Overall trading was relatively calm

Asset Management - 07.10.2016

Overall trading was relatively calm this week but not for sterling which continued to come under pressure as the UK looked increasingly to be heading towards a hard Brexit. Elsewhere, the IMF’s description of the macroeconomic environment was hardly enthusiastic: its report said global growth was still as sluggish while indebtedness continued to rise. And yet recent data from the US, Germany and the UK came in higher than expected, especially corporate investment. (English version)
Commodities Corporate

Oil prices enjoyed a sharp bounce following OPEC’s agreement to make modest cuts to output. The surge offset the becalmed mood on fixed income markets which remained in thrall to any future central bank trends.

Note that the IMF stressed that the eurozone would grow faster than the US in 2017. This is one of the factors underpinning our preference for eurozone equities, along with their attractive valuations and dividend yields.


  European equities

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Markets rose and fell in line with rumours that the ECB could slow its QE programme but ended the week almost flat. Oil broke above USD 51, taking energy and base product stocks higher with it. Banks and insurance companies were back in favour due to a rise in long bond yields.

New car registrations in Germany rose more than 9% in September, taking the YTD advance to 6.1% and helping auto stocks like BMW, Volkswagen and Daimler extend gains. At its investors' day, ING as expected said it was hoping by 2020 to report ROE between 10% and 13% and a cost/income ratio of 50-52% (compared to 56% today).

Accor delivered little fresh news at its own investors' day and disappointed traders took the stock lower over the week. The group simply reiterated its development plans in the luxury bracket and in digital investments. HotelInvest's EUR 7bn valuation has not changed for the time being. The proceeds from the spin-off could go on optimising the group’s balance sheet, returning cash to shareholders and/or making acquisitions. Airbus said it had delivered more A320ceos in September than expected but also admitted that a number of orders had been cancelled, mainly because of Kingfisher going bankrupt.

It was a busy week for M&A. LVMH acquired 80% of Germany’s Rimowa (high end luggage) for EUR 640m. NN Group launched a EUR 2.4bn bid on Delta Lloyd that will be financed by a mix of cash and debt. The price tag represents a 29% premium on the last quoted price. Innogy, which is 75% held by RWE, started trading on October 7. The IPO came at EUR 36, valuing the entire company at EUR 20bn. Total sold its Atotech subsidiary to the Carlyle fund for USD 3.2bn. And Amundi is reportedly well placed to buy Pioneer for around EUR 4bn.


  US equities

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Markets trod water in relatively quiet trading with no major news on the economic indicator front. Composite non-manufacturing ISM swept past expectations to hit 57.1, reinforcing the thesis that a buoyant economy would justify another hike in benchmark rates.

The next quarterly earnings season starts the week of October 10. The fact that there have so far been very few profit warnings is a good sign. There were a number of IPOs but the pace has slackened considerably with only 80 new listings to date compared to 143 over the same period last year. Tech stocks Nutanix and Coupa Software began trading and both soared more than 100% on their first day. Speculation on Salesforce or Google bidding for Twitter receded a little, sending the target’s stock 20% lower over the week. Note though that it had gained 50% in recent months.

Over the last 5 trading sessions, financials and energy stocks led advances. Property and utilities, the sectors most sensitive to any interest rate increase, posted steep losses.


  Japanese equities

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The TOPIX index rallied for a fourth straight day as the yen weakened, moving to 103.7 from 101.5 against the US dollar. This was due to growing prospects of a Fed hike in December after ISM manufacturing data trailed market consensus. The drop boosted Japanese exporters. Elsewhere, energy companies continued to enjoy gains as the oil price advanced.

Mining (+4.5%) led sector gains. The Insurance and Securities & Commodity sectors both gained more than 3% while Electric Power & Gas was this week’s worst performing sector with a 3.7% fall.

Several company news releases on business strategy attracted investor attention. Hitachi soared 6.4% after reportedly considering selling its stake in two subsidiaries.

Sompo Holdings also jumped after announcing the acquisition of New York-listed Endurance Specialty Holdings for about USD 6.3bn. Sumitomo Metal Mining declined 8.8% as the gold price extended its longest losing streak since May.


  Emerging markets

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Emerging stocks hit a one week high mid-week after the US released strong economic data, though bets on a December rate rise by the Federal Reserve brought many currencies under pressure. Robust US growth is generally seen as a positive for emerging markets even if it leads the Fed to raise interest rates.

China’s surge in home prices is fuelling fears that the housing market is in a bubble. Home prices started to take off last year in the wake of the stock market crash after the government’s eased curbs on property purchases. Shanghai property values jumped jumped 31% in August from a year earlier, the latest data show.

The Philippine Stock Exchange Index has dropped 2.8 percent since the eve of Rodrigo Duterte’s June 30 inauguration, the only decliner among major Asian gauges. The initial euphoria after his victory melted away as concern over high company valuations was exacerbated by his volatile response to critics of his deadly anti-drug campaign.

In India, the main event this week was the Reserve Bank of India’s decision to cut its repo rate by 25bp and stick with its accommodative monetary policy stance. This was due to lower food price pressure and very low rates across the globe.

