
Perf

EPS
Gr

P/E

Div
Yield

FCF
yield

P/B

4%

11%

14.0

3.7%

5.4%

1.8

N

-5%

0%

10.9

5.3%

0.9%

1.2

N

-2%

0%

11.1

5.2%

0.3%

1.2

UW

-30%

2%

9.0

6.4%

6.9%

1.0

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

Figure 65: Energy sector EPS growth vs oil price
100%

60%

80%
40%

60%
40%

20%

20%
0%

0%

-20%

Energy is by far the worst performing level 1 sector ytd,
both in Europe and in the US, lagging the broader market
by 9% and 14%, respectively. We have been cautious on
the space for more than two years, but advise not to be
short into ‘15. We look to use any significant rallies to
sell into them, though. Within Energy, we maintain a
preference for integrated vs services names.
Oil price to remain under pressure over the medium
term …
Figure 64: WTI and Brent prices ytd ($/BBL)

-20%

-40%
-60%

-40%

-80%
-100%

-60%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

JPM oil index %yoy (brought forward by 2m)

Energy 12m Fwd EPS %yoy

Source: IBES, Bloomberg. dotted line represents J.P. Morgan forecasts

Against the backdrop of weakening oil prices, we expect
Energy earnings to continue being downgraded. Here,
IBES expectations of flat EPS growth for Energy next
year appear too optimistic.
Figure 66: Energy FCF yield

115
110

4%

105

3%

100

2%

95

1%

90

0%

85

-1%

80

-2%

75

-3%

70

-4%

65
Jan-14

-5%
Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Brent ($/bbl)

Aug-14

Sep-14

Oct-14

Nov-14

'08

'09

'10

'11

'12

'13

'14e

'15e

'16e

Source: IBES

Oil prices have fallen sharply in H2 ’14, with Brent and
WTI down 25-30% from their June highs.
Table 32: J.P. Morgan oil price projections
Brent
78.3
100.3
75.0
80.0
85.0
88.0
82.0
87.8
90.0

Y/Y Chg, %
-8%

-18%
7%

WTI
74.1
93.7
72.0
76.0
80.0
81.0
77.3
80.8
80.0

Source: J.P. Morgan Commodity research. As at COB 25th Nov ‘14

26

'07

Energy FCF Yield, %

Source: Bloomberg

($/BBL)
Spot
2014
1Q15
2Q15
3Q15
4Q15
2015
2016
LT

'06

WTI ($/bbl)

Y/Y Chg, %
-4%

-18%
5%

Also, cash flow generation will likely stay under pressure
next year despite greater capex cuts by integrated
companies, as lower oil prices hurt their profitability. We
fear that sell side analysts’ hopes of positive FCF yield
for the Energy sector in ’15 will not be met.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

The sector also screens cheap on P/Book metric,
currently trading at the bottom of the historical range
relative to the overall market.

…but a lot is in the price already
Figure 67: Energy sector performance ytd vs oil price
8%

115

3%

105

-2%

95

-7%

85

-12%

75

-17%
Jan 14

65

Figure 70: Energy dividend yield relative
1.7
1.6
1.5
1.4
1.3
1.2

Feb 14

Mar 14

Apr 14

May 14

Jun 14

Jul 14

Aug 14

Sep 14

Oct 14

Nov 14

1.1

Dec 14

1.0
Stoxx600 Oil & Gas YTD total return relative to market

Brent ($) - rhs

0.9

Source: Bloomberg

0.8
95

Clearly, the Energy sector is unlikely to rebound
materially without a bottoming out in oil prices. We note,
however, that the sector has already underperformed
sharply, peaking almost to the day with the peak in oil
price, and it followed oil price all the way down.
Figure 68: European Energy 12m forward P/E relative
1.3
1.2
1.1
1.0

96

97

98

99

00

01

02

03

04

Energy Dividend yield relative to Europe

05

06

07

08

average

09

10

+1stdev

11

12

13

14

-1stdev

Source: Datastream

While lower oil prices will likely keep Energy dividends
under pressure, the sector offers some cushion to
potential cuts, with current dividend yield at 5% vs 3.3%
for the market. Our sector analysts believe that the
sector's dividends are largely covered at the current spot
oil prices.
Figure 71: Oil sector seasonality

0.9
0.8

4%

0.7

3%

0.6
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Energy 12mth Fwd P/E rel

Median

+1stdev

2%
1%

-1stdev

Source: IBES

2.8%

0.2%

0%
-1%

Given the big recent underperformance, Energy
valuations have improved materially, to be back to the
bottom of the range on P/E relative metrics.

-1.0%

-2%
-3%

-2.3%
Q1

Q2

Q3

Q4

Oil & Gas relative to mkt median performance

Figure 69: Energy P/Book relative

Source: Datastream

1.5

We note that the Oil sector tended to perform well in the
first half of the year. Seasonality is soon likely to become
a support.

1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
95

96

97

98

99

00

01

02

03

Energy P/Book relative to Europe

04

05

06

average

07

08

09

10

+1stdev

11

12

13

14

-1stdev

Source: Datastream

27

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 73: Speculative positions on Copper futures contracts

Materials - Neutral

50000
40000

Table 33: Materials sector snapshot

30000

15e
Ytd
Perf

EPS
Gr

4%

P/E

FCF
yield

P/B

10000

11%

14.0

3.7%

5.4%

1.8

0

N

-2%

10%

13.7

3.4%

6.1%

1.8

-10000

Chemicals

N

0%

9%

15.6

3.1%

5.0%

2.7

-20000

Cons Mat
Met&Min

OW

6%

30%

15.5

2.6%

7.8%

1.3

-30000

N

-6%

9%

11.7

4.0%

6.8%

1.3

-40000

Allocation
Europe
Materials

20000

Div
Yield

93

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

Copper - non commercial net long positions

Our big picture view is that commodity sectors will
remain under structural pressure due to the strong USD
regime and the continued slowing in China. We believe
the current situation is similar to the ’95-’00 period.
Within this, Materials have already dramatically
underperformed over the past 3 years, and the near term
potential for more Chinese monetary easing keeps us
from being outright short. However, we would sell into
any meaningful rallies in the space.
Mining - Neutral

Source: Bloomberg

Investor positioning in commodity space appears to be
bearish again. As per the above chart, speculative shorts
on copper are back to the lows of '02 and '09. Both were
followed by a strong rebound in Mining stocks and in
commodity prices.
Figure 74: Chinese copper inventories
290,000
250,000
210,000

Figure 72: Mining price relative

170,000

230
210

130,000

190

90,000

170

50,000
150

10

11

12

13

14

Chinese Copper Inventory (tonnes)

130

Source: Bloomberg

110
90
06

07

08

09

10

11

12

13

14

MSCI Europe Met&Min price rel

Source: Datastream

We started the year UW Mining, the third year in a row
with a cautious stance, but tactically upgraded in May
following the sector’s sharp underperformance. After a
brief rebound since May, Miners have rolled over again,
to be back to the price relative lows seen in ‘09.

28

Also, Chinese commodity destocking has gone a long
way already, with inventories at low levels.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 75: Chinese copper imports

Figure 77: Commodity index vs DXY

550

60%

-20%

-15%
40%

500

-10%
20%
-5%

450
0%

0%

400
5%
-20%
10%

350
-40%

15%

300

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

-60%

20%
02

03

04

05

06

Chinese Copper Imports Th. Tonns (Unwrought Copper)

07

08

09

10

JPM commodity index %yoy

11

12

13

14

DXY %yoy (rhs, rs)

Source: Bloomberg

Source: J.P. Morgan, Bloomberg

We note that Chinese commodity imports have started to
increase again.

Also, our expectation of further dollar strengthening
points to continued downside to commodity prices.

In the very short term, some of these oversold indicators,
the helpful time of the year with seasonal restocking into
Chinese New Year and the potential further monetary
easing could support the sector.

Figure 78: Mining EPS vs Metal prices

Figure 76: Cement consumption vs GDP per capita - China vs
Spanish and Irish bubbles
2.0

China (1985-2013e)

120%

200%

100%
150%
80%
60%

100%

40%
50%
20%
0%

0%

Ireland (1985-2013e)

1.8

China 2013e

Spain (1985-2013e)

-20%

Cement Consumption per capita (tonnes)

-50%
1.6

Peak for Spain in 2006

-40%
-60%

1.4

-100%
97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

Peak for Ireland in 2006

1.2

CRB Metals price index %yoy - 5m brought forward (rhs)
1.0

Metals&Mining 12m Fwd EPS %yoy

Source: CRB, IBES

0.8

Ireland 2013e

0.6
0.4
0.2

Spain 2013e

0.0
0

10000

20000

30000
40000
GDP Per Capita (USD)

50000

60000

Source: J.P. Morgan

In an environment of low commodity prices, we expect
Mining’s profitability to remain under significant
pressure. Here, IBES estimates of nearly 30% cumulative
EPS growth for the sector over the next two years look
too optimistic. The cash return thesis is being
increasingly challenged by the stubbornly low
commodity prices.

However, we believe that the long standing concerns
over Chinese structural imbalances, credit excess and
overcapacity in many parts of the economy, are not going
away.

29

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 79: Mining P/E relative

Figure 81: Chemicals EPS growth vs oil price
100%

1.6

80%

80%

1.4

60%

60%
40%
40%

1.2

20%

20%

1.0

0%

0%

-20%

0.8

-20%

-40%
-40%

0.6

-60%
-60%

-80%

0.4
95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

-100%

-80%
03

Metals & Mining 12mth Fwd P/E rel

Median

+1stdev

04

05

06

07

08

09

10

11

12

13

14

15

-1stdev
JPM oil index %yoy (1m brought forward)

Source: IBES

Chemicals 12m Fwd EPS %yoy

Source: IBES, Datastream. *Dotted line represents J.P. Morgan forecasts

Mining is not particularly attractively priced, in our view
currently trading in line with its’ long term P/E relative.
In the very short term, potential for further policy support
prevents us from being outright short the sector, but we
would use any rally to reset shorts.
Chemicals – Neutral

The prospect of lower oil prices next year does not bode
well for the sector, in our view. The derivatives of oil,
through naphtha, are used as inputs or raw materials. A
lower oil price is typically passed through to customers,
in terms of falling selling prices.
Figure 82: US and European Chemicals EBIT margins

Figure 80: European chemicals volume and pricing growth vs
EPS growth

16%
15%

30%

70%

14%

20%

50%

13%

30%

12%

10%

11%

-10%

10%

-30%

9%

-50%

8%

10%
0%
-10%
-20%

'05
-30%
Q308

Q109

Q309

Q110

Q310

Chemicals Volume, % y/y

Q111

Q311

Q112

Q312

Chemicals Pricing, % y/y

Q1 13

Q3 13

Q1 14

Q3 14

EPS %yoy (rhs)

Source: J.P. Morgan, IBES

We remain unexcited by Chemicals going into next year.
We believe that their pricing will continue to be under
pressure due to soft demand and still significant
overcapacity.

30

'06

'07

'08

'09

'10

'11

'12

'13

'14e

-70%
Q108

European Chemicals EBIT Margins

US

Source: IBES

European players will likely continue to see margin
pressure compared to US Chemicals. US peers benefit
from lower production costs thanks to the shale gas ramp
up.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 83: Chemicals 12m Fwd P/E relative

Figure 84: Construction Materials EV/EBITDA relative

1.4

1.4

1.3

1.3

1.2

1.2

1.1

1.1

1.0

1.0

0.9

0.9

0.8

0.8

0.7

0.7

0.6
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0.6
01

Chemicals 12mth Fwd P/E rel

Median

+1stdev

02

03

04

05

06

07

08

09

10

11

12

13

14

-1stdev

Source: IBES

Cons Materials EV/EBITDA rel to Europe

Chemicals’ fundamentals remain uninspiring, but we
acknowledge that their valuations have improved
recently. This should limit the downside to share prices.
Also, the sector is highly correlated to PMIs and could
see a rebound if the region’s PMIs stabilize.
Construction Materials – Overweight
Table 34: Construction Materials geographical sales exposure
Western
Europe

North
America

Developed
Asia

EM

CRH

45%

44%

0%

11%

Heidelberg cement

31%

24%

9%

37%

+1sd

The sector valuations do not look particularly cheap, but
our sector analysts see limited downside risks to ‘15
consensus earnings estimates, following the sharp cuts
seen earlier this year.
Figure 85: US construction spending and construction materials
relative performance
1300

100

1200

90

1100

Holcim

25%

18%

10%

48%

Lafarge

20%

21%

0%

59%

900

Construction Materials are offering an attractive riskreward at present, in our view. They are one of best plays
on Eurozone recovery. Construction activity could
bottom out in Europe next year, while it is expected to
remain strong in the US and to stabilize in EM.

