Profit taking after Emmanuel Macron's victory

Market analysis - 12/05/2017

Equity markets edged lower on profit taking after Emmanuel Macron’s victory in the French presidential elections.

European markets had surged after the first round so they had already discounted the success of the pro-Europe candidate. The key political issue is what sort of new Europe will result from an expected reinforcement in Franco-German cooperation but we will, at any rate, have to be patient, if only because of the approaching French, and then German, parliamentary elections. 

Oil prices remained volatile due to persistently disappointing news on inventories. However, the May 25 OPEC summit holds out hope that producer countries will extend efforts to regulate supply. The economic recovery had shown signs of running out of steam in recent weeks but this week's economic data suggested it was still on track. In the US, for example, 211,000 jobs were created in April, a rebound from a weak March, while unemployment fell to 4.4%. Germany’s GDP grew 0.6% in the first quarter compared to the fourth quarter of 2016, or 1.7% YoY. In China, the central bank’s efforts to orchestrate a slowdown appeared to be continuing and monetary aggregates declined at a slightly faster pace than expected. Investors have factored in a Chinese slowdown but would start to worry again if it were to be stronger than expected. We have maintained our asset allocation bias in favour of equities as a whole with a preference for the eurozone and Japan. 

  European equities

European markets consolidated after Emmanuel Macron’s presidential election win in France. Quarterly earnings reports continued to have an impact. Banks, telecoms, media and construction lost ground while energy and healthcare led gains. 

This week’s upbeat results came primarily from banks. Natixis beat consensus estimates by 8%. All divisions at ING, apart from retail banking in Belgium, performed really well. Crédit Agricole reported reassuring figures across its businesses and showed that costs were under control. 

Elsewhere, Deutsche Telekom's results were in line while poor conditions in Spain weighed on Telefonica’s performance. SFR’s results were encouraging. Diageo's sales were in line and management maintained guidance for 2017. Sales at Eiffage rose 8% and the order book grew 7.7%, providing confirmation that construction in France was recovering, notably due to the Grand Paris project. ENI had a good first quarter and generated an impressive EUR 2.6bn in cash flow. Ahold Delhaize’s first quarter net earnings soared 73% despite an unfavourable deflationary trend in the US.

In M&A news, Akzo Nobel rejected PPG’s third bid. PPG now has until June 1st to file its official bid with the Dutch market authorities. Danone is reportedly in talks with China’s Yili Industrial to buy its Stonyfield bio yoghurts for USD 850m which is more than expected. Adidas has sold its golf brands TaylorMade, Adams Golf and Ashworth to private equity fund KPS Capital Partners for USD 425m. Vivendi has launched a EUR 9.25 a share bid on Havas. The price represents an 8.8% premium. 

  US equities

The S&P edged lower while the Nasdaq hit new records and ended the period at 6,130. There was little macroeconomic news as the earnings seasons drew to a close. The US and China signed a trade deal giving US beef producers, electronic payment companies and natural gas players access to the Chinese market. This was a long way from Donald Trump's recent declarations on China. As such, it echoes his shift on NAFTA barely two weeks ago when he finally decided a unilateral exit from the agreement was no longer on the cards. 

Out of 455 companies to have reported first quarter results, 339 have managed to beat expectations while 107 have fallen short. Aggregate EPS came in at USD 30.71 or 14.59% higher than in the first quarter of 2016 and 5.14% more than consensus expectations of USD 29.21. 

Apple's market cap hit more than USD 800bn, a new record. Valeant climbed by almost 9% after the legal dispute over Xifaxan was settled favourably. Whole Foods Market gained more than 2% on upbeat figures and news of a share buyback. AAL and UAL rose by close to 5% after the former reported strong passenger traffic figures. Marriott advanced by 6%, also on strong results. 

Among disappointments, department store chain Macy’s tumbled 17% when sales missed expectations and other sector stocks like JC Penney (-7%) and Kohls (-8%) were dragged down with it. Disney also saw strong selling when its partly owned ESPN sports channel reported disappointing ad revenues and because of the weak consumer segment. This earnings season has been rather difficult for media companies. Over the last 5 trading sessions, energy and technology led advances. Financials and healthcare were the worst performing sectors.  