Indonesia’s planed tax amnesty will potentially help clean up the economy as people build more trust in the government. President Joko Widodo has staked his credibility on an ambitious tax amnesty plan aimed at repatriating Indonesian cash stashed overseas, while giving evaders a way to come clean.

The Russian government gave permission for Rosneft to buy the government’s 50.08% stake in Bashneft (a smaller oil producer), according to an order published Thursday. The country’s largest oil producer will pay no more than RUB 330bn (USD 5.3bn) and should sign the deal by October 15, the directive shows. The Bashneft sale, part of a government effort to shrink its budget deficit, will be Russia’s largest privatisation since Rosneft’s USD 10.7bn IPO in 2006.

In Brazil, the stock market gained 4.4% after opposition parties lost 60% of municipalities in last weekend’s elections. This strengthened the view that the government might have enough support to pass reforms.

This week’s net subscriptions to emerging market equity funds were USD 1.4bn. Year to date, EM equity funds have seen net subscriptions of USD 12.1bn. We remain upbeat on emerging markets.



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Oil added to gains made after the OPEC meeting in Algiers agreed in principle to cut production.

Even if many questions remain unanswered, OPEC’s return to centre stage has helped oil move back above the USD 50 mark for the first time since last June. The main players are due to meet again in Istanbul at the World Energy Congress (October 9-13). These will be informal meetings so any market hopes for the agreement to be made official are likely to be disappointed. Attention will focus on Russia which is still blowing hot and cold. Moscow has welcomed moves to underpin oil prices but is apparently only prepared to make a minimal effort, i.e. stabilise output at current levels. The Venezuelan and Algerian oil ministers in contrast are arguing for bigger cuts of up to around 1.2 million b/d. In the meantime, action seemed all the more necessary after Bloomberg reported that OPEC’s output had continued to rise in September to a new high of 33.75 million b/d. At the same time, US crude inventories fell by a further 3 million barrels over the week, taking the drop in the last 5 weeks to 26 million or close to 5% of total stocks.

At the risk of sounding cynical, we might think that rising oil prices were good for the valuation of Saudi Aramco’s upcoming IPO. Crown Prince Bin Salman has talked of floating 5% of the company and a valuation of the entire company around USD 2,000bn.

In gold news, the ounce fell 3.4% on October 4, its biggest daily drop since July 2015. A number of factors led to his sell off, notably a Bloomberg report that suggested the ECB was considering a QE taper in the second quarter of 2017. This sent the US dollar higher and the Yen lower -gold’s correlation with the Yen has increased since the Bank of Japan took interest rates into negative territory last January- and the gold ounce fell below USD 1,300, a technical and psychological level that then prompted further declines. The price is expected to stabilise once Chinese investors return from the Golden Week holiday.


  Corporate debt

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Credit markets were stable over the week. Rumours of a possible ECB tapering triggered fresh volatility on risk-free bonds and the yield on the10-year German Bund moved back into positive territory. Itraxx indices were stable with the Main at 74bp and the Xover at 335bp.

The CSPP programme has bought EUR 1.8bn in debt securities per week since June for a total of EUR 30bn. New issuance in the investment grade segment calmed down this week. EDF issued green bonds with 8 and 12 year maturities and Sodexo sold a bond with a maturity of 10 and half years.

In contrast, the high yield new issues market remained busy. Air France sold a 2022 maturity yielding 3.75% and N&W, an Italian manufacturer of vending machines, made its debuts with a 7-year maturity yielding 7%.

The financial sector was marked by NN Group’s bid on Delta Lloyd and the ongoing Deutsche Bank saga. The German bank still faces a fine from the US Department of Justice but markets are now expecting it to be less than the USD 14bn initially mentioned.


New convertible issuance volume started the fourth quarter more modestly after the strongest quarter (USD 24.4 billion across 23 deals vs. 12.1bn in the same period in 2015) since the first quarter of 2015.

Macquarie Infrastructure sold a USD 325m 7-year convertible with pricing to be finalised on October 7. The proceeds will go on refinancing and general corporate purposes. There was also a small USD 55m issue from US oil and natural gas producer, Resolute Energy Corporation, mainly to finance the acquisition of certain oil and gas properties in Texas.

In other news, Dassault Aviation delivered its first Falcon 8X ultra-long-range business jet, the first of its kind in service. This is positive because it keeps the company on track to meet its delivery calendar. The Qualcomm/NXP saga continued with speculation that the two companies were in final discussions to combine but had yet to agree pricing (between USD 110 and 120 per share) and the deal’s structure (Qualcomm wants a 75% cash/25% stock mix while for NXP is arguing for 100% cash). Elsewhere, Salesforce was hit by heavy selling on reports that it was now alone in looking to buy Twitter after Google and Disney withdrew from the bidding.

In Asia, property developers like China Overseas Land came under pressure on news that regional authorities had reintroduced restrictions on property purchases owing to concerns that the Chinese housing market might be overheating. In the coming week, we will be closely monitoring the release of Sony’s new PlayStation VR headset.

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