-1sd

Source: IBES

1000

Source: Worldscope, Bloomberg

Avg

80
70
60

800

50

700
600

40
99

00

01

02

03

04

05

06

US construction spending ($ bn, saar)

07

08

09

10

11

12

13

14

Europe Construction Materials relative (rhs)

Source: Census, Datastream

US construction plays, Heidelberg Cement and CRH,
should benefit from further strong recovery in US
construction activity. Historically, the sector tended to
perform well in the environment of improving US
construction spending. We note that a gap between the
two series has opened up most recently.

31

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 87: Industrials EPS growth vs Euro IP

Industrials - Overweight
Table 35: Industrials sector snapshot
15e
Ytd
Perf

EPS
Gr

P/E

Div
Yield

FCF
yield

P/B

4%

11%

14.0

3.7%

5.4%

1.8

OW

-2%

14%

14.8

3.2%

6.4%

2.7

Cap Goods

OW

-2%

14%

14.8

3.2%

7.0%

2.7

Transport

OW

4%

17%

13.6

3.2%

4.1%

2.2

N

-5%

11%

16.3

3.1%

6.4%

5.2

Allocation
Europe
Industrials

Business Svs

60%

15%

40%

10%

20%

5%

0%

0%

-20%

-5%

-40%

-10%

-60%

-15%
96

97

98

99

00

01

02

03

04

05

06

07

08

Industrials 12m Fwd EPS %yoy

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

09

10

11

12

13

14

15

Euro IP %yoy (rhs)

Source: IBES, J.P. Morgan

We are OW Industrials, mainly through the Capital
Goods and the Transport - in particular the Airlines. We
note that the sector’s relative valuations are the most
attractive in 10 years, it is not a consensus long anymore
and the prospect of a pickup in global growth, coupled
with a lower Euro, could be the supports next year.
Capital Goods – Overweight

We think that the sector is offering an attractive riskreward into next year. Our expectation of a recovery in
Eurozone IP points to an improving EPS momentum for
Capital Goods. We believe the inventories are getting
depleted as the consumer spend has held up well recently
and the fall in commodity prices will likely boost
spending further into next year.

Figure 86: Capital Goods 12M Fwd P/E relative

Figure 88: Capital Goods EBIT/Margins
9%

1.4
1.3

8%

1.2
7%

1.1
1.0

6%

0.9
5%

0.8
4%

0.7

03

0.6

Capital Goods 12mth Fwd P/E rel

Median

+1stdev

-1stdev

Capital Goods have underperformed the market sharply
this year, derating further. The sector is now trading on
the cheapest relative P/E multiple in 10 years.

32

05

06

07

08

09

10

11

12

13

14e

European Capital Goods EBIT margins, %

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Source: IBES

04

Source: IBES

Capital Goods’ profit margins have moderated in the last
3 years and are below their last cycle peak. Our analysts
expect improving margin trend going forward due to a
favorable base, improving topline and the FX tailwind.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 89: Eurozone capex share of GDP

On the flipside, the US capex cycle appears to be more
mature, with non-residential capex share of GDP already
back to above historical norms.

17%

In addition, Chinese demand will likely stay soft.
Chinese fixed investment share of GDP is currently near
50%, and in our view there is only one direction this can
go from here.

16%

15%

14%

Figure 92: Capital Goods price relative vs US bond yields

13%

25%

60%

20%

12%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Eurozone non-residential fixed investment % of GDP

40%

15%
10%

average

20%

5%

Source: Eurostat

0%

Regionally, Eurozone capex could show some pickup. It
is depressed in the historical context as a share of GDP
and is unlikely to move much lower from here.

0%

-5%
-20%

-10%
-15%

-40%

-20%
-25%

-60%
96

Figure 90: Eurozone capex growth vs corporate profits

97

98

99

00

01

02

03

04

05

06

Capital Goods relative, %6mom

15%

40%

07

08

09

10

11

12

13

14

15

US 10 Yr Bdy, %6mom, rhs

Source: Datastream

30%

10%

20%
5%

10%

0%

0%
-10%

-5%

We note that Capital Goods were historically one of the
most positively correlated sectors to bond yields. If
JPM’s forecast of rising US yields next year materializes,
the sector will likely outperform.

-20%
-10%

-30%

-15%

-40%
92

94

96

98

00

02

04

06

08

10

12

14

Figure 93: Mining capex projections
60

53

50

EMU Non-Residential fixed investment (%yoy)
MSCI EMU 12m Fwd EPS (%yoy, rhs) - brought forward by 1Q

44
37

40

Source: IBES, Eurostat *dotted line represents JPM forecasts

30

The combination of improving credit dynamics,
accelerating corporate profit growth and rising utilization
rates points to a turn in Eurozone capex ahead.

20

19

32

32

22

26

27

2016E

2017E

10
0
2009

2010

2011

2012

2013

2014E

2015E

Cumulative Capex of BHP, RIO, GLEN ($bn)

Figure 91: US non-residential capex share of GDP

Source: J.P. Morgan

16%

Within Capital Goods, we are particularly positive on
consumer plays, US construction related names and on
Aerospace & Defense, while we stay cautious on Mining
and Energy capex plays.

15%
14%
13%
12%
11%
10%
70

73

76

79

82

85

88

91

94

97

US Nonresidential fixed investment % of GDP

00

03

06

09

12

Long term average

Source: BEA

33

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Transports – Overweight
Figure 94: Transports 12m Fwd P/E relative
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Transport 12mth Fwd P/E rel

Median

+1stdev

-1stdev

Source: IBES

We are Overweight Transports in Europe. The sector is
trading on the cheapest relative P/E in more than 10
years.
Figure 95: Airlines relative performance vs oil price
40%

-100%
-80%

30%

-60%
20%
-40%
10%

-20%

0%

0%
20%

-10%

40%
-20%
60%
-30%

80%

-40%

100%
96

97

98

99

00

01

02

03

04

05

Global Airlines relative %yoy

06

07

08

09

10

11

12

13

14

Oil price %yoy (rhs,RS)

Source: Datastream

The overall Transport sector, and Airlines in particular,
should be one of the main beneficiaries of lower oil
prices.

34

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Autos – Overweight

Consumer Discretionary Overweight

Figure 97: Sectoral correlation to Eurozone Composite PMI
Automobile

Table 36: Discretionary sector snapshot

90%

Banks

88%

Met&Min

15e
Allocation
Europe

85%

HPC

78%

Business Services

Ytd
Perf

EPS
Gr

P/E

Div
Yield

FCF
yield

P/B

Chemicals

4%

11%

14.0

3.7%

5.4%

1.8

Div Fin

13.6

3.0%

5.4%

2.5

76%
74%

Transport

73%
70%

Cap Goods

70%

Euro Area

70%

Discretionary

OW

3%

13%

Automobile

OW

2%

13%

9.2

3.3%

4.4%

1.4

Food Bev&Tob

69%

Cons Durables

OW

1%

16%

16.5

2.4%

6.7%

3.0

Food Drug Ret

69%

N

4%

13%

16.5

3.4%

6.9%

4.2

Media
Retailing

OW

-1%

12%

18.9

3.3%

4.6%

5.0

Hotels, Rest&Leis

OW

11%

11%

19.0

2.5%

3.4%

4.6

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

Retailing

67%

Healthcare

67%

Cons Mat

64%

Real Estate

59%

Insurance

56%

Cons Durables

55%

Energy

Big picture - we believe that Consumer Cyclicals stocks
stand to benefit from the falling oil prices, resilient
labour markets in the US, bottoming out in Eurozone
activity and the stronger USD.

54%

Telecoms

46%

Media

45%

Hotels,Rest&Leis

42%

Utilities

40%

Software

39%

Semicon

21%

Tech Hardware

Figure 96: Euro area consumer credit growth

7%
0%

20%

10%

40%

60%

80%

100%

Earnings correlation to Eurozone Composite PMI

8%

Source: Markit, IBES

6%

Autos, along with Banks, are the two sectors which
display the highest sensitivity to the Eurozone business
cycle. We believe the disappointment on this front seen
in '14 will not be repeated next year.

4%
2%
0%
-2%

Figure 98: Autos EV/EBITDA relative

-4%
-6%
04

05

06

07

08

09

10

11

12

13

14

Euro Area consumer credit (%y/y)

Source: ECB

0.9
0.8
0.7
0.6

In addition, the turn in Eurozone’s credit cycle will likely
provide a boost to consumer spending into '15.

0.5
0.4
0.3
0.2

01

02

03

04

05

06

Autos EV/EBITDA rel to Europe

07

08
Avg

09

10

11
-1sd

12

13

14
+1sd

Source: IBES

Autos’ valuations appear attractive; the sector has shown
one of the most significant deratings of the 24 European
level 2 sectors ytd.

35

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 99: Eurozone car sales and unemployment rate

Figure 101: Steel prices

125

5

115

6

690
680

7

105

670
8

95

9
85
75

10

650

11

640

65

12

55

13
95

96

97

98

99

00

01

02

03

04

Euro Area car registrations, ('000s)

05

06

07

08

09

10

11

12

13

660

14

630
620
Jan 14

Eurozone Unemployment rate, % (rhs) - rs

Apr 14

Jul 14

Source: Eurostat, ECB

Oct 14

Hot-Rolled Coil Steel Index

Source: Bloomberg

We expect improving labor markets in Europe to help
volume growth next year.

Lower commodity prices will benefit the profitability of
the Auto sector, in our view. Raw commodities account
for around 60% of COGS.

Figure 100: Spanish car sales and unemployment rate
125

5

115
105

10

95
85

Figure 102: Tyre manufacturers’ price relative vs Oil price
100%

-100%

50%

-50%

15

75
65

20

55

0%

45

0%

25

35
25

30

-50%

50%

-100%

100%

-150%

150%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Spain

Spanish Unemployment rate, % (rhs) - rs

Source: Eurostat, ECB

Car sales appear to have bottomed out already in the
periphery, as the unemployment rate started to fall. In
addition, lower energy costs are a welcome development
for global final demand, as they boost consumer
purchasing power through higher disposable incomes.
Autos are likely to be one of the key beneficiaries here.
Table 37: European Autos' regional sales split
as % of
Total

Western
Europe

North
America

EM

of which
China

BMW

39.4%

21.8%

29.9%

21.3%

8.9%

Daimler

43.7%

21.0%

25.1%

14.7%

10.2%

Fiat

20.1%

48.5%

28.8%

3.9%

2.6%

PSA

53.6%

0.2%

42.2%

19.2%

4.0%

Renault

50.5%

0.9%

43.4%

1.3%

5.2%

Volkswagen

32.6%

9.5%

52.4%

34.8%

5.5%

Others

Source: Worldscope, Bloomberg, J.P. Morgan

Our sector analyst expects EM volumes to stay under
pressure in the near term, but we think that the falling
Euro will help mitigate some of the negative impact for
Auto exporters.
36

-200%

200%
96

97

98

99

00

01

02

03

04

05

06

07

European tyres manufactures relative %yoy

08

09

10

11

12

13

14

WTI %yoy (rhs, rs)

Source: Datastream

Tyre manufacturers and Auto parts will likely benefit the
most from the lower oil price, as it reduces their input
costs significantly.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

With two thirds of sales coming from outside Europe,
Luxury Goods companies look set to benefit more than
most other sectors from further Euro weakness.

Luxury Goods – Overweight
Figure 103: Luxury Goods price relative to Europe

Figure 105: HK luxury watches sales vs Luxury goods EPS
growth

128
123
118

80%

80%

60%

60%

40%

40%

20%

20%

113
108
103

0%

98
Jan 12

Jul 12

Jan 13

Jul 13

Jan 14

Jul 14

Luxury Goods price relative to MSCI Europe

0%

-20%

-20%

-40%

-40%

-60%

Source: Datastream

-60%
05

We started the year cautious on Luxury Goods, but
upgraded the sector to OW in October. The sector has
struggled to perform over the past two years.
Figure 104: Luxury Goods P/E relative
1.8
1.6

06

07

08

09

10

11

Hong Kong Retail Sales Value Jewelry Watches & Clocks %yoy

12

13

14

Consumer Durables 12m Fwd EPS %yoy (rhs)

Source: IBES, Bloomberg

Concerns about the health of the mainland Chinese
consumer and the anti-corruption campaign are unlikely
to go away. However, we note that HK luxury watch
sales – a good leading indicator of luxury goods earnings
- have rebounded again.

1.4

Figure 106: Luxury Goods relative performance vs Japanese
consumer sentiment

1.2
1.0

80%

0.8

50%

0.6
95

96

97

98

99

00

01

02

03

04

05

Luxury 12mth Fwd P/E rel

06

07

08

Median

09

10

+1stdev

11

12

13

14

30%

40%

-1stdev

Source: IBES

10%
0%
-10%

Luxury Goods' valuations have derated sharply and the
sector is now trading on the cheapest P/E relative in
almost 10 years.