  Japanese equities

The TOPIX gained 2.3% while the Nikkei 225 marked a 17-month-high on persistent yen weakness against the US dollar. Stocks were also buoyed by JPY 910bn in non-domestic investor inflows to Japanese equities in April. Towards the end of the week, the Nikkei 225 flirted with 20,000 but fell short on profit taking.

Air Transportation (+5.0%), Information & Communication (+4.2%) and Construction (+3.7%) led advances. SoftBank Group, the mobile phone carrier, rose sharply after consolidated net profits topped JPY 1 trillion for the first time after Toyota Motor Corporation. Fast Retailing, a clothing store chain operator, jumped 7.1% on April’s existing store sales rising 6.2% YoY. Other major winners included Kao Corporation (+9.5%), Daiwa House Industry (+8.0%) and Shiseido (+7.3%).

In contrast, Subaru Corporation tumbled 6.7% on disappointing operating profit guidance for the next fiscal year. Daikin Industries (air conditioning and electronic parts) and TDK retreated on weaker-than-expected operating profit estimates for the current fiscal year. 

  Emerging markets

Emerging markets gained 2% in USD during the period. First quarter results were generally upbeat across the board. In China, EPS grew 22% and companies increased their dividend payout for the first time.

On the macro side, April’s exports rose 8% (below consensus, but in line with the first quarter) and imports came in 12% higher (below consensus of +18%), due to lower commodity prices. FX reserves increased for the third consecutive month.

April’s CPI inflation was 1.2%, or a bit higher than consensus. Core inflation was 2.1%. We added NetEase, which had just beaten first quarter EPS expectations by 16%.

In India, company results were in line. In the capital goods space, Havells published 20% recurring EPS growth (ex-extraordinary items). On the consumer side, Zee TV managed to improve its margins despite flat top line growth, Godrej Consumer’s results rose 22% YoY or more than expected. Given the telecom price war, Bharti Airtel unsurprisingly reported very bad poor results which fell 28% YoY on a recurring basis. The bad news of the week came from Yes Bank which disclosed a INR 42bn discrepancy in its annual report with the RBI’s assessment. Despite the fact that the bank managed to recover a substantial part and keep its profitability intact for FY17, question marks were raised on the management’s reliability.

In Korea, the highlight was the victory of Moon Jae-in as president and the bringing to power of the Liberal party. The new president wants to resume talks with North Korea which could indirectly improve relations with China and benefit Korea’s exports.

In Brazil, results beat expectations, mainly EBITDA and earnings, on lower financial expenses. In the auto industry, Randon’s top line was still negative but the EBITDA margin jumped 200bp YoY to 8.3% (vs. consensus expectations of 7.3%). This was down to good cost control performance and market share gains as imports fell. In Mexico, the main highlight was Walmex’s stronger-than-expected 10% increase in April same store sales, better than the 8% rise expected by the consensus. In Argentina, April inflation was 2% MoM or more than expected. We believe the central bank will keep interest rates unchanged at 26%. Argentinean banks presented a good set of results, with loan growth in line with 2017 guidance of +35% (real growth of 10-15%). 

  Commodities

Have oil prices returned to normal or is this just a pause? At any rate, prices have recovered from last week’s lows for Brent crude (USD 46.6) and WTI (43.8) to USD 50 and 48. This high volatility was once again due to US inventories. This time, crude stocks fell by a significant, 5.2 million b/d, the biggest drop so far this year. The decline reflected a sharp fall in imports and signs that floating stocks had also declined.

Meanwhile, OPEC’s monthly report said compliance with production quotas was still running at a very high 111%, up from 110% in March. OPEC also revised up its forecasts for non-OPEC global supply by 373,000 b/d, taking YTD increases to 950,000 b/d. Demand was left unchanged at +1.27 million b/d. The next important report will come from the IEA on May 16. 

