2018 starts with a bang

Marktanalyse - 05.01.2018

Everything's fine! That at least was the impression from looking at consumer and company confidence figures, low inflation and persistently accommodating monetary policies. Consumption, investment and global trade should all help to extend this trend in 2018. What primarily sets indices apart in performance terms is currency sensitivity -notably to the euro/US dollar exchange rate - and commodity and technology weightings. (English version)

And yet, apart from geopolitical risk, markets in 2018 will have to confront gradually monetary tightening, investor concerns over some sector valuations and the fact that it will be difficult to sustain economic growth at levels which are running well above its potential. The fact that many companies are struggling to hire competent staff is a warning signal. Nevertheless, over the foreseeable future, equity markets still look more attractive than fixed income, especially in Japan and the eurozone. 

  European equities

European equity markets kicked off the new year in fine form on strong PMI data - composite PMI hit levels not seen since 2011 - and despite the fact that the figures triggered a rise in the euro. Italian stocks shone, underpinned by gains from banks like UniCredit, Ubi Banca and Fineco Bank) and dollar-sensitive stocks like FCA, Ferrari, Leonardo, Prysmian, Buzzi and Tenaris which gained on upbeat US data. 

All cyclical sectors, construction, banks and autos, outperformed. New car registrations in 2017 came in a little better than expected. Tech stocks also followed the Nasdaq higher. And oil stocks generally benefited from further strength in the oil price and encouraging figures from Norway’s PGS. But interest rate sensitive sectors like utilities, property and consumer staples, underperformed. 

FCA outperformed thanks to its exposure to strong US car sales and a rumour suggesting Alphabet (which is working on driverless cars through its Waymo subsidiary) might be considering a bid. Altice rebounded after signing a distribution agreement with M6. Rémy Cointreau fell after a broker downgraded the stocks on worries over slowing sales in China. Solocal continued to benefit from buying momentum. 

In M&A, Michelin is to transfer its US wholesale business to TBC, a Sumitomo subsidiary to create a 50-50 joint venture that will be N° 2 in North America. The deal will give Michelin better access to this market (downstream distribution as well as the Mexican market) and is a logical fit with the group’s strategy. Elsewhere, Mondadori rose on speculation that it and Lagardère might merge their magazine businesses. Auto suppliers Continental and Bosch finalised the purchase of a 5% stake in Here, a digital mapping specialist which belongs to Audi/BMW/Daimler. The stake comes with an agreement to cooperate on projects. 

  US equities

Markets started 2018 in bullish mood with the S&P500 gaining close to 2% in US dollars. There was no major economic news over the period. However, manufacturing ISM performed well, coming in at 59.7 and ADP’s job survey said 250,000 new positions were created, or more than the 190,000 expected.

Company news was dominated by the discovery of a major chip security flaw in most computers. Intel was in the limelight and the stock lost more than 3% over 2 trading sessions.

Over the last 5 trading days, energy and materials led gains followed by tech. Defensive sectors like utilities, property and telecoms all lost considerable ground. 

  Japanese equities

After a quiet end to 2017, Tokyo started the new year in fine form on the first business day, Thursday 4th January, and the Nikkei 225 surged to a 26-year high. Over the week, the TOPIX jumped 2.5% on optimism over earnings growth. Sentiment was buoyed by US tax reform, notably a hefty corporate tax cut, as well as improving economic indicators in the US and China.

By sector, all TSE 33 sectors posted positive returns with growth stocks leading advances. The best four performers of the week were Securities & Commodities Futures (+4.86%), Oil & Coal Products (+3.73%), Marine Transportation (+3.58%), and Electric Appliances (+3.57%). In individual stocks, labour-force saving industrial robot producer Fanuc gained 6.41% and investors piled into semiconductor manufacturing stocks such as Tokyo Electron (+6.18%) and Shin-Etsu Chemical (5.72%).

On the other hand, Fishery, Agriculture & Forestry (+0.39%), Rubber Products (+0.67%), Air transportation (+0.7%), Foods (+1.12%) and Construction (+1.18%) only made modest gains. Daito Trust Construction declined 6.01% on slowing earnings momentum. Rakuten (-0.05%) underperformed on worries over the cost of breaking into the highly competitive mobile network operator business. 