-40%

-30%

-80%

-50%
96 97

Table 38: Luxury goods' regional sales split

98 99

00

01 02

03 04

Luxury Goods rel to Europe (%yoy)

% Sales From
Company

05

06 07

08 09

10

11 12

13 14

Japanese consumer sentiment (%yoy,RHS)

Source: Datastream, ESRI

EMEA

Japan

Americas

Asia Pacific

LVMH

30%

12%

21%

36%

Richemont

37%

8%

15%

40%

Swatch

35%

8%

8%

58%

Hermès

36%

12%

17%

33%

Burberry

36%

-

25%

39%

Tod's

55%

4%

9%

32%

Pandora

38%

-

50%

12%

Hugo Boss

61%

-

24%

13%

Luxottica

17%

-

57%

13%

Also, Japanese consumer confidence appears to be
bottoming out most recently.

Source: Worldscope, Bloomberg, J.P. Morgan

37

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Retail – Overweight
Figure 107: Oil price vs retail sales
-25

8

-20

7

-15

We see headwinds for the UK consumer ahead of the
upcoming General Elections and the potential start of
policy normalisation, but the sector has already
performed rather poorly. Within the UK, we have a
preference for domestic consumer and the global plays
relative to the commodities and the long duration sectors.

6

-10

5

Hotels, Restaurants & Leisure – Overweight

-5
4

0

3

5
10
15
11

12

13

Crude Oil Price, %3m/m (rs)

Figure 110: Hotels, Restaurants & Leisure relative performance
and US consumer confidence

2

20%

40%

1

15%

30%

10%

20%

14

Global (ex-Japan) Real Retail Sales, %3m/m, saar (rhs)

Source: J.P. Morgan

We expect strengthening consumer activity over the next
few quarters, partly helped by lower oil price.
Figure 108: Eurozone consumer spending vs confidence

5%

10%

0%

0%

-5%

-10%

-10%

-20%

-15%

-30%

-20%

5

5

4

0

3

-5

2

-10

1

-15

-40%
03

04

05

06

07

08

09

Hotels,Restaurants & Leisure rel to Europe %yoy

0

-20

-1

-25

-2

-30

-3

-35
95

96

97

98

99

00

01

02

03

04

05

06

Euro Area Consumer Spending, %q/q, 2qma

07

08

09

10

11

12

13

14

11

12

13

14

15

US consumer confidence %yoy (rhs)

Source: Datastream, Bloomberg

Hotels, Restaurants & Leisure should benefit from the
strong consumer backdrop next year, particularly in the
US where the sector is highly exposed.
Media – Neutral
Figure 111: Eurozone advertising spend and GDP growth

Eurozone Consumer Confidence (rhs)

Source: Eurostat, Bloomberg

Consumer spending is likely to continue recovering next
year in Eurozone, helped by the improving employment
and credit conditions.
Figure 109: UK consumer confidence vs UK retail performance
30

10

60%

10%

5%

8%

4%

6%

3%

4%

2%

2%

1%

0%

0%

-2%

-1%

-4%

-2%

-6%

-3%

-8%

20

40%

10

20%

0

0%

-4%

-10%

-5%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14e 15e
Euro-area advertising spending (%yoy)

EMU Real GDP (%yoy,rhs)

Source: J.P. Morgan

-10

-20%

-20

-40%

-30

-60%
01

02

03

04

05

06

07

08

UK GFK consumer confidence (ch oya)

Source: GFK, Datastream
38

09

10

11

12

13

14

MSCI Retailing rel to UK (%yoy, rhs)

We are Neutral Media, with a preference for cyclical
plays - TV broadcasters and advertising agencies, over
the more defensives plays – pay TV and publishers.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 112: Eurozone advertising spending
120
110
100
90
80
70
60
50
2007

2008

2009

2010

2011

Germany (Advertising Spending - rebased)

2012

Spain

2013
Italy

2014e
France

2015e

2016e

UK

Eurozone

Source: J.P. Morgan

Advertising trends are stabilizing in most Eurozone
countries, we expect this to continue into next year.
Figure 113: Mediaset Italy and Mediaset Spain advertising
revenue
20%

60%

15%
40%
10%
5%

20%

0%
0%
-5%
-10%

-20%

-15%
-40%
-20%
-25%

-60%
'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

Mediaset (Italian Business) Advertising revenue (%y/y)

'11

'12

'13

'14

Mediaset Espana (rhs)

Source: Company reports, J.P. Morgan

Spanish advertising growth is already positive. Italy
appears to be bottoming out as well.
Figure 114: Media 12m Fwd P/E relative
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
95

96

97

98

99

00

01

02

Media 12mth Fwd P/E rel

03

04

05

06

Median

07

08

09

+1stdev

10

11

12

13

14

-1stdev

Source: IBES

The sector's valuations are not particularly stretched,
trading in line with historical relatives.

39

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 116: Food, Beverages and Tobacco EV/EBITDA relative to
Europe

Consumer Staples Underweight

1.9
1.8
1.7

Table 39: Staples sector snapshot

1.6
1.5
1.4

15e
Ytd
Perf

EPS
Gr

4%

P/E

FCF
yield

P/B

11%

14.0

3.7%

5.4%

1.8

UW

6%

8%

18.5

3.0%

5.4%

3.7

Food Drug Ret

UW

-21%

6%

13.3

3.4%

5.9%

1.5

Food Bev&Tob

UW

10%

8%

19.1

3.1%

5.5%

4.3

N

4%

8%

19.7

2.3%

4.8%

3.9

Allocation
Europe
Staples

HPC

1.3

Div
Yield

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

Staples have outperformed the market ytd, benefiting
from the broader rotation into defensive growth style.
However, we find Staples’ fundamentals poor and are
UW the sector into ’15, with a preference for HPC over
Food producers and over Food retail.

1.2
1.1
1.0
0.9
0.8
01

02

03

04

05

06

07

08

Fd Bev & Tob EV/EBITDA rel to Europe

09

10

11

Avg

12

13

-1sd

14

+1sd

Source: IBES

On EV/EBITDA metrics, Staples also look expensive
relative to the market, trading near the top of their
historical range.
Figure 117: Staples profit margins vs sales growth
8%

23%

6%
22%

4%

Food, Beverages & Tobacco - Underweight

2%

Figure 115: Food, Beverages and Tobacco 12m Fwd P/E relative
to Europe

21%

0%
-2%

20%

-4%

1.7

-6%

1.5

-8%

19%

-10%

1.3

18%
'03

1.1

'04

'05

'06

'07

'08

Food, Bev & Tobacco Sales growth, %

'09

'10

'11

'12

'13

'14e

Food, Bev & Tobacco EBITDA / Sales (rhs)

0.9

Source: IBES

0.7

Staples' margins have been resilient so far, despite
weakening top line growth. We think that this will start
to change. Margins could come under increasing pressure
as EM volume growth slows further and pricing
environment gets tougher.

0.5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Food Bev&Tob 12mth Fwd P/E rel

Median

+1stdev

-1stdev

Source: IBES

Staples' valuations are unattractive. Their P/E has rerated
back to the outright expensive territory relative to the
overall market.

40

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 118: CRB Food price index vs Food PPI

Food retail - Underweight

40%

8%

30%

6%

20%

4%

10%

2%

0%

0%

-10%

-2%

5

-20%

-4%

4

-30%

-6%

Figure 120: UK Food retail capex to depreciation vs sales growth
8

25%

7

20%

6
15%

10%

-40%

-8%
84

86

88

90

92

94

96

98

00

02

CRB Food %6mom (2m lead, rhs)

04

06

08

10

12

14

5%
3
0%

2
1

Food PPI %6mom

-5%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14e

Source: Eurostat, CRB, Bloomberg
UK Food retail Capex/Depreciation

Soft commodity prices have rolled over again. This
points to a challenging pricing environment ahead, for
both food producers and the retailers.

Source: Worldscope, IBES

Figure 119: Staples 12m EPS vs soft commodity prices

Food retailers underperformed sharply ytd, to be down
21% in absolute terms. We stay UW as we believe the
sector's structural outlook remains poor, particularly in
the UK. The combination of intense competition,
deflationary trends and unwinding of excess capacity will
continue to drag the sector's margins lower in our view.

35%

70%

25%

50%

15%

30%

5%

10%

2%

-5%

-10%

1%

-15%

-30%

0%

-50%

-1%

-25%
03

04

05

06

07

08

Staples 12m Fwd EPS %yoy (1m lag)

09

10

11

12

13

Sales growth %yoy (rhs)

14

JPM Agricultural commodity index %yoy ()rhs)

Source: IBES, J.P. Morgan

We expect the deflationary food pricing trends to weigh
on Staples’ profitability. We see downside risks to IBES
estimates of 8% EPS growth for Food producers in '15.

Figure 121: UK food retail sales vs overall retail sales

-2%

-3%

-4%
05

06

07

08

09

10

11

12

13

14

UK Food retail sales vs overall retail sales %yoy, 3mma

Source: ONS

We note that despite resilient UK consumer backdrop,
food spending appears to be on a downtrend.

41

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

HPC - Neutral
Figure 122: HPC 12m Fwd P/E relative
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
95 96 97 98 99 00 01 02

03

04

Household Products 12mth Fwd P/E rel

05

06

07

08

Median

09

10

11

+1stdev

12

13

14
-1stdev

Source: IBES

Within Staples, we keep a relative preference for the
HPC subsector. We find its’ valuations to be more
attractive than the rest of the sector and its earnings
outlook is more favorable due to more resilient pricing
power and diversified geographical revenue exposure.

42

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

The outperformance was largely due to the P/E rerating,
rather than improving profitability. Pharma was still
outright cheap at the start of the year, but its relative P/E
is now looking expensive relative to historical norms.

Healthcare - Underweight
Table 40: Healthcare sector snapshot
15e
Allocation
Europe
Healthcare

UW

Figure 125: Healthcare PEG relative

Ytd
Perf

EPS
Gr

P/E

Div
Yield

FCF
yield

P/B

4%

11%

14.0

3.7%

5.4%

1.8

2.0

16%

7%

17.3

3.0%

6.2%

4.6

1.8

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

2.2

1.6
1.4

We were OW Healthcare for most of the year, but cut the
sector to UW in October. We stay UW into ’15.

1.2
1.0
0.8

Figure 123: European level 1 sectors ytd performance

0.6
0.4
95

Healthcare

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

16%

Utilities

Healthcare PEG ratio relative

14%

median

+1stdev

-1stdev

Source: IBES
Telecoms

6%

Staples

Healthcare’s PEG relative is back to the top of its
historical range vs the overall market. Our sector analysts
see little near term potential for upward revisions to long
term earnings growth expectations, due to lack of
visibility with respect to pipeline and new drugs
launches.

6%

Europe

4%

IT

3%

Financials

3%

Discretionary

3%

Industrials

-2%

Materials

-2%

Figure 126: Healthcare EPS relative vs US drug CPI
80%

8%

60%

Energy

6%

-5%
40%

-10%

-5%

0%

5%

10%

15%

4%

20%
20%

YTD Performance, %

2%

Source: Datastream. As at of 25th Nov ‘14

0%
0%

Healthcare performed strongly this year, up 16% vs 4%
for the overall market.

-20%

Figure 124: Healthcare 12m Fwd P/E relative

-60%

-2%

-40%

-4%
96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

1.6

Europe Healthcare EPS relative (%yoy)

1.5

US prescription drugs CPI rel (%yoy,rhs)

Source: IBES, Bloomberg

1.4
1.3

Our analysts worry that drug pricing in the US could
come under increased pressure, following the sharp
rebound seen this year.

1.2
1.1
1.0
0.9
0.8
95

96

97

98

99

00

01

02

Healthcare 12m Fwd P/E relative

03

04

05

median

06

07

08

09

+1stdev

10

11

12

13

14

-1stdev

Source: IBES

43

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 127: Healthcare relative performance vs DXY
50%

25%

40%

20%

30%

15%

20%

10%

10%

5%

0%

0%

-10%

-5%

-20%

-10%

-30%

-15%

-40%

-20%

-50%

-25%
96

97

98

99

00

01

02

03

04

05

06

07

Healthcare relative %yoy

08

09

10

11

12

13

14

DXY (%yoy, rhs, rs)

Source: Datastream, Bloomberg

On the positive side, Healthcare is likely to benefit from
further strengthening in the dollar next year, as the bulk
of the sector’s revenues are USD denominated.

