Last week saw a stabilization of both Equity and Bond markets

Asset Management - 22.07.2016

Equity markets stabilized after rallying to levels close to, and in some cases better than, the pre-Brexit period. Bond markets also stabilized after several days of rising yields. Last week saw the Bank of England preferring to hold off on any action before a likely move in August and this week the ECB adopted a reassuring tone.
Commodities Corporate

​Equity markets stabilised after rallying to levels close to, and in some cases better than, the pre-Brexit period. Bond markets also stabilised after several days of rising yields. Last week saw the Bank of England preferring to hold off on any action before a likely move in August and this week the ECB adopted a reassuring tone. Mario Draghi is ready to act but wants to have more time to assess the economic impact that uncertainty over the future UK exit from Europe is having. The quarterly survey on eurozone credit showed that lending conditions continued to ease and demand to rise. But, again the ECB tempered these positive results due to lack of visibility on the Brexit impact.

US second quarter data pointed to healthy economic conditions with June retail sales, industrial production and housing starts and permits all coming in better than expected. All eyes will be focused on the July 26-27 Fed meeting and initial GDP estimates.
End July will also see the Bank of Japan’s meeting which is expected to go for fresh easing and the results of the ECB’s stress tests on European banks. The earnings seasons is entering its busiest weeks amid reduced expectations.

In our asset allocation, we took profits on our US 10-year Treasury short after prices fell and yields rose. Given the speed of the high yield corporate debt rally, we have hedged exposure.



  European equities

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Markets rose on the back of a crop of company results.

Autos and banks followed through on last week’s momentum. Volkswagen pre-released its results and said operating profits would be higher than €5 billion or above market expectations. Along with Daimler’s results, these figures underpinned the entire sector. Daimler said it was confident over full-year prospects thanks primarily to rising sales of the new Mercedes E class. US truck sales were disappointing but this had already been flagged several weeks ago. SAP’s sales and operating profits both beat expectations. Thales released excellent figures with like-for-like growth close to 10% in the second quarter.

Publicis announced a robust 2.7% increase in like-for-like growth thanks to Europe (+7.3%) and emerging countries (+5.5% in Asia and +4.8% in Latin America). In the luxury sector, Hermès continued to stand apart with more than 8% in like-for like growth in the second quarter when the consensus had expected +5%. This was due to a 17% surge in leather goods, a division which represents 52% of sales. At the same time, Swatch posted its worst-ever operating performance for the half year with sales down 12.5% and a slump in operating margins to 9.5%.

Other disappointments included Rémy Cointreau which posted flat first quarter figures and a dip in cognac sales. The Americas zone, however, posted double digit growth due to cognac sales. EasyJet and Lufthansa both released poor quarterly figures; Lufthansa even cut its forecasts of second half revenues, dragging down their share prices and those of rivals like Air France and Ryanair.

In M&A, Japan’s Softbank paid $ 32 billion, or a 43% premium, for ARM Holdings, a UK tech company active in mobile phone processors and software. Arkema acquired Den Braven, a Dutch group specialised in sealants for the construction industry. The move will reinforce its Bostik division and its speciality chemicals segment. The competition watchdog validated the tie-up between FNAC and Darty with no major constraints. Monsanto unsurprisingly rejected Bayer’s sweetened $125 bid, a 2.5% increase on the first bid.



  US equities

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Markets stabilised. The property market remained in excellent health with a 4.5% rise in housing starts, much higher than the +0.2% expected, and a 1.1% sequential rise in new home sales. But quarterly earnings were the main market driver.

IBM released upbeat figures, with sales in its “strategic imperatives” division up 12%. Microsoft followed suit with a rebound in its servers division and excellent sales momentum in cloud computing with Azure up by more than 100%. Healthcare heavyweight Johnson & Johnson released upbeat figures, led by its Pharma division (Remicade, Stelara, etc.) and raised annual guidance.

