Equity and bond markets had a really good week

Asset Management - 12/08/2016

At long last, equity and bond markets had a really good week. The rally was triggered by earnings that came in better than (admittedly low) estimates, US jobs data, a rebound in oil prices as rumours swirled over a possible OPEC agreement and decisions by central banks to maintain accommodating policy.
Commodities Corporate

Trading was quiet but any structural problems, and in particular the eventual consequences of Brexit, were for the time being pushed to one side. Italy, however, remains a source of concern due to its ailing banking system and doubts Matteo Renzi will win the upcoming institutional referendum.

The dividend yield on the STOXX 600 is still running at an attractive 3.6%. We remain overweight eurozone equities and corporate bonds.



  European equities

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Equity markets resumed their upward trend and wiped out post-Brexit declines on an oil price rally and generally good quality earnings.

Henkel raised annual guidance after reporting better like-for-like growth and a higher EBIT margin. Thyssen's fiscal third quarter was also upbeat thanks to its steel business both in Europe and in the Americas.

In contrast, German utilities disappointed investors. RWE was hit by its Trading/Gas Midstream division and EON by costs at its UNIPER subsidiary (gas, coal and hydroelectric power plants and electricity trading).

In telecoms, SFR suffered further subscriber losses both in mobile and land lines as competition heated up, notably with Orange. SFR's management is nevertheless pleased with higher tariffs due to content offers, reduced subscriber attrition thanks to network improvements and its cost-cutting plan. All these factors will make a positive contribution to operating profits. Elsewhere, Deutsche Telekom’s results saw further momentum in the US where sales rose 10% in the second quarter after rising 13% in the previous quarter. The group expects operating profits to be stable in Germany in 2016.

In M&A, Vinci has bought the Lamsac and PEX motorway concessions in Peru for EUR 1.5bn. Randstad (interim employment and recruiting) paid USD 429m for Monster, a move that was largely motivated by its wish to access on-line recruiting technology.

In Italy, the Atlante 2 fund set up by the country's banks to help the weakest lenders is now up and running. It has so far raised EUR 1.71bn from Italy’s financial institutions. It hopes to reach EUR 2.5-3bn by the fund’s first closing at the end of September. The fund will subsequently continue to raise money from both Italian and non-Italian companies with a target of EUR 3-3.5bn by July 31 2017.



  US equities

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US indices hit fresh highs as results and macroeconomic data remained encouraging. Jobs data in particular helped reassure investors with record job offers and stable jobless claims.

Consumer stocks like Ralph Lauren, Macy’s and Nordstrom took the market by surprise by announcing sharp improvements in trading after two tricky quarters.

In healthcare, Bristol Myers tumbled after announcing that clinical trials for its anti-lung cancer drug Opdivo had failed. Merck’s Keytruda, a rival drug, is expected to benefit and capture a bigger share of the immunotherapy market.




  Japanese equities

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The TOPIX gained 2.5% after the yen weakened on better-than-expected US job data for July. The yen sagged to 102 against the US dollar at the beginning of the week on growing expectations of a US rate hike by December due to the robust US labour market. The movement boosted Japan’s exporters. Shares in financial sectors also climbed as long-term yields rebounded after the BoJ said it would be assessing the effectiveness of its negative interest rate policy at its September meeting.

Mining (+6.5%) led gains. Financials such as Other Financing Business (+4.8%) and Banks (+4.6%) also advanced. Only 3 sectors including Rubber Products (-2.8%) posted negative performance.

Concordia Financial Group, the largest regional bank group established in April 2016, jumped 10.5% when it announced a share buyback for a maximum of about 1.54% of its outstanding equity.

In contrast, ONO Pharmaceutical plunged 16.4% after analysts downgraded its rating or lowered their target price on anxieties over stagnant sales of Opdivo, a new anti-cancer drug. This followed a Bristol-Myers Squibb research report on the controversial drug.



  Emerging markets

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China’s earnings season got off to a strong start with internet companies leading the charge. Alibaba's sales soared 59%, the biggest increase since it was listed, and earnings jumped 28%. JD.com halved its losses thanks to a 42% boost to revenues. Weibo’s earnings also rocketed, rising 488% thanks to economies of scale after revenues rose 36%. China Mobiles’ results also beat expectations with an annualised rise of 9.4%.

Thailand’s referendum approved the military government’s appointment of 250 senators; they will sit in the lower house and help vote for the next Prime Minister. Investors saw the result as a positive as it marked a return to political stability. India’s central bank left interest rates unchanged.

In Brazil, Petrobas reported, as expected, a 30% drop in results but reassured investors by posting positive cash flow. Gross operating profits at CCR (concessions and construction) rose 13% but the net figures plunged 20% primarily on higher financial charges. Brazil’s retail sales were down by an annualised 5.2% but are stabilising as they are up 0.1% MoM. Mexico’s airport traffic remained buoyant, posting average growth of 10%.