44

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 129: Banks price to Book relative

Financials - Overweight

1.0
0.9

Table 41: Financials sector snapshot

0.8

15e
Allocation
Europe

Ytd
Perf

EPS
Gr

P/E

Div
Yield

P/
B

4%

11%

14.0

3.7%

1.8

Financials

OW

3%

17%

11.1

4.5%

1.0

Banks

OW

2%

23%

10.8

4.7%

0.9

Div Fin

OW

-1%

31%

11.8

3.5%

1.1

Insurance

OW

6%

5%

10.5

4.8%

1.2

N

15%

7%

19.6

4.2%

1.2

Real Estate

0.7
0.6
0.5
0.4
0.3
95 96 97

98 99 00

01 02 03

04 05 06

European Banks P/Book rel

07 08 09

Median

10 11 12

+1stdev

13 14
-1stdev

Source: Datastream

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

We are OW Financials and like both Banks and
Insurance subsectors. In contrast, we recommend a
Neutral stance on real Estate into ’15 as it has performed
strongly and it might be sensitive to a potential increase
in interest rates. Within Banks, we focus our OW on the
continental banks, and are relatively more cautious on the
UK.

Eurozone Banks' valuations are attractive, in our view.
The sector is trading at a significant P/Book discount to
historical relatives. We think that Banks offer potential
for multiple rerating next year.
Figure 130: Eurozone banks leverage
1.33

20
19

1.28

18

Banks – Overweight

1.23

17

1.18

Figure 128: Eurozone banks price relative ytd

16
15

1.13

14
111

1.08

109

1.03

13
12
98

99

00

107

01

02

03

04

05

06

07

Eurozone Loan to Deposit Ratio, %

105

08

09

10

11

12

13

14

Eurozone banks leverage, % (rhs)

Source: ECB

103
101
99
Jan 14

Feb 14

Mar 14

Apr 14

May 14

Jun 14

Jul 14

Aug 14

Sep 14

Oct 14

Nov 14

MSCI Eurozone Banks price relative

Source: Datastream

Eurozone Banks gave up all of their ytd gains in the last
month. We think that the selloff post the stress test and
AQR results was largely due to heavy positioning and the
investor concern over the lack of the new catalysts to
support the share prices going forward. We see the recent
correction as an opportunity to increase exposure to the
sector.

The dilution fears and balance sheet concerns should be
largely behind us. We believe that the stress tests were
credible and that the sector’s share count is now safe.
Figure 131: % change in Financials credit spreads vs earnings
40%

0
50

20%
100
0%

150
200

-20%
250
-40%

300
350

-60%
400
-80%

450
04

05

06

07

08

EMU Banks 12m Fwd EPS %yoy

09

10

11

12

13

14

15

Euro Financials HG spreads (brought Fwd by 6m, rhs, rs)

Source: IBES, J.P. Morgan

45

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

We expect further improvement in Banks' costs of equity
due to the lower funding costs, which will boost earnings
materially. Our fixed income analysts expect a strong
take-up at the upcoming December T-LTRO, of around
€190bn, with the money being used for carry trades and
increased lending activity.

Figure 133: Eurozone Banks ROE vs private loan growth
14%

20%

12%

18%

10%

16%
14%

8%

12%

6%

Figure 132: Banks performance vs Itraxx Senior financial spreads

8%

2%

250

6%

0.021

230

0.019

210

0.017

190

0.015

170

0.013

150

0.011

130

0.009

110

0.007

90

0.005

70
Jul 11

10%
4%

0.003
Jan 12

Jul 12

SX7E Index

Jan 13

Jul 13

Jan 14

Jul 14

1/Senior Financials 5Y CDS Swap Spread (rhs)

0%

4%

-2%

2%

-4%

0%
99

00

01

02

03

04

05

06

07

08

09

Total credit to private sector - %y/y

10

11

12

13

14

Eurozone banks ROE (%) - rhs

Source: ECB, Datastream

There was historically a strong positive correlation
between Banks’ ROE and the region’s loan growth. Here,
the positive 2nd derivative in loan growth points to
improving ROE trends.

Source: Bloomberg

We note that despite the recent underperformance of
Eurozone Banks, senior Financials CDS spreads have
remained well behaved and continue to trade at very
healthy levels, at 65bp over swaps, which is 5x tighter
than they were at the peak of the crisis in the summer of
’12.

Figure 134: Eurozone banks provisioning
80%

1.4%

70%

1.2%

60%

1.0%

50%
0.8%
40%

Table 42: Private loan growth - current vs recent trough
Private Loan growth, %yoy
Latest October

Trough

Germany

1.3%

France

-0.3%

Netherlands

0.6%
30%

Trough date

10%

-1.5%

Mar 10

0%

-1.6%

Nov 09

-0.3%

-3.4%

Sep 09

Euro Area

-1.1%

-2.4%

Jan 14

Italy

-1.9%

-4.7%

Feb 14

Greece

-3.4%

-8.4%

Jan 13

Portugal

-4.9%

-6.7%

Nov 12

Spain

-6.4%

-10.2%

Jun 13

Ireland

-7.2%

-12.3%

Dec 10

Source: ECB

We think that the market underestimates the potential for
a turn in loan growth and its likely positive impact on
Banks profitability. Private loan growth is still outright
negative in most Eurozone countries, but the second
derivative has improved, even in periphery. We note that
loan growth is already expanding in Germany.

46

0.4%

20%

0.2%

0.0%
00

01

02

03

04

05

06

07

08

Eurozone Banks provisions as % pre-provision operating income

09

10

11

12

13

Provisions as % total loans (rhs)

Source: Worldscope

We see the potential for Banks provisioning to start
coming down next year, as credit quality improves and
delinquencies fall.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 135: Spanish loan delinquencies vs unemployment rate
16%

Figure 137: Insurance relative performance vs US bond yields
30%

40%

14%

70%

30%

25%
12%

50%

20%
10%

20%

10%

30%

0%

10%

8%
15%

6%

-10%

4%

10%

2%
0%

5%
83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

-10%
-20%
-30%

-30%

13

-40%

Spain loan delinquencies % total

-50%
02

Spain unemployment rate (rhs)

03

04

Source: Bloomberg

05

06

07

08

09

Insurance rel to Europe (%yoy)

Improving macro momentum should result in lower
NPLs. We note that in Spain both the unemployment rate
and loan delinquencies appear to have peaked recently.
While we are positive on Eurozone Banks, we advise
caution on UK names. Political uncertainty ahead of the
upcoming General Elections and the likelihood of rising
BOE rates next year are expected to be drags on
sentiment for the space.
Insurance – Overweight
Figure 136: Insurance dividend yield relative

10

11

12

13

14

15

US 10yr yields (%yoy,rhs)

Source: Datastream

However, lower bond yields are ultimately a negative for
the sector due to the asset/liability duration mismatch.
Here, our expectation of a moderate move up in yields
next year points to a positive backdrop for insurers.
Figure 138: Life Insurance Price to Book and US bond yields
3.5

7.7%

3.0

6.7%

2.5

5.7%

2.0

4.7%

1.5

3.7%

1.0

2.7%

0.5

1.7%

1.6
1.5
1.4
1.3

0.0

1.2

0.7%
00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

1.1

Life Insurance P/Book

1.0

US 10Y BDY, rhs

Source: Datastream, MSCI, J.P. Morgan, dotted line indicates J.P. Morgan forecast for US
10-year bond yields

0.9
0.8
0.7
0.6
95

96

97

98

99

00

01

02

03

04

Insurance dividend yield relative

05

06

07

average

08

09

10

+1stdev

11

12

13

14

A move up in bond yields could lead to a significant
rerating potential for life insurers.

-1stdev

Source: Datastream

Insurance benefited from the search for yield theme this
year, slightly outperforming the overall market. In the
near term, the sector will likely continue to be seen as an
attractive alternative to the low bond yields, in our view.
The prospect of subdued inflation bodes well for non-life
insurers, due to low claims inflation while pricing
remains healthy.

47

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

The overall Tech sector in Europe is still trading
attractively on a P/E relative metric, but we see few
catalysts for outperformance into ’15.

IT - Neutral
Table 43: IT sector snapshot

Figure 141: Total mobile data estimates

15e
Allocation
Europe
IT

N

18

Ytd
Perf

EPS
Gr

P/E

Div
Yield

FCF
yield

P/B

4%

11%

14.0

3.7%

5.4%

1.8

3%

22%

18.0

2.0%

6.3%

3.4

10

14

UW

-3%

10%

16.3

2.0%

6.7%

3.9

8

Tech Hardware

OW

13%

37%

17.5

2.7%

5.8%

2.7

6

N

4%

34%

22.6

1.4%

6.0%

3.7

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

CAGR: 61%

12

Software

Semicon

15.9

16

7.0
4.4

4
2

2.6

1.5

2013

We have upgraded Tech sector to OW on 2nd June, but
are cutting it now back to Neutral. Within the sector, we
have a preference for Tech equipment over Semis and
Software.
Figure 139: Global IT price relative
108
107
106
105
104

2014e

2015e

2016e

2017e

2018e

Total mobile data (ExaBytes per month)

Source: Cisco VNI

Tech Hardware is our preferred area in Europe. Data
consumption by mobile users is expected to increase by
more than 50% over the next 4 years. This will require a
significant increase in Tech spending by Telecom
operators, in our view. We see Nokia in particular as a
key beneficiary from this.
Figure 142: Electronics and Semiconductor $$ content in Cars

103
102

60%

101
100

50%

99
98
Jan 14

10.8

Feb 14

Mar 14

Apr 14

May 14

Jun 14

Jul 14

Aug 14

Sep 14

Oct 14

Nov 14

MSCI World IT price relative

40%
30%

Source: Datastream
20%

Global Tech has performed very well in the 2H of the
year, up almost 10% relative to the market. We fear that
OW Tech is a crowded position nowadays.

10%
0%
1950

Figure 140: European Tech 12m Fwd P/E relative

1960

1970

1980

1990

2000

2010

2020

2030

Automotive Electronics cost as % of total car cost

3.0

Source: KPMG, Infineon and J.P. Morgan estimates

2.6

We are Neutral on Semis. Our sector analysts expect
strong revenue growth for Semi companies to come from
Automotive areas, as usage of Tech content within cars is
expected to increase substantially.

2.2
1.8
1.4
1.0
95 96

97

98

99

00

01

02

IT 12mth Fwd P/E rel

Source: IBES

48

03

04

05 06 07 08 09 10
Median

-1stdev

11

12

13

+1stdev

14

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 143: Smartphones unit and revenue growth
70%

Figure 145: SAP 12m Fwd PE relative to market

62%
55%

60%

46%

50%

40%

40%

0.0%

2.6

-2.0%

2.4

-4.0%

2.2

-6.0%

2.0

-8.0%

1.8

-10.0%

1.6

-12.0%

1.4

35%
29%

28%

30%

16%

20%
10%
0%

2011

2012

Unit growth (LHS)

2013E

2014E

Revenue growth (LHS)

1.2

ASP decline (RHS)

1.0
03

Source: J.P. Morgan

However, smartphones volume growth is expected to
decelerate further over time, which will offset some of
the benefits from higher demand from the Autos
industry.
Figure 144: PC market growth
20%
14%

15%
10%

14%

04

05

06

07

08

09

10

SAP 12m Fwd PE relative toMSCI Europe

11

12

13

14

Median

Source: IBES

We are UW on Software & Services. Our analysts are
cautious on SAP, the biggest European stock by market
cap, due to the headwinds from cloud. We note though
that one potential positive is that the P/E relative of the
stock is already near record lows.

10%

9%

7%

5%

2%

1%

0%
-1%
-5%

-4%

-10%
-10%
-15%
'06

'07

'08

'09

'10

'11

'12

'13

'14e

'15e

PC Growth with forecasts (%)

Source: Gartner, J.P. Morgan forecasts

PC growth forecasts appear to be stabilizing after 2 years
of weakness, but we don’t expect an outright acceleration
from here.

49

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 147: Telecoms 12m Fed P/E relative

Telecoms – Neutral

2.6
2.4

Table 44: Telecoms sector snapshot

2.2
2.0

15e
Allocation

Ytd
Perf

EPS
Gr

4%
6%

Europe
Telecoms

N

1.8

P/E

Div
Yield

FCF
yield

P/B

11%

14.0

3.7%

5.4%

1.8

1.2

7%

18.3

4.4%

6.9%

1.8

1.0

1.6
1.4

0.8

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

0.6

We upgrade Telecoms from UW to Neutral. The sector
has benefitted from search for yield theme this year, but
has lagged behind the other 3 defensive sectors,
Healthcare, Utilities and Staples. We see a better riskreward tradeoff for the sector into next year compared to
the other Defensives. The key support will hopefully be
the stabilization in the earnings dynamics as the sector
takes advantage of greater data usage.
Figure 146: Ytd move in European level 2 sectors' 12m Fwd P/E

95

96

97

98

99

00

01

02

03

04

05

Telecoms 12m Fwd P/E relative to Europe

06

07

08

median

09

10

11

12

13

+1stdev

14

-1stdev

Source: IBES

Telecoms’ P/E relative is back to the top of the range, to
be at the highest level in more than 10 years.
Figure 148: Telecoms EV/EBITDA relative
1.4
1.3

Telecoms
Healthcare

23%
13%
11%

Food Bev&Tob
Energy

1.1

9%

1.0

6%
4%

Food Drug Ret
Europe

0.9

3%
2%

Chemicals
Div Fin

0.8

2%
1%

Media
Cons Durables
Insurance

0.7
01

1%

-7%
-7%

Business Services
Semicon

-8%
-8%
-10%
-11%

-15%

05

06

07

08

09
Avg

10

11
-1sd

12

13

14

+1sd

Our sector analysts believe that Telecoms P/E is inflated
by the impact of amortization and high capex on
earnings. On EV/EBITDA, Telecoms are looking less
expensive and trade in line with historical relatives to the
market.