Disappointments included Netflix which reported 2 million new subscribers outside the US or less than the 2.8 million expected. The trend in the US was the same and the stock plunged by close to 15% on the news. Starbucks also missed expectations for like-for-like US sales, reporting “only” +4% instead of +5%. Management has trimmed its forecasts for the second half. Note also that the increasingly marked impact of higher wages in the US could mean additional costs of $300 million for the company in 2017.

Over the period, tech and healthcare advanced by 1.3% and 1% respectively in a flat market. Energy, consumer staples and industrials all ended lower.




  Japanese equities

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Japanese equity markets continued to rise, with the Topix adding 2.2% as the yen fell below 106 against the US dollar, a boost for export stocks. Growing expectations for massive fiscal stimulus lifted investor sentiment. The market was also abuzz with rumours of helicopter money although BoJ Governor Kuroda denied this.

Financials advanced, led by Insurance (+7.4%), while Fishery, Agriculture & Forestry slid 1.4%.

Game producer Nintendo saw further strong momentum on the back of “Pokémon Go” fever, adding 10.7%. The company also announced the game’s long- awaited release in Japan.

Messaging app company LINE soared 52% on its first day of trading on the Tokyo Stock Exchange before closing 22% higher after profit taking set in.

On a negative note, SoftBank lost 10%, on news of its $ 32 billion acquisition of UK major chip designer ARM Holdings, the biggest overseas takeover by a Japanese company. Investors were worried over debt on SoftBank’s balance sheet. However, CEO Masayoshi Song sees a business opportunity in the future from a paradigm shift from mobile businesses to the Internet of Things.



  Emerging markets

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Most Emerging Markets closed higher over the last week led by Indonesian, Brazilian and Taiwanese equities.

In India quarterly earnings season continued. HDFC Bank reported a rise in net profit by 20% YoY, as loan growth remained strong albeit some moderation.

Indonesia's central bank held its benchmark interest rate, contrary to expectations for a fifth cut this year, and said previous easing moves are helping the sluggish economy improve.

After the positive IPCA (inflation numbers) surprise for June, Brazil’s July’s IPCA-15 came in at +0.54% month on month, above the market’s forecast (+0.45% MoM) and our expectation (+0.41% MoM). However, on a YoY basis, inflation decelerated to 8.93% (from 8.98% YoY in June).

Mexico’s Aeroportuario del Sureste reported strong 2Q16 results that beat the estimates. Total revenue (ex-construction) reached P$1.8bn, increasing 16.7% YoY. Aeronautical revenues were up 12% YoY; while non-aeronautical revenues soared 24.2% YoY, driven by a 25.3% increase in commercial revenues. In addition, total traffic reached 6.9mn passengers, Moody’s Investors Service put Turkey's debt on review for downgrade to junk status following last weeks failed coup. Since then Turkish stocks and the lira have been under selling pressure, forcing the country's central bank to lower interest rates for the fifth consecutive month.




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Oil prices fell back below $ 45 over the period while base metal prices were mixed despite the stronger US dollar. Gold lost $14 to $ 1,323/oz.

Investors were again worried by the Department of Energy’s weekly report. Despite the 9th consecutive fall in US crude inventories, petrol stocks continued to rise even though we are in the middle of the driving season which usually means strong demand for refined products. In May, US mileage rose by 2% YoY (+3.3% YTD), a sign that demand is still buoyant. In fact, refineries are responsible for the situation as they have decided to anticipate demand by transforming crude into products ahead of annual maintenance shut-downs at the end of the summer.

Elsewhere, the Energy Information Administration’s drilling report showed that on-shore output in main production areas had continued to fall and it now expects to see a drop of 99,000b/d in August or a 740,000 b/d reduction over the last 12 months. 
The other factor that sent oil prices lower was the IMF’s decision to cut growth expectations due to the long term impact Brexit might have on oil demand in Europe. The failed coup in Turkey had little impact on prices. Turkey itself only produces 50,000 b/d but there are worries over the Bosphorus strait which is used by tankers shipping oil from Russia and Kurdistan, or 3% of global output. The Detroit was closed during the coup but reopened after a few hours with no major incidents reported.