  Emerging markets

Emerging markets had a strong start to the year and surged 3%, driven by China. Beijing’s air quality has been largely improved this winter thanks to the general adoption of gas heating and the temporary suspension of high pollution construction material production sites in Northern China. But surprisingly, despite multiple anti-pollution measures, economic dynamics picked up towards the year-end: both December’s Caixin Manufacturing and Services PMI indices came in higher than market estimates and better than the previous month.

After years of consolidation in the Chinese beer market, major local brewery producers are hiking retail prices after more than 5 years of furious price competition to gain market share. Although the hike is only 5% for companies and 10%-20% for distributors, we believe this may be the beginning of margin improvement and a turnaround in sector profitability. The retail beer price in China is 30% lower than the world average and only a third of Japan and Korea.

In India, Idea (telecoms) announced a Rs 32.5bn ($5bn) equity raising through a preferential allotment to promoters. The company is also thinking about raising another Rs 35 bn. At the same time, the group will sell its tower assets to reduce debt further. Last month, there were 5 equity raisings (HDFC, HDFC Bank, Tata Steel, and now Idea) and asset sales. If this trend were to gain traction across sectors, it could be positive news for India as companies will pay down debt on their balance sheets faster than expected and start to invest again. On the negative side, Indian government bond yields are still rising due to higher inflation expectations (food prices are rebounding) and a higher deficit (98% of the budget was spent a quarter before the close).

In Brazil, CSN announced a 23% steel price increase for auto makers, or above expectations. This is an encouraging sign not only for the steel sector, but also for banks.

In Mexico, November loan growth decelerated to 8.9% YoY from 10.3% in October, with companies leading the field.

Elsewhere, Asur’s 2017 traffic growth was 9.3%, in line with expectations after being revised downwards due to hurricanes.

Argentina sold $9bn in bonds with 5, 10 and 30-year maturities and yields of 4.625%, 6% and 6.95% respectively.

We remain upbeat on emerging markets. 

  Commodities

Oil prices started 2018 with a bang as Brent crude surged to close to $68, its highest level since 2014, and WTI rose to $62. Prices had risen in the second half of December mainly on tension in Iran, even if exports were untouched, and technical incidents in the North Sea Forties pipeline and in Libya.

But this week's surge was primarily down to the icy spell in the US and a drop in US inventories. US crude inventories are still returning to normal and the US Department of Energy said they had fallen sharply in the preceding week. This occurred with refineries working flat out before the end of quarter shutdown for maintenance. The rise in distillate and petrol stocks over the week was a perfect reflection of the situation. The drill count remained at 747 over the last fortnight. But we should be wary of this sudden surge in oil prices as it may well not last over 2018. We believe inventories will continue to normalise and expect prices to trade between $55 and 65 depending on demand.

On the political front, the Trump administration said it intended to open up almost the entire US coastline to offshore oil and gas exploration projects We should, however, put this news into perspective as these zones are unlikely to contribute to US output for at least 5 years.

Elsewhere, base metals started the year flat, after a strong end of year rally, despite upbeat PMI data for December in Europe, the US and China. The gold ounce has risen from $1,245 to close to $1,320 since the latest Fed rate hike on December 13. The Chinese New Year will take place in February and should underpin buying of physical gold in the coming weeks. 

  Corporate debt

 

Credit

After the long Christmas break, credit markets started the new year on the front foot. This January is almost a repeat of the start to 2017: more buyers than sellers with market makers in bullish mood as they seek to build up their books to gain from the trend. As a result, the Main and Xover indices tightened by 2bp and 12bp respectively.

On Thursday, Italian bank Monte dei Paschi said it intended to tap markets again and was mulling a Tier 2 CCC+ issue.

The high yield new issues market remained closed for business. 

Convertibles 

The convertible bond primary market reopened with two new deals in Europe. JP Morgan raised $350m in a 3-year zero coupon cash settled exchangeable bond linked to the performance of the shares in the world’s largest duty-free retailer, Dufry. The deal is tied to a derivative transaction by HNA Group on their Dufry stake.

French tyre manufacturer Michelin announced another non-dilutive convertible bond with a 5Y maturity, 30% premium and 0-0.8% YTM pricing range.

Elsewhere, Steinhoff announced that Philip Dieperink would replace Ben La Grange as CFO. The company also intends to appoint an external independent debt restructuring expert and work with auditors to complete the 2017 financial statements as soon as possible. Pepkor Europe arranged a new loan facility independently of Steinhoff so as not to depend on the holding’s working capital. Steinhoff shares soared 85% over the week and the convertibles gained between 8 and 12 points depending on the maturity.

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