-5%
-5%
-6%

Met&Min
Software
Automobile

04

Source: IBES

-2%
-2%

Retailing
Banks

03

Telecoms EV/EBITDA rel to Europe

-1%
-1%

Cap Goods
Cons Mat

0%

15%

30%

YTD Rerating, %

Source: IBES

At face value, Telecoms’ valuations appear stretched.
This is the case even excluding Vodafone. For the second
year in a row, Telecoms enjoyed the biggest P/E rerating
out of all 24 level 2 sectors in Europe ytd, at 23%.

50

02

0%

Hotels,Rest&Leis
HPC

Tech Hardware
Transport

1.2

13%

Utilities
Real Estate

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 149: Telecoms EBITDA growth

Figure 151: Mobile data usage per capita

20%

2.4

15%
10%
5%

1.3

1.3

0%

0.7

-5%

0.6

-10%
-15%
04

05

06

07

08

09

10

11

12

13

14e

15e

16e

Sweden

Japan

Korea

US

Norway

0.3

0.3

0.3

UK

Portugal

Germany

0.2
France

Data usage GB per capita per month

Telecoms EBITDA %yoy

Source: IBES

Source: J.P. Morgan

Telecom fundamentals remain fragile and profitability
has been on a downtrend for several years. Relative to
the market, they will remain under pressure, but in
absolute terms the trends are expected to improve.

Our sector analysts believe that increase in data usage
could lead to further rerating. The data usage of
European customers is running at half the average usage
of a US customer.

Figure 150: Telecoms CPI vs overall Eurozone CPI

Improving pricing trends and the stabilizing earnings
suggest one should not be short Telecoms into ’15, but
relative valuations remain dire, preventing us from being
outright OW.

4%

2%

Figure 152: Telecoms seasonality
0%

6%
4.9%

5%
3.6%

4%

-2%

3%
2%
-4%

0.7%

1%

1.1%

0%
-1%

-6%
03

04

05

06

07

08

09

10

11

12

13

14

-2%

-0.8% -1.0%

-3%
EMU HCPI %yoy

EMU Telecoms HCPI %yoy

Source: Eurostat

-1.1%
-2.7%

-4%
Q1

Q2

Telecoms rel to Europe (%qoq avg, since 1995)

Also, we note that the Telecom pricing appears to have
bottomed out in ’13, in contrast to overall inflation which
continues to move lower.

Q3

Q4

Telecoms rel to Europe (%qoq median, since 1995)

Source: Datastream

We note that Telecoms typically enjoyed good Q4
seasonality, and the sector could come under pressure in
1H.

51

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 155: Utilities relative performance vs bond yields

Utilities - Underweight
Table 45: Utilities sector snapshot

Allocation
Europe
Utilities

UW

EPS
Gr

4%

11%

14%

4%

2.1%

111

1.9%

109

15e
Ytd
Perf

113

P/E

Div
Yield

FCF
yield

P/B

14.0

3.7%

5.4%

1.8

14.6

4.8%

5.5%

1.5

Source: Datastream, MSCI, IBES, J.P. Morgan, as at COB 25th Nov ‘14

1.7%

107
1.5%
105
1.3%
103
1.1%

101

We were positive on Utilities for most of ’14 but
downgraded the sector to UW in August. We remain
cautious into next year.

0.9%

99
97
Jan-14

0.7%
Apr-14

Jul-14

Utilities relative to Europe

Figure 153: Utilities 12m Fwd P/E relative

Oct-14

10-year bund yield (rhs)

Source: Datastream

1.4
1.3

Utilities have benefited from the search for yield theme
this year. However, with German bund yields currently at
0.7%, the lowest level in history, we think the
deflationary trade offers little upside from here.

1.2
1.1
1.0
0.9

Figure 156: Utilities dividend yield relative

0.8
0.7
95

96

97

98

99

00

01

02

03

04

Utilities 12mth Fwd P/E rel

05

06

Median

07

08

09

10

11

-1stdev

12

13

2.0

14

1.8

+1stdev

Source: IBES

1.6

Most of the Utilities’ outperformance ytd has come from
P/E rerating, rather than EPS upgrades. The sector is now
looking expensive, trading at the top of the historical
range relative to the market.

140

60

130

55

120

50

110

45

100

40

90

35

80
70
Apr 12

Oct 12

German Electricity prices (€)

Apr 13

Oct 13

Apr 14

Oct 14

Steam Coal price ($), rhs

Source: Bloomberg

At the same time, power prices remain depressed,
pointing to a challenging profitability outlook for the
sector.
52

1.0

95

65

Oct 11

1.2

0.8

Figure 154: German electricity prices vs steam coal prices

30
Apr 11

1.4

96

97

98

99

00

01

02

Utilities dividend yield relative

03

04

05

median

06

07

08

09

+1stdev

10

11

12

13

14

-1stdev

Source: Datastream

In addition, the dividend yield of Utilities has come down
substantially, to be in line with long term relatives.

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Figure 157: UK vs Eurozone Utilities

Figure 159: UK utilities relative performance vs UK bond yields
40%

-2.0%

30%

-1.5%

200
175

-1.0%

20%

150

-0.5%

10%

0.0%
125

0%

100

-10%

0.5%
1.0%

-20%

75

1.5%

-30%

2.0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

50
95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

MSCI UK Utilities relative to Market (%y/y)

UK 10Y Bond Yields vs 1 year ago (rhs, rs)

UK vs EMU Utilities price relative

Source: Datastream

Source: Datastream

Within Utilities, we keep our preference for continental
over UK names, looking for the chunk of ’08-’12
outperformance to be unwound.
Figure 158: Spanish Utilities relative performance vs Spanish
bond spreads to Germany
50
120

On the flipside, UK Utilities, which are mostly regulated,
look particularly vulnerable to a potential move up in
bond yields, if BOE/Fed raise rates. Also, the upcoming
General Elections are likely to be a source of regulatory
uncertainty for the sector. Finally, the prospect for lower
oil prices is a clear negative for UK Utilities, as UK
power prices are largely driven by gas prices, which tend
to be highly correlated to oil.

150
110
250
100
350

90

450

80

550

70

60
Jan 12

650
Jul 12

Jan 13

Jul 13

Spanish Utilities rel to EuropeanUtilities

Jan 14

Jul 14

Jan 15

Spanish 10yr Spread to Bunds (rhs, revs scale)

Jul 15
JPM forecasts

Source: Datastream, J.P. Morgan

The bulk of the peripheral spread normalization is largely
behind us, but our fixed income strategists expect another
20-30bp tightening next year, which should support the
share prices of peripheral Utilities.

53

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Top picks
Top picks by Sector Heads
Price
Aerospace & Defence
Airbus Group
48.28
Autos
Valeo SA*
98.28
Banks
UBS
16.90
Danske Bank*
167.00
Building Materials
Holcim
72.45
Business Services
Brenntag
44.22
Capital Goods
Wärtsilä
38.41
Chemicals
Clariant
17.52
Consumer
Anheuser Busch InBev*
92.78
Nestle
72.10
Carrefour*
25.47
Inditex
23.14
L'Oréal
135.45
Elior
13.00
LVMH
144.95
British American Tobacco
3,704p
General Financials
Euronext
22.86
Infrastructure
Atlantia
19.69
Insurance
Munich Re
161.00
Media
Reed NV*
18.94
Medtech & Services
Fresenius SE
42.33
Metals & Mining
Rio Tinto plc*
3,012p
Oil & Gas
Royal Dutch Shell B
2,391p
Tecnicas Reunidas
41.19
Pharmaceuticals
Novartis*
92.75
Property
Deutsche Annington
25.39
Steel
ThyssenKrupp
20.85
Technology - IT Hardware
Nokia
6.54
Technology - Software & IT Services
Dassault Systèmes
52.76
Telecom Services
Vodafone
228p
Transportation & Logistics
CTT - Correios de Portugal
7.74
Transportation - Airlines
easyJet
1,553p
Utilities
E.ON
13.49

Ccy

Rating

Price
Target

PT
End date

Mkt cap
bn

Adj. EPS
15E

16E

P/E (x)
15E

16E

Div yield
15E %

ROE
15E %

OW

60.50

31 Dec 15

€37.8

3.30

3.68

14.7

13.2

2.2%

19.6%

OW

119.00

31 Dec 15

€7.8

9.2

11.2

10.4

8.5

2.9

21

SF
Dkr

OW
OW

23.00
194.00

31 Dec-15
31 Dec-15

SF65.0
Dkr164.6

1.65
15.73

1.81
17.28

10.3x
10.4x

9.3x
9.4x

5.3%
4.8%

-

SF

OW

83.00

03 Nov 15

SF23.6

4.78

6.84

15.1

10.6

2.2%

8.3%

OW

50.00

31 Dec 15

€6.83

2.50

n/a

17.7

n/a

1.9%

-

OW

47.50

31 Dec 15

€7.5

2.82

2.94

13.6

13.1

3%

21%

SF

OW

20.20

31 Dec 15

SF5.8

1.39

1.55

12.6

11.3

2.4%

13%


SF





£

OW
OW
OW
OW
OW
OW
OW
OW

106.00
74.00
30.00
26.60
135.00
16.00
155.00
4,233p

31 Dec 15
31 Dec 15
30 Sep 15
31 Aug 15
31 Dec 15
30 Nov 15
31 Dec 15
21 Oct 15

$185.3
SF231
€16.67
€72.5
€82.0
€2.1
€72.8
£69.1

6.30
3.70
1.66
0.78
6.08
87c
7.7
223.4

7.19
3.99
1.93
0.82
6.54
96c
8.6
240.7

18.3x
19.5
15.4
27.0
21.8*
14.9x
18.8
16.6

16.1x
18.1
13.2
24.2
20.2*
13.5x
16.8
15.4

3.5%
3.5
2.9
2.1
2.3
2.7%
2.5
6.1%

14.7
23.9
15.4
9.3%
17
-

OW

24.50

31 Dec 15

€1.26

1.80

2.08

12.7x

11.0x

3.3%

32%

OW

24.00

10 Nov 15

€16.1

0.99

1.19

19.5

16.2

4.5%

13.5%

OW

185.00

31 Dec 15

€27.8

17.3

18.1

9.3

8.9

5.3

9.7

OW

21.70

31 Dec 15

€13.3

1.14

1.21

16.5

15.6

3.2%

-

OW

44.33

31 Mar 15

€22.92

2.42

2.78

17.5x

15.2x

1.4%

13.5%

£

OW

4,050p

30 Dec 15

$88.6

508USc

516 USc

9.3

9.1

4.7

17.4

£

OW
OW

2,500p
47.00

31 Dec 15
31 Dec 15

£150.2
€2.21

$3.64
2.94

$2.54
3.26

14.7
14.0

13.6
12.6

5.1
4.2

8.1
30.3

SF

OW

100.00

30 Jun 15

$226.4

6.02

6.43

16.0

15.0

3.1%

18.1%

OW

27.00

31 Oct 15

€6.76

1.36

1.42

19.8

19.0

3.0%

-

OW

25.00

01 Jun 15

€11.88

1.14

1.75

18.3

11.9

1.4

21.3

OW

8.00

31 Dec 15

€24.47

0.27

-

24.1

-

1.8%

12%

OW

60.00

31 Dec 15

€13.2

2.07

2.32

25.4x

22.7x

1.9%

25.7%

£

OW

265p

31 Mar 16

£60.4

7.12p

9.62p

30.0

21.0

5.3%

3.3

OW

10.05

31 Dec 15

€1.2

0.58

0.60

13.3

12.9

7.2

29.3

£

OW

1,815p

31 Dec 15

£6.15

132.6

147.9

11.7x

10.5x

3.6%

23%

OW

17.00

31 Dec 15

€25.74

1.03

1.01

13.1

13.3

4.4

5.8

Source: Bloomberg, J.P. Morgan estimates, Prices and Valuations as of November 21, 2014 unless stated otherwise with * (see individual company pages).