Iron ore prices fell over the period. Sector majors Rio Tinto, Vale and BHP Billiton released quarterly results. Output in the main fell for BHP and Vale, hit by Samarco, but the most disappointing factor was prices. Rio maintained guidance of 350 million tonnes for 2016 (350 Mt) while BHP raised its outlook for 2017 to 265-275 million tonnes, a 10 million increase due to the Jimblebar mine’s expansion.



  Corporate debt

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Credit markets held fire before the ECB meeting. As expected, Mario Draghi left interest rates unchanged and maintained the EUR 80bn-a-month asset purchasing programming. He added that Brexit was clearly bad for any recovery in eurozone growth. All solutions will be considered but no action will be taken before autumn. 

Details on the CSPP showed that 6 central banks (Germany, France, Italy, Spain, Belgium and Finland) had bought € 10.4 billion in corporate investment grade debt since June 8 2016 (more than 400 IG and Xover bonds) across all sectors and maturities. This buying has continued to underpin credit markets. The Main tightened to 68bp and the Xover to 307bp.

The HY new issues market remained busy and included companies like Lecta (paper), Navira (ferries in the Canaries), Gamenet (betting), BEH (a Bulgarian utility) as well as a tap on United Group (Slovenia, telecoms & cables).

The financials primary market dried up due to US banks reporting and ahead of the latest stress test results for European banks due on July 29. These tests are expected to trigger some action over Monte Paschi. Mario Draghi tried to reassure investors over Italian bank solvency, stressing that government support in exceptional circumstances was necessary to solve the non-performing loan problem.


After 21 days of lethargy, the US Convertibles Bonds primary market picked up a bit with 2 new issues.

Belden (leader in signal transmission solutions) issued $ 450 million of 3Y Mandatory Convertible Preferred Stock which may be used to finance possible acquisition or business expansion. BlackHawk Network (gift cards, digital payments…) offered $ 452 million of 2022 CB partially in order to repay its existing 2018 loan.

In the meantime, Q2 results period is going full swing (1/5 of Stoxx 600 companies have already reported results). Severstall released strong performance on Q2 on QoQ basis with positive FCF of $342 million compared to -$32 million in Q1 (annualized FCF yield of 14%) thanks to decrease in net working cap on the back of seasonal sell-off of inventories, while showing less than expected revenues. To point out, CFO revealed plans to keep Net Debt/Ebitda Ratio at 0.5 around. Werelhave witnessed a 77.7 million Euros Direct Results versus 62.6 million last year same period and an occupancy rate of shopping centre of 94.8% against 93.8% last year (Outlook reconfirmed). Dassault Aviation reported poor EBIT at € 125 million versus 144 million last year. Falcon deliveries guidance has been cut for a 2016 considered by many as a transition year. Nexity disclosed strong first half with EBIT 10% above consensus (4% upgrade of year guidance), overall margins expansion. With +25.32% on gold price since the beginning of the year, Newmont Mining showed impressive numbers with Q2 EPS at $0.44 (consensus $0.29) and EBITDA at $804 million (consensus $692 million) and a stronger balance sheet (circa $600 million of debt repayment since beginning of 2016 & expect between $800 and 1300 million until 2018).

In the news also this week and in brief, Nuance Communications signed a definitive agreement to acquire TouchCommerce, leader in digital customer service and egagement solutions for $ 215 million. Regarding Tesla, Elon Musk revealed that his Tesla MasterPlan will include a compact SUV, a pickup truc and/or  autonomous bus, plan met with relative indifference.

In Europe, ECB kept rate unchanged nevertheless it said to be ready to give further dose of stimulus if risks such as Brexit’s vote, too-low inflation of banking crisis in Italy are starting to weigh on the European’s Economy.
For the days ahead, we will have a close look at the BOJ meeting planned 28th-29th, and the G20 summit the 23rd-24th in China (currency devaluation triggering renewed capital outflows should be on the watchlist).

Written on 22/07/2016

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