Looking beyond the raised outlook for supply growth, the key factor is global inventories as of end March. Ahead of the May 25 OPEC summit, the Iraqi and Algerian energy ministers confirmed that all member countries were in favour of extending the production cuts for another 6 months. 

Another upcoming meeting is the One Belt, One Road forum, the new “Silk Road”, scheduled for May 14 &15 in Beijing. The transport, infrastructure, energy and telecom sectors are among those involved. Not many precise figures are expected to emerge but the event should provide confirmation of the project's strategic importance and it should lift demand for commodities like steel, copper and aluminium. At the same time, Chinese steel and coal capacity continues to fall, a development which is helping clean up these industries. 

  Corporate debt

 

Credit

European corporate debt markets continued to perform well. Although Emmanuel Macron’s election had largely been expected between the two rounds, risk premiums remained solidly rooted at historic lows. The Main and Xover quoted 63bp and 258bp respectively. Year to date, the euro investment grade bracket has risen 0.8% while high yield euro bonds have advanced more than 3%.

Due to the black-out period, there were no new issues this week. Quarterly results in Europe were generally upbeat with positive surprises running at 75% for sales and 64% for net earnings. The improving fundamentals of companies in our universe warrant today’s tight spreads. 

Europcar (B1/B+) said sales had risen 3.2% to EUR 439m on strong performance in Cars (+4.3%), InterRent (+49%), and Vans &Trucks (+4.5%). EBITDA fell by EUR 1.5m to minus 6.2m and free cash flow was a negative EUR 27m, primarily due to non-fleet capex doubling to EUR 12m. Results at Altice (B2/B+) were in line. Overall sales rose 32% to EUR 5.93bn and EBITDA was 9.5% higher to EUR 2.24bn, improving margins by 2.2 points. Trading stabilised in France and Portugal and performance remained strong in the US. 

Titan also released excellent results on a strong 27% increase in the US which accounted for 61% of sales in the quarter. Overall sales rose 7.1% to EUR 362m and EBITDA jumped 18% to EUR 51m. 

CGG (Caa3/CCC) is in the thick of financial restructuring and results missed expectations. However, the group says it disposes of USD 390m in cash or enough to keep the group functioning until March 31 2018. For holders of its high yield debt, CGG’s offer would mean total conversion into equity at USD 4 a share and USD 325m in new money through a new high yield issue with share warrants.  

Convertibles 

It was another busy week in the convertibles space with numerous company results and primary deals.

In Europe we saw another French company tapping an existing CB deal. Construction and concessions company Vinci added an additional USD 125m to its original USD 450m 0.375% 2022 non-dilutive convertible which was issued in February.

In the US‎, DexCom (continuous glucose monitoring solutions for diabetes) issued USD 350m with a 2022 0.75% convertible at a 35% premium for refinancing and general corporate purposes. Another vanilla CB deal in the US came from Kaman Corp (aerospace and industrial distribution) which issued a USD 175m 3.25% 2024 convertible at a 25% premium to repay existing debt.

On the earnings side, in the US, Nuance Communications released a very strong set of results aided by its mobile and enterprise segments with sales growth of +5% QoQ; the stock reacted positively, jumping 8%. In Europe, Aperam reported a solid first quarter beat with EBITDA at EUR 171m as the Brazilian market started to stabilise. Air France reported another strong quarter owing to a 1.5% fall in non-fuel unit costs and continued improvement in revenues with a mere 0.2% decline QoQ.

In Japan, Toray Industries disappointed investors with weaker-than-expected earnings. EBIT declined -5% YoY due to reduced use of fibre in aircraft. In China, Semiconductor Manufacturing International reported first quarter results below estimates: EPS declined 33% QoQ owing to higher operating expenses. In addition, the company guided for a 3-6% decline in second quarter sales owing to seasonal inventory corrections and tepid handset growth in China. In Thailand, conveniences store chain CP All reported an 8% increase in first quarter revenues YoY and net profit up+17.2% YoY; management confirmed its expansion strategy with more than 700 stores expected to open in 2017 so as to reach the 13,000 target in 2021.

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