54

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Least preferred
Least preferred by sector heads
Price
Aerospace & Defence
Meggitt
488p
Autos
Michelin*
74.72
Banks
Bankinter
6.84
Raiffeisen
15.70
Building Materials
Italcementi
5.02
Business Services
Securitas
90.30
Capital Goods
Sandvik
80.50
Chemicals
Solvay
110.60
Consumer
Carlsberg
540.00
Unilever NV/Plc
32.22/2,656p
DIA
5.71
Debenhams
71p
Henkel
85.04
World Duty Free
7.35
Puma
185.90
General Financials
Deutsche Börse
56.24
Infrastructure
Abertis
16.73
Insurance
AXA
18.92
Media
Wolters Kluwer
22.66
Medtech & Services
Straumann
245.50
Metals & Mining
Anglo American
1,380p
Oil & Gas
Galp Energia
11.35
CGG
7.94
Pharmaceuticals
Sanofi
75.91
Property
Cofinimmo
93.01
Steel
SSAB
51.45
Technology - IT Hardware
Arm Holdings Plc
901p
Technology - Software & IT Services
SAP
55.94
Telecom Services
TeliaSonera
51.90
Transportation & Logistics
Kuehne + Nagel
129.50
Transportation - Airlines
Lufthansa
13.40
Utilities
EDF
22.98

Ccy

Rating

Price
Target

PT
End date

Mkt cap
bn

Adj. EPS
15E

16E

P/E (x)
15E

16E

Div yield
15E %

ROE
15E %

£

UW

460p

31 Dec 15

£3.9

35.8

38.6

13.6

12.6

2.8%

13.8%

UW

73.00

31 Dec 15

€13.9

7.8

8.1

9.6

9.2

3.7

13


UW
N

6.00
16.00

31 Dec-15
31 Dec-15

€6.2
€4.6

0.41
1.35

0.46
2.66

16.5x
11.6x

14.7x
5.9x

3.1%
0.0%

-

N

5.40

11 Oct 15

€1.8

0.05

0.25

-

20.0

1.2%

0.2%

Skr

UW

67.92

31 Dec 15

Skr31.41

6.30

n/a

14.3

n/a

3.3%

-

Skr

UW

72.00

31 Dec 15

Skr100.9

5.38

5.35

15.0

15.1

4%

15%

UW

90.00

31 Dec 15

€9.4

6.05

6.38

18.3

17.3

3.3%

6%

Dkr
€/£

£


UW
UW
UW
UW
UW
UW
UW

500.00
29.00/2,400p
4.45
64p
75.00
6.50
155.00

31 Aug 15
31 Dec 15
31 Mar 15
31 Aug 15
31 Dec 15
30 Nov 15
31 Dec 15

$14.2
£91.4
€3.69
£0.86
€14.8
€1.9
€2.8

39.27
1.67
0.36
7.57
4.41
30.3c
7.4

43.29
1.79
0.42
8.14
4.74
35.5c
9.3

13.8x
19.3
16.0
10.8
19.3
24.3x
25.2

12.5x
18.0
13.7
9.9
17.9
20.7
20.1

1.8%
3.8
3.2
5.3
1.5
0.0%
0.4

33.4
11.5
17.2
13.3%
7

UW

54.00

31 Dec 15

€8.59

3.85

4.17

14.6x

13.5x

3.7%

19%

UW

16.00

10 Nov 15

€15.0

0.87

0.95

19.2

17.6

4.1%

11.4%

UW

17.20

31 Dec 15

€45.8

1.93

1.83

9.8

10.3

4.8

8.6

UW

16.80

31 Dec 15

€6.8

1.66

1.70

13.7

13.4

3.3%

-

SF

UW

189.00

30 Dec 15

SF3.82

9.52

10.49

25.8x

23.4x

1.5%

19.8%

£

UW

1,310p

31 Dec 15

$29.8

186.7 USc

242.8 USc

11.4

8.8

4.0

10.0


UW
UW

11.50
3.50

31 Dec 15
31 Dec 15

€9.3
€1.41

0.38
0.18

0.49
0.49

30
54.7

23
20.5

3.1
0

6.1
1.0

N

78.00

30 Jun 15

$124

5.60

5.81

13.6

13.1

4.1%

9%

UW

96.00

31 Jul 15

€1.68

6.85

6.95

13.5

13.3

6.0%

-

Skr

UW

55.00

30 Jun 15

Skr26.76

2.54

3.79

20.2

13.6

2.3

3.3

£

N

750p

31 Mar 15

£12.64

29.7p

36.3p

30.3

24.8

0.8%

25%

N

55.00

30 Sep 15

€67.0

3.70

4.02

15.1x

14.0x

2.0%

19.7%

Skr

UW

48.00

31 Dec 15

Skr225

Skr4.1

Skr4.2

11.9

10.9

6.8

8.4

SF

UW

114.00

31 Dec 15

SF15.5

6.58

7.11

21.9

19.7

5.2

31.9

N

12.00

31 Dec 15

€6.12

2.08

2.12

6.4x

6.3x

3.4%

12%

N

22.00

31 Dec 15

€42.80

1.89

1.79

12.2

12.8

4.9

9.5

Source: Bloomberg, J.P. Morgan estimates, Prices and Valuations as of November 21, 2014 unless stated otherwise with * (see individual company pages).

55

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Performance
Table 46: Sector Index Performance — MSCI Europe
(%change)
Industry Group
Europe
Energy
Materials

4week
5.3
0.4
4.9
6.7
8.5
1.8
6.3
6.7
4.8
4.9
8.7
10.6
8.9
7.4
7.1
7.6
5.6
7.7
5.2
6.2
5.2
4.4
2.9
6.3
6.5
4.8
9.3
9.8
8.4
9.4
9.0
3.2

Chemicals
Construction Materials
Metals & Mining
Industrials
Capital Goods
Transport
Business Svs
Consumer Discretionary
Automobile
Consumer Durables
Media
Retailing
Hotels, Restaurants & Leisure
Consumer Staples
Food & Drug Retailing
Food Beverage & Tobacco
Household Products
Healthcare
Financials
Banks
Diversified Financials
Insurance
Real Estate
Information Technology
Software and Services
Technology Hardware
Semicon & Semicon Equip
Telecommunications Services
Utilities

Local currency
12m
5.3
(4.2)
0.7
1.5
6.5
(2.2)
0.5
(0.4)
10.1
(3.2)
3.9
4.2
(1.1)
6.9
(0.1)
15.6
5.6
(23.4)
10.3
4.6
17.7
4.9
2.7
3.0
9.6
14.0
5.4
0.9
11.2
7.4
8.8
13.8

14YTD
3.8
(5.5)
(1.4)
0.0
5.2
(5.2)
(1.9)
(2.3)
4.4
(4.9)
2.5
2.4
0.6
4.0
(1.4)
9.9
5.6
(21.7)
10.3
3.2
16.4
2.7
1.1
(0.6)
6.1
15.3
2.9
(3.6)
12.8
3.7
6.8
14.5

Source: MSCI, Datastream, as at COB 26th Nov, 2014

Table 47: Country and Region Index Performance
(%change)
Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United States
United States
United Kingdom
EMU
Europe
Global

Index
ATX
BEL 20
KFX
HEX 20
CAC 40
DAX
ASE General
ISEQ
FTSE MIB
Topix
AEX
OBX
BVL GEN
IBEX 35
OMX
SMI
S&P 500
NASDAQ
FTSE 100
MSCI EMU
MSCI Europe
MSCI AC World

Source: MSCI, Datastream, as at COB 26th Nov, 2014.
56

4week
6.0
4.7
4.1
5.8
6.4
9.2
4.7
7.3
4.1
10.7
5.7
1.5
(0.3)
3.9
4.9
4.7
4.6
5.2
4.3
6.7
5.3
5.1

Local Currency
12m
(13.2)
14.3
29.6
8.3
2.2
6.7
(15.2)
12.1
6.2
12.2
7.6
5.3
(14.9)
9.6
11.6
10.0
15.0
19.2
1.4
5.6
5.3
11.4

US$
YTD
(9.8)
11.6
23.6
8.3
1.8
3.8
(16.0)
10.1
5.1
8.0
5.5
3.4
(15.6)
7.4
9.4
10.4
12.1
14.6
(0.3)
3.9
3.8
8.9

4week
4.0
2.8
2.2
3.9
4.5
7.2
2.8
5.3
2.2
1.8
3.8
(0.9)
(2.2)
2.0
3.7
3.1
4.6
5.2
2.0
4.8
3.4
3.7

12m
(19.8)
5.6
20.1
0.0
(5.5)
(1.4)
(21.7)
3.6
(1.9)
(3.2)
(0.6)
(5.3)
(21.4)
1.3
(0.5)
4.0
15.0
19.2
(1.0)
(2.4)
(0.8)
7.8

YTD
(18.0)
1.5
12.7
(1.5)
(7.4)
(5.6)
(23.6)
0.1
(4.4)
(3.5)
(4.1)
(7.8)
(23.3)
(2.4)
(4.8)
2.3
12.1
14.6
(4.9)
(5.5)
(4.2)
5.2

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Earnings
Table 48: IBES Consensus EPS Sector Forecasts — MSCI Europe
2013

(6.1)
(19.5)
(13.5)
(9.8)
(1.0)
(19.6)
1.2
(1.9)
22.8
3.5
(12.9)
(28.6)
6.9
2.1
5.1
7.0
0.2
(5.1)
0.9
2.8
(3.0)
7.3
(4.3)
15.0
23.9
5.0
26.7
11.0
(1.2)
(28.7)
(5.2)

Europe
Energy
Materials
Chemicals
Construction Materials
Metals & Mining
Industrials
Capital Goods
Transport
Business Svs
Discretionary
Automobile
Consumer Durables
Media
Retailing
Hotels, Restaurants & Leisure
Staples
Food & Drug Retailing
Food Beverage & Tobacco
Household Products
Healthcare
Financials
Banks
Diversified Financials
Insurance
Real Estate
IT
Software and Services
Technology Hardware
Semicon & Semicon Equip
Telecoms
Utilities

EPS Growth (%)
2014E

3.7
1.9
5.8
3.2
10.5
7.3
7.5
5.9
20.6
3.9
7.1
14.8
(3.2)
2.8
8.4
1.9
(1.9)
(23.0)
1.6
2.9
1.2
13.2
35.2
(30.8)
3.7
6.7
34.4
2.2
213.3
40.0
(24.7)
(15.1)

2015E

2016E

10.9
(0.2)
10.4
9.3
30.4
8.6
14.3
14.3
16.8
11.2
13.4
13.1
15.7
13.0
11.6
11.4
8.0
5.7
8.4
7.6
7.2
17.5
23.1
31.2
5.0
6.6
22.1
10.3
36.8
33.9
7.4
4.2

10.6
10.8
15.8
10.1
22.7
20.5
10.3
9.6
14.1
10.2
11.4
12.0
11.9
9.2
10.4
13.3
8.5
9.1
8.6
6.8
8.2
11.4
13.9
17.4
4.8
5.0
14.3
9.7
13.9
25.8
9.8
3.4

2015E

2016E

383.3
11.2
13.2
8.2
11.7
10.5
155.8
31.9
35.1
13.5
3.4
33.5
22.2
12.2
10.6
4.2
16.4
14.7
10.9
9.5
12.8
10.9
10.2

18.3
9.0
13.4
5.7
10.5
9.8
45.3
23.8
17.1
10.7
5.6
19.3
17.1
10.2
9.1
10.0
11.7
10.9
10.6
11.9
9.1
11.2
11.2

Source: IBES, MSCI, Datastream. As at COB 26th Nov, 2014.