Most downward revisions in emerging country earnings have occurred which explains why performance has been upbeat since the beginning of 2016. We still have a bullish outlook on these markets.




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Commodity prices stabilised this week. Oil prices rebounded early in the week following news that OPEC countries were to meet at the forthcoming International Energy Forum in Algiers in September. We do not, however, expect a freeze on output given the market's trend towards rebalancing. But oil prices were subsequently hit by weekly inventories in the US which showed crude stocks had risen further to a seasonal high. In its monthly report, the US Energy Information Administration (EIA) confirmed that US output was on a downtrend, falling 0.2 million b/d in July compared to June, but it revised up its estimates of average production levels for 2016 by 0.1 million b/d to 8.7 million and to 8.3 million in 2017. This compares with 9.5 million b/d in 2015. At the same time, the agency now expects non-US output in 2017 to fall more sharply, by 0.3 million b/d, a trend which we feel will gather strength. Meanwhile, the International Energy Agency has revised down global growth in demand for 2017 by 0.1 million b/d, citing uncertainty over the world economy.

Nickel prices remained underpinned by news of mine closures in the Philippines. In the aftermath of the recent elections, the new government is targeting production which does not comply with environmental norms. The Philippines had replaced Indonesia on the nickel market following the latter’s decision to ban exports in 2014. Now trading at close to USD 10,800/t, nickel has risen 23% so far this year.

Data from the World Gold Council for the second quarter confirmed the trend established in the previous quarter: robust investment demand, primarily for ETFs but also bars and coins reached record levels in the first half amid ultra-accommodating central bank policy. But strong gold prices took jewellery demand to a low last seen in the second quarter of 2010, with China and India, the two biggest consumers, down 15% and 20% respectively.



  Corporate debt

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Credit markets advanced with the iTraxx Main and Xover stabilising at year lows of 65bp and 307bp respectively. As a result of quantitative easing by the ECB and Bank of England, investors are chasing yield by going for euro-denominated corporate debt.

The sterling and US dollar new issues market remained busy. Standard Chartered and RBS issued fresh dollar-denominated Additional Tier 1 debt, attracting strong demand with order books more than 10 times oversubscribed. The US high yield market was equally active with a crop of placings. But the summer break was in evidence in Europe and no new issues are expected before Labor Day in the US in September which traditionally marks the resumption of business after the holidays.

In the ongoing earnings seasons, Altice’s second quarter results beat consensus expectations but Numericable-SFR continued to suffer from steep competition. Bombardier posted a loss of USD 0.53bn and has consumed USD 1.2bn in free cash-flow since the beginning of 2016. But these results had been flagged by management and the group says it is on track to reach its annual and medium term results. Hapag-Lloyd saw EBITDA plunge 60% in the first half of 2016.


Steinhoff International agreed to buy Mattress Firm for USD 3.8bn (including net debt), creating the world’s largest bedding giant and at the same time entering the US market. The company will raise USD 3.8bn through loans (a mix between bridge and 2-3-5Y term loans) by the end of Q3. Moody’s reaffirmed its Baa3/stable rating outlook following the acquisition news. At the same time, it raised its bid on Poundland by 5% to 227 pence, valuing the budget chain group at roughly GBP 610m.

Ageas posted EUR 566m in second quarter net profits, generally in line with estimates, primarily thanks to a EUR 404m capital gain from the sale of its life business in Hong Kong. It also announced the launch of a new EUR 250m share buyback. Deutsche Wohnen unveiled upbeat first half results. Its gross rental income rose to EUR 347.8m, up from 313.3m last year. EBITDA jumped 18% thanks to further efficiency gains in business operations and a fall in general expenses. The company has raised its full year FFO I target by EUR 20m to over 380m.

In Asia, the pace of the oil price rebound (WTI is now back around USD 44 against 39 in early August due to speculation that producers will be meeting to discuss stabilising the market) combined with good economic numbers in China (inflation there appears to be stabilising), paved the way for an Asian equity rally.

Trading on credit markets was relatively quiet with spreads tightening by a couple of basis points over the week. All eyes were on SMIC this week. The integrated circuits producer reported strong Q2 results, beating estimates on net income (USD 97.6m vs. 66.6m) and gross margin (31.6% vs. 25.4%), and the stock jumped 11.43% on the week. Mid-week, Suntec Real Estate in Singapore issued SGD 300m in convertible bonds due 2021.

In the US, Liberty Media is issuing USD 425m in 30Y convertibles (Put&Call 5Y). This is an exchangeable into Time Warner Inc. shares. The deal was supposed to be priced on August 12. On Tuesday, Nuance shares were down nearly 8% after weaker-than-expected Q3 revenues on “faster erosion in healthcare, transcription and devices”. But it’s not all doom and gloom: management is still confident that they will deliver 100-200bp in like-for-like top-line improvement next year.

Written on 12/08/2016

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