Table 49: IBES Consensus EPS Country Forecasts
Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
EMU
Europe ex UK
Europe
United States
Japan
Emerging Market
Global

Index
ATX
BEL 20
Denmark KFX
MSCI Finland
CAC 40
DAX
MSCI Greece
MSCI Ireland
MSCI Italy
AEX
MSCI Norway
MSCI Portugal
IBEX 35
OMX
SMI
FTSE 100
MSCI EMU
MSCI Europe ex UK
MSCI Europe
S&P 500
Topix
MSCI EM
MSCI AC World

2013

(28.5)
17.0
19.1
24.3
(5.0)
(10.1)
(47.9)
(10.5)
(7.2)
28.8
(4.6)
4.6
(10.4)
(6.3)
(3.8)
(6.1)
6.5
74.2
20.6
7.8

EPS Growth (%)
2014E

(66.5)
(2.3)
30.4
25.5
(0.3)
1.8
(85.4)
309.8
111.5
10.2
7.7
6.6
6.4
(0.3)
2.9
6.7
5.7
3.7
7.8
7.0
2.7
5.3

Source: IBES, MSCI, Datastream. As at COB 26th Nov, 2014** Japan refers to the period from March in the year stated to March in the following year – EPS post-goodwill.
57

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Valuations
Table 50: IBES Consensus European Sector Valuations
P/E

EV/EBITDA

Price to Book

2015e

2016e

2014e

2015e

2016e

2014e

2015e

2016e

2014e

2015e

2016e

15.6
10.9
15.2
17.2
20.1
12.8
17.0
17.0
15.9
18.3
15.4
10.5
19.2
18.7
21.1
21.1
20.0
14.0
20.7
21.2
18.7
13.0
13.2
15.6
11.1
20.9
22.0
18.0
24.1
30.3
19.8
15.3

14.1
10.9
13.8
15.7
15.4
11.8
14.8
14.9
13.6
16.4
13.6
9.2
16.6
16.6
18.9
19.0
18.5
13.3
19.1
19.7
17.4
11.1
10.8
11.9
10.6
19.6
18.0
16.3
17.6
22.6
18.4
14.7

12.7
9.8
11.9
14.3
12.5
9.8
13.5
13.6
12.0
14.9
12.2
8.3
14.8
15.2
17.1
16.7
17.1
12.2
17.6
18.5
16.1
10.0
9.4
10.2
10.1
18.7
15.7
14.9
15.5
18.0
16.8
14.2

3.4%
5.3%
3.1%
2.9%
2.2%
3.4%
2.9%
3.0%
2.6%
2.8%
2.6%
2.8%
2.1%
3.2%
2.5%
2.3%
2.8%
4.5%
2.8%
2.1%
2.8%
3.8%
3.6%
2.7%
4.6%
4.0%
1.8%
1.7%
2.6%
1.3%
4.3%
4.6%

3.6%
5.2%
3.3%
3.0%
2.6%
3.7%
3.2%
3.2%
3.2%
3.0%
2.9%
3.2%
2.4%
3.3%
2.8%
2.5%
2.9%
3.5%
3.0%
2.3%
2.9%
4.4%
4.5%
3.3%
4.8%
4.3%
2.0%
1.9%
2.6%
1.5%
4.3%
4.8%

3.9%
5.3%
3.6%
3.3%
3.0%
4.2%
3.4%
3.5%
3.0%
3.3%
3.2%
3.6%
2.7%
3.6%
3.1%
2.8%
3.1%
3.7%
3.2%
2.4%
3.1%
5.1%
5.4%
3.9%
5.0%
4.5%
2.2%
2.1%
2.8%
1.7%
4.4%
4.9%

7.7
4.4
7.7
9.2
9.1
6.8
8.7
8.9
7.5
11.9
6.5
3.7
9.3
10.3
13.6
10.6
11.3
6.7
12.3
12.9
12.7
10.9
10.4
9.5
14.8
6.4
7.4

7.3
4.5
7.2
8.6
8.0
6.3
7.9
8.1
6.9
10.4
5.9
3.4
8.7
9.5
12.4
9.7
10.7
6.2
11.5
11.8
11.8
9.2
9.1
7.8
11.7
6.1
7.3

6.7
4.0
6.4
7.9
7.1
5.6
7.5
7.4
7.2
9.3
5.4
3.0
7.9
8.8
11.2
9.0
9.9
5.9
10.7
10.7
10.3
8.0
8.1
6.8
9.7
6.0
7.2

1.7
1.2
1.6
2.5
1.2
1.2
2.5
2.5
1.9
4.7
2.3
1.2
2.8
4.4
5.9
4.2
3.2
1.4
3.7
3.8
4.0
1.0
0.9
1.1
1.2
1.1
3.3
3.6
2.6
3.7
1.7
1.4

1.7
1.1
1.5
2.3
1.2
1.2
2.3
2.3
1.8
4.2
2.1
1.1
2.5
4.0
5.4
3.8
3.1
1.4
3.4
3.3
3.8
1.0
0.9
1.0
1.2
1.0
3.0
3.2
2.4
3.4
1.8
1.3

1.6
1.1
1.4
2.2
1.1
1.1
2.1
2.1
1.7
3.7
1.9
1.0
2.4
3.6
4.8
3.4
2.8
1.3
3.2
3.0
3.6
0.9
0.9
0.9
1.1
1.0
2.7
2.9
2.2
3.0
1.7
1.3

Europe
Energy
Materials
Chemicals
Construction Materials
Metals & Mining
Industrials
Capital Goods
Transport
Business Svs
Discretionary
Automobile
Consumer Durables
Media
Retailing
Hotels, Restaurants & Leisure
Staples
Food & Drug Retailing
Food Beverage & Tobacco
Household Products
Healthcare
Financials
Banks
Diversified Financials
Insurance
Real Estate
IT
Software and Services
Technology Hardware
Semicon & Semicon Equip
Telecoms
Utilities
Source: IBES, MSCI, Datastream. As at COB 26th Nov, 2014

58

Dividend Yields

2014e

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Table 51: IBES P/E and 12-Month Forward Dividend Yields — Country Forecasts
Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
EMU
Europe ex UK
Europe
United States
Japan
Emerging Market
Global

Index
ATX
BEL 20
Denmark KFX
MSCI Finland
CAC 40
DAX
MSCI Greece
MSCI Ireland
MSCI Italy
AEX
MSCI Norway
MSCI Portugal
IBEX 35
OMX
SMI
FTSE 100
MSCI EMU
MSCI Europe ex UK
MSCI Europe
S&P 500
Topix
MSCI EM
MSCI AC World

12-Mth Fwd
12.1
16.4
16.5
16.6
13.3
12.7
16.3
17.5
12.6
13.5
11.1
15.0
15.1
15.3
16.0
13.6
13.7
14.4
14.2
16.2
14.5
10.8
14.7

P/E
2014E
54.2
18.1
18.5
17.9
14.7
14.0
39.8
22.5
16.7
15.2
11.5
19.6
18.2
17.1
17.5
14.1
15.8
16.4
15.6
17.7
15.8
11.9
16.1

2015E
11.2
16.3
16.4
16.5
13.2
12.7
15.5
17.1
12.4
13.4
11.1
14.7
14.9
15.2
15.8
13.6
13.6
14.3
14.1
16.2
14.0
10.7
14.6

2016E
9.5
14.9
14.4
15.6
11.9
11.6
10.7
13.8
10.6
12.1
10.5
12.3
12.7
13.8
14.5
12.3
12.2
12.9
12.7
14.5
12.8
9.6
13.1

Dividend Yield
12-Month Forward
2.8%
3.8%
1.9%
3.6%
5.0%
2.9%
1.2%
2.5%
3.1%
3.5%
5.7%
4.5%
4.7%
3.7%
2.9%
4.0%
3.9%
3.6%
3.8%
2.3%
1.7%
2.8%
2.7%

Source: IBES, MSCI, Datastream. As at COB 26th Nov, 2014; ** Japan refers to the period from March in the year stated to March in the following year – P/E post goodwill

59

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Economic, Interest Rate and Exchange Rate Outlook
Table 52: Economic Outlook in Summary
Real GDP

Real GDP

% oya

Consumer prices

% oqa, saar

% oqa, saar

2014E

2015E

1Q14E

2Q14E

3Q14E

4Q14E

1Q15E

2Q15E

2Q14E

4Q14E

4Q15E

United States

2.2

3.0

-2.1

4.6

3.5

2.5

3.0

3.0

2.1

1.4

1.6

Eurozone

0.9

1.6

1.2

0.3

0.6

1.5

1.8

2.0

0.6

0.4

1.1

United Kingdom

3.0

2.8

3.0

3.7

2.8

2.5

2.5

3.0

1.7

1.3

1.8

Japan

0.3

1.1

6.7

-7.3

-1.6

2.0

2.5

2.5

3.6

3.0

2.5

Emerging market

4.1

4.2

3.1

4.0

4.2

4.5

4.0

4.2

4.1

3.6

3.6

Global

2.5

3.0

1.7

2.3

2.6

3.0

3.1

3.1

2.6

2.1

2.3

Source: J.P. Morgan economic research, J.P. Morgan estimates, as of COB 26th Nov, 2014.

Table 53: Official Rates Outlook
%
United States
Eurozone
United Kingdom
Japan

Official interest rate
Federal funds rate
Refi rate
Repo rate
Overnight call rate

Current

0 - 0.25
0.05
0.50
0.06

Last change (bp)
16 Dec 08 (-87.5bp)
4 Sep 14 (-10bp)
5 Mar 09 (-50bp)
5 Oct 10(-5bp)

Forecast
next change (bp)

Jun 15 (+25bp)
3Q 18 (+20bp)
2Q 15 (+25bp)
On Hold

Forecast for

Mar 15
0 - 0.25
0.05
0.50
0.06

Jun 15
0.25 - 0.50
0.05
0.75
0.06

Sep 15
0.50 - 0.75
0.05
1.00
0.06

Dec 15
0.75 - 1.00
0.05
1.25
0.06

Source: J.P. Morgan estimates, Datastream, as of COB 26th Nov, 2014

Table 54: 10-Year Government Bond Yield Forecasts
%
United States
Eurozone
United Kingdom
Japan

Forecast for end of

26-Nov-14
2.24
0.74
1.98
0.44

Mar 15
2.55
1.00
2.20
0.40

Jun 15
2.70
1.15
2.40
0.40

Sep 15
2.75
1.20
2.50
0.45

Dec 15
2.80
1.25
2.65
0.50

Sep 15
1.18
1.51
1.02
125

Dec 15
1.18
1.53
1.02
128

Source: J.P. Morgan estimates, Datastream, as of COB 26th Nov, 2014.

Table 55: Exchange Rate Forecasts vs. US Dollar
Forecast for end of
EUR
GBP
CHF
JPY

26-Nov-14
1.25
1.58
0.96
118

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 26th Nov, 2014

60

Mar 15
1.22
1.53
0.99
120

Jun 15
1.20
1.51
1.00
123

Global Equity Research
01 December 2014

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Sector, Regional and Asset Class Allocations
Table 56: J.P. Morgan Equity Strategy — European Sector Allocation
Energy
Materials

MSCI Europe Weights
8.5%
7.6%

J.P. Morgan
Allocation
8.0%
7.0%

Deviation From MSCI
-0.5%
-0.6%

11.0%

13.0%

2.0%

10.3%

14.0%

3.7%

13.5%

10.0%

-3.5%

13.6%
22.6%

12.0%
26.0%

-1.6%
3.4%

3.3%

3.0%

-0.3%

5.2%
4.3%
100.0%

5.0%
2.0%
100.0%

-0.2%
-2.3%
0.0%

Chemicals
Construction Materials
Metals & Mining
Industrials
Capital Goods
Transport
Business Svs
Consumer Discretionary
Automobile
Consumer Durables
Media
Retailing
Hotels, Restaurants & Leisure
Consumer Staples
Food & Drug Retailing
Food Beverage & Tobacco
Household Products
Healthcare
Financials
Banks
Diversified Financials
Insurance
Real Estate
Information Technology
Software and Services
Technology Hardware
Semicon & Semicon Equip
Telecoms
Utilities

J.P. Morgan
Recommendation
Neutral
Neutral
N
OW
N
Overweight
OW
OW
N
Overweight
OW
OW
N
OW
OW
Underweight
UW
UW
N
Underweight
Overweight
OW
OW
OW
N
Neutral
UW
OW
N
Neutral
Underweight
Balanced

Source: MSCI, Datastream, J.P. Morgan

Table 57: J.P. Morgan Equity Strategy — Global Regional Allocation
EM
DM
US
Japan
Eurozone
UK
Others*

MSCI Weights
11%
89%
57%
8%
12%
8%
15%
100%

Allocation
11%
89%
54%
11%
15%
5%
15%
100%

Deviation
0%
0%
-3%
3%
3%
-3%
0%
0%

Recommendation
Neutral
Neutral
Underweight
Overweight
Overweight
Underweight
Neutral
Balanced

Source: MSCI, J.P. Morgan

Table 58: J.P. Morgan Equity Strategy — European Regional Allocation
Eurozone
United Kingdom
Others**

MSCI Europe Weights
46%
32%
22%
100%

Allocation
60%
20%
20%
100%

Deviation
14%
-12%
-2%
0%

Recommendation
Overweight
Underweight
Neutral
Balanced

Source: MSCI, J.P. Morgan

Table 59: J.P. Morgan Equity Strategy — Asset Class Allocation
Equities
Bonds
Cash

Benchmark Weighting
60%
30%
10%
100%

Allocation
75%
20%
5%
100%

Deviation
15%
-10%
-5%
0%

Recommendation
Overweight
Underweight
Underweight
Balanced

Source: MSCI, J.P. Morgan estimates * Switzerland, Sweden, Norway and Denmark

61

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Companies Discussed in This Report (all prices in this report as of market close on 27 November 2014)
AXA (AXAF.PA/€19.28/Underweight), Abertis (ABE.MC/€17.10/Underweight), Airbus Group
(AIR.PA/€49.79/Overweight), Anglo American (AAL.L/1352p/Underweight), Anheuser Busch InBev
(ABI.BR/€93.30/Overweight), Arm Holdings Plc (ARM.L/915p/Neutral), Atlantia (ATL.MI/€20.17/Overweight),
Bankinter (BKT.MC/€7.13/Underweight), Brenntag (BNRGn.DE/€44.59/Overweight), British American Tobacco
(BATS.L/3741p/Overweight), CGG (GEPH.PA/€7.80/Underweight), CTT - Correios de Portugal
(CTT.LS/€7.49/Overweight), Carlsberg (CARLb.CO/Dkr537.50/Underweight), Carrefour (CARR.PA/€25.55/Overweight),
Clariant (CLN.VX/SF17.69/Overweight), Cofinimmo (COFB.BR/€93.69/Underweight), DIA
(DIDA.MC/€5.58/Underweight), Danske Bank (DANSKE.CO/Dkr169.00/Overweight), Dassault Systèmes
(DAST.PA/€52.38/Overweight), Debenhams (DEB.L/72p/Underweight), Deutsche Annington
(ANNGn.DE/€25.74/Overweight), Deutsche Börse (DB1Gn.DE/€58.56/Underweight), E.ON
(EONGn.DE/€14.28/Overweight), EDF (EDF.PA/€23.90/Neutral), Elior (ELIOR.PA/€12.63/Overweight), Euronext
(ENX.PA/€22.78/Overweight), Fresenius SE (FREG.DE/€43.62/Overweight), Galp Energia
(GALP.LS/€10.40/Underweight), Henkel (HNKG_p.DE/€87.11/Underweight), Holcim Ltd
(HOLN.VX/SF71.25/Overweight), Inditex (ITX.MC/€23.27/Overweight), Italcementi (ITAI.MI/€4.87/Neutral), Kuehne +
Nagel (KNIN.VX/SF130.50/Underweight), L'Oréal (OREP.PA/€136.30/Overweight), LVMH
(LVMH.PA/€143.00/Overweight), Lufthansa (LHAG.DE/€13.69/Neutral), Meggitt (MGGT.L/497p/Underweight),
Michelin (MICP.PA/€74.21/Underweight), Munich Re (MUVGn.DE/€164.02/Overweight), Nestle
(NESN.VX/SF72.15/Overweight), Nokia (NOK1V.HE/€6.69/Overweight), Novartis (NOVN.VX/SF93.00/Overweight),
Puma (PUMG.DE/€184.75/Underweight), Raiffeisen Bank International (RBIV.VI/€16.46/Neutral), Reed NV
(ELSN.AS/€19.62/Overweight), Rio Tinto plc (RIO.L/3012p/Overweight), Royal Dutch Shell B
(RDSb.L/2266p/Overweight), SAP (SAPG.DE/€56.67/Neutral), SSAB (SSABa.ST/Skr53.30/Underweight), Sandvik
(SAND.ST/Skr80.55/Underweight), Sanofi (SASY.PA/€77.23/Neutral), Securitas (SECUb.ST/Skr91.40/Underweight),
Solvay (SOLB.BR/€112.30/Underweight), Straumann (STMN.S/SF245.50/Underweight), Tecnicas Reunidas
(TRE.MC/€38.97/Overweight), TeliaSonera (TLSN.ST/Skr53.15/Underweight), ThyssenKrupp
(TKAG.DE/€21.29/Overweight), UBS (UBSN.VX/SF17.10/Overweight), Unilever NV (UNIA.AS/€32.45/Underweight),
Unilever plc (ULVR.L/2677p/Underweight), Valeo SA (VLOF.PA/€98.69/Overweight), Vodafone
(VOD.L/227p/Overweight), Wolters Kluwer (WLSNc.AS/€23.51/Underweight), World Duty Free
(WDF.MI/€7.69/Underweight), Wärtsilä (WRT1V.HE/€38.10/Overweight), easyJet (EZJ.L/1633p/Overweight)
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.

Important Disclosures


Market Maker: JPMS makes a market in the stock of Sanofi, Arm Holdings Plc.


Designated Sponsor: J.P. Morgan Securities plc is the appointed designated sponsor to Brenntag, Deutsche Annington.

Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
Airbus Group, Valeo SA, UBS, Danske Bank, Holcim Ltd, Brenntag, Wärtsilä, Clariant, Anheuser Busch InBev, Nestle, Carrefour,
Inditex, L'Oréal, Elior, LVMH, British American Tobacco, Euronext, Atlantia, Munich Re, Reed NV, Fresenius SE, Rio Tinto plc, Royal
Dutch Shell B, Tecnicas Reunidas, Novartis, Deutsche Annington, ThyssenKrupp, Nokia, Dassault Systèmes, Vodafone, CTT - Correios
de Portugal, E.ON, Meggitt, Michelin, Bankinter, Raiffeisen Bank International, Italcementi, Securitas, Sandvik, Solvay, Carlsberg,
Unilever NV, Unilever plc, DIA, Debenhams, Henkel, World Duty Free, Puma, Deutsche Börse, Abertis, AXA, Wolters Kluwer,
Straumann, Anglo American, Galp Energia, CGG, Sanofi, Cofinimmo, SSAB, Arm Holdings Plc, SAP, TeliaSonera, Kuehne + Nagel,
Lufthansa, EDF.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Airbus Group,
UBS, Danske Bank, Holcim Ltd, Anheuser Busch InBev, Nestle, Elior, LVMH, British American Tobacco, Euronext, Fresenius SE,
Novartis, Deutsche Annington, ThyssenKrupp, Vodafone, CTT - Correios de Portugal, E.ON, Sandvik, Solvay, Carlsberg, Unilever NV,
Unilever plc, DIA, Henkel, Anglo American, Galp Energia, Sanofi, SAP, EDF within the past 12 months.
62

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

Director: An employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of
Inditex.

Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Inditex,
Nokia, Unilever NV, World Duty Free, Lufthansa.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Airbus Group, Valeo SA,
UBS, Danske Bank, Holcim Ltd, Brenntag, Wärtsilä, Clariant, Anheuser Busch InBev, Nestle, Carrefour, Inditex, L'Oréal, Elior, LVMH,
British American Tobacco, Euronext, Atlantia, Munich Re, Reed NV, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Tecnicas
Reunidas, Novartis, Deutsche Annington, ThyssenKrupp, Nokia, Dassault Systèmes, Vodafone, CTT - Correios de Portugal, easyJet,
E.ON, Meggitt, Michelin, Bankinter, Raiffeisen Bank International, Italcementi, Securitas, Sandvik, Solvay, Carlsberg, Unilever NV,
Unilever plc, DIA, Henkel, World Duty Free, Puma, Deutsche Börse, Abertis, AXA, Wolters Kluwer, Straumann, Anglo American, Galp
Energia, Sanofi, Cofinimmo, SSAB, Arm Holdings Plc, SAP, TeliaSonera, Kuehne + Nagel, Lufthansa, EDF.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Airbus Group, UBS, Danske Bank, Holcim Ltd, Brenntag, Anheuser Busch InBev, Nestle, L'Oréal, Elior, LVMH, British
American Tobacco, Euronext, Reed NV, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Novartis, Deutsche Annington,
ThyssenKrupp, Nokia, Vodafone, CTT - Correios de Portugal, E.ON, Michelin, Sandvik, Solvay, Carlsberg, Unilever NV, Unilever plc,
DIA, Henkel, AXA, Anglo American, Galp Energia, Sanofi, SAP, EDF.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Airbus Group, UBS, Danske Bank,
Holcim Ltd, Brenntag, Anheuser Busch InBev, Nestle, Carrefour, Inditex, L'Oréal, LVMH, British American Tobacco, Munich Re, Reed
NV, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Tecnicas Reunidas, Novartis, Deutsche Annington, ThyssenKrupp, Nokia,
Vodafone, easyJet, E.ON, Meggitt, Michelin, Bankinter, Raiffeisen Bank International, Italcementi, Sandvik, Solvay, Carlsberg, Unilever
NV, Unilever plc, DIA, Henkel, World Duty Free, Puma, Deutsche Börse, AXA, Wolters Kluwer, Anglo American, Galp Energia, Sanofi,
Cofinimmo, SSAB, Arm Holdings Plc, SAP, Kuehne + Nagel, Lufthansa, EDF.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Airbus Group, UBS, Danske Bank, Holcim Ltd, Brenntag, Anheuser Busch InBev,
Nestle, Carrefour, L'Oréal, LVMH, British American Tobacco, Euronext, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Novartis,
Deutsche Annington, ThyssenKrupp, Nokia, Vodafone, E.ON, Meggitt, Michelin, Bankinter, Raiffeisen Bank International, Italcementi,
Sandvik, Solvay, Carlsberg, Unilever NV, Unilever plc, DIA, Henkel, Puma, Deutsche Börse, Abertis, AXA, Anglo American, Galp
Energia, Sanofi, Cofinimmo, SAP, EDF.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Airbus
Group, UBS, Danske Bank, Holcim Ltd, Brenntag, Anheuser Busch InBev, Nestle, L'Oréal, Elior, LVMH, British American Tobacco,
Euronext, Reed NV, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Novartis, Deutsche Annington, ThyssenKrupp, Nokia, Vodafone,
CTT - Correios de Portugal, E.ON, Michelin, Sandvik, Solvay, Carlsberg, Unilever NV, Unilever plc, DIA, Henkel, AXA, Anglo
American, Galp Energia, Sanofi, SAP, EDF.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Airbus Group, UBS, Danske Bank, Holcim Ltd, Brenntag, Anheuser Busch InBev, Nestle,
Carrefour, L'Oréal, Elior, LVMH, British American Tobacco, Euronext, Munich Re, Reed NV, Fresenius SE, Rio Tinto plc, Royal Dutch
Shell B, Novartis, Deutsche Annington, ThyssenKrupp, Nokia, Vodafone, CTT - Correios de Portugal, E.ON, Michelin, Raiffeisen Bank
International, Sandvik, Solvay, Carlsberg, Unilever NV, Unilever plc, DIA, Henkel, Puma, Deutsche Börse, Abertis, AXA, Anglo
American, Galp Energia, Sanofi, Cofinimmo, SAP, Lufthansa, EDF.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Airbus Group, UBS, Danske Bank, Holcim Ltd, Brenntag, Anheuser Busch InBev, Nestle, Carrefour,
Inditex, L'Oréal, LVMH, British American Tobacco, Munich Re, Reed NV, Fresenius SE, Rio Tinto plc, Royal Dutch Shell B, Tecnicas
Reunidas, Novartis, Deutsche Annington, ThyssenKrupp, Nokia, Vodafone, easyJet, E.ON, Meggitt, Michelin, Bankinter, Raiffeisen
Bank International, Italcementi, Sandvik, Solvay, Carlsberg, Unilever NV, Unilever plc, DIA, Henkel, World Duty Free, Puma, Deutsche
Börse, AXA, Wolters Kluwer, Anglo American, Galp Energia, Sanofi, Cofinimmo, SSAB, Arm Holdings Plc, SAP, Kuehne + Nagel,
Lufthansa, EDF.


Broker: J.P. Morgan Securities plc acts as Corporate Broker to British American Tobacco, Reed NV, Rio Tinto plc, Vodafone.

“J.P. Morgan Limited (“J.P. Morgan”) is acting as the sole financial advisor to AXA to sell its Mandatory Provident Fund (MPF) and
Occupational Retirement Schemes Ordinance (ORSO) businesses in Hong Kong to The Principal Financial Group as announced on 7
November 2014. J.P. Morgan will be receiving fees for so acting. J.P. Morgan and/or its affiliates may perform, or may seek to perform,
other financial or advisory services for AXA and/or its affiliates and may have other interests in or relationships with AXA and/or its
affiliates, and receive fees, commissions or other compensation in such capacities. This research report and the information herein is not
intended to serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any

63

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

other action by a security holder. This report is based solely on publicly available information. No representation is made that it is
accurate or complete.”

MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information
and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any
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originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without
limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or
compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and
its affiliates.
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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
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coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
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J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2014
J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*

Overweight
(buy)
46%
57%
46%
76%

Neutral
(hold)
42%
49%
48%
67%

Underweight
(sell)
12%
34%
7%
51%

*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.

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64

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

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65

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

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Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
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66

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

Global Equity Research
01 December 2014

67

Mislav Matejka, CFA
(44-20) 7134-9741
mislav.matejka@jpmorgan.com

68

Global Equity Research
01 December 2014

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