All calm despite Donald Trump and Italy

Análisis de mercado - 11/05/2018

Global stock markets continued higher despite the US decision to withdraw from the Iran nuclear agreement. Looking beyond the positive impact of higher oil prices on oil and cyclical sectors, US inflation for April also helped stimulate market rises, especially in the US and Asia by coming in at +0.2% instead of the +0.3% expected. And it offset the negative pressure on equity market sentiment from rising bond yields and US dollar strength. (English version)

Annual inflation is running at 2.5% due to last Spring's base effects but underlying inflation, i.e. ex food and energy, is now at an annualised 2.2%. The Fed pointed out at its monetary policy meeting that its 2% inflation target was symmetrical, a sign that it was prepared to put up with inflation above this level, especially when temporary factors were at play. The inflation figure may have reduced tension on emerging country currencies and credit indices but there is a strong likelihood inflation will accelerate in coming months due to rising oil prices and the looming driving season.

The other focus of attention this week was Italy. Silvio Berlusconi had always refused to let his Forza Italia party support any government with the M5S party in it, but he suddenly changed tack by declaring that he would not object to the Liga forming a coalition with M5S. Both these parties say talks have made significant progress. As a result, Europe could see its first anti-system government in Europe before the end of the week.

  European equities

European equities ended the week higher amid persistently robust first quarter results, political horse-trading in Italy, even higher oil price rises and US dollar gains against the euro.

In food retail, Ahold Delhaize’s figures were a favourable contrast with competitors. Like-for-like growth in the Netherlands and the US rose 3.2% and 2.8% respectively and operating profits came in higher than expected, underpinning the promising outlook for cash flow generation and shareholder returns.

Lafarge, following on from HeidelbergCement a few days previously, reaffirmed its growth targets for 2018 despite a soft start to the year which the company attributed to weather and calendar effects.

ArcelorMittal posted record quarterly profits on an 8% rise in prices compared to the end of 2017. Cash flow generation was, however, slowed by rising inventories, both in volume and in value. The order book remained strong.

Siemens’ results were a relief as expectations were low. Further declines in the turbine and energy division and the need to continue restructuring the joint venture with Gamesa were offset by strong performance from the digital factory division. Management is expected to release a 2020 strategic plan soon.

Despite low growth in interest revenues, Europe's banks reported positive results on rising commissions and a reduced cost of risk. This allowed ING to continue growing and Intesa Sanpaolo to maintain its generous dividend. UniCredit’s recovery continued and the bank announced the complete winding down of its non-core division by 2021 instead of 2025. German media group ProSieben failed to completely reassure investors despite reporting results in line, adopting a new reporting format and reaffirming its full-year guidance.

In M&A, Saint-Gobain threw in the towel and abandoned plans to acquire Switzerland’s Sika. The group will, however, keep an 11% stake for at least 2 years and make after-tax capital gains of around CHF 600m. Nestlé has paid $7.15bn to sell Starbucks products outside the Starbucks chain circuit. The deal represents sales of around $2bn and will allow it to reinforce its North American presence in coffee.

  US equities

US markets rose over the week, totting up 6 consecutive up sessions, the longest series in 6 months. The S&P gained 2% and the Nasdaq 2.2%. Investors liked lower-than-expected April inflation (+0.2% instead of the +0.3% pencilled in) and pushed stocks higher. The dollar has stabilised at relatively high levels since the middle of April and oil closed at a high not seen since the end of 2014 on Middle-East tensions.

Indices continued to be driven by technology which gained 5.8% over the week. Tech stocks rose on strong earnings growth and massive buybacks. Apple, for example, is to spend $100bn on buying back stock. Tensions with Iran have also pushed energy stocks 6% higher year to date, a strong performance albeit less than the 12% surge in Brent crude.

With 85% of US quarterly earnings reports in, shareholder returns have hit a record $1 trillion. In IPO news, AXA raised $2.75bn from listing 24.5% of its AXA Equitable Holdings affiliate. The deal was the biggest IPO so far this year on the US market, but the listing price was lower than expected. 

  Japanese equities

The TOPIX edged up 0.34% over the week. After lengthy national holidays and amid receding geopolitical risk, Japanese stocks were largely unchanged with, on the one hand the Yen stable at around 109 against the US dollar, a good point, but, on the other, concerns over earnings guidance for FY2018 (ending in March 2019). After seeing record earnings in FY2017 (ending 31 March 2018), most market participants are focusing on individual company earnings guidance for the next fiscal year. So far, most companies are assuming around 105 for the yen against the dollar in their forecasts.

This week’s star performance came from human resources giant Recruit Holdings which jumped 6.86% after announcing the acquisition of US Glassdoor. Toyota Motor (+5.96%) and wholesale trading companies such as Marubeni (+4.75%) and Mitsubishi Corporation (+4.56%) were also strong after posting record earnings.

On the other hand, Air Transportation (-3.13%) was the worst performing sector due to rises in oil prices. Japan Airlines sank 4.05% and ANA Holdings lost 2.30%. Innovative carbon fibre producer Toray also declined 6.68% on worries over rising raw material costs.

In the largest ever M&A deal for a Japanese company, Takeda Pharmaceuticals reached an agreement to acquire Ireland’s Shire. Other pharmaceutical companies such as Otsuka Holdings (-6.68%) were weak on worries over intensified competition.

  Emerging markets

Chinese e-commerce companies are generally seeing reduced margins because of hefty investment but they are still managing to post upbeat results. Alibaba’s sales rose 61% and earnings 31%, or more than expected, but management is also going for a 60% increase in future sales compared to the expected 40%. JD.com results fell by an annualised 41% despite a 33% rise in sales due to investments in logistics and sales promotions to counter increased e-commerce competition. Despite Weibo’s superb 94% rise in sales, the company admitted that video platform competition from Douyin, for example, could get tougher in the next 12 months. Autohome announced a strong 42% increase in results. April auto sales in China rebounded by 15%.

Indian consumer companies released generally satisfactory results, up 71% for Titan (jewellery), +23% for Whirlpool and +13% in operating results for Asian Paints. ICICI bank saw results plunge 50% due to a 129% increase in provisions.

Taiwan’s export growth slowed to 10% (vs. 12.3% expected) and South Korea's exports contracted by 1.5% instead of rising 3.3% as expected. However, Globalwafers (TW) still managed to increase results six-fold (+576%). Indonesia’s 10-year bond yields broke above 7% and the Rupiah sneaked across 14,000 vs; the US dollar. We are underweight Indonesia.

Petrobras announced an excellent 56% surge in results and pursued its deleveraging efforts. Management said output would grow over the next 2 years and unveiled a new dividend policy. Iochpe and Randon also reported upbeat results as sales in the national auto industry recovered. Brazil’s B3 stock exchange missed earnings expectations. Brazil’s GDP growth in the first quarter was disappointing and inflation continued to come in lower than expected in April.

Mexico’s consumer confidence levels rebounded in April after falling for 4 months.

Argentina asked the IMF to help with its external funding needs and undertook to reduce the budget deficit by 0.5% up to the end of 2018. Last week, its central bank increased its benchmark rate by 625bp to 40% in an effort to stem the currency’s fall. Mercado Libre posted disappointing results. Russia’s Sberbank reported a robust 27% YoY increase in results over the first four months with ROE at 22.9%.

  Commodities

On January 12 this year, Donald Trump called it the last chance when he once again extended the sanctions reprieve by 120 days but demanded changes to the 2015 Joint Comprehensive Plan of Action which was designed to curb Iran's nuclear programme. Just a few days before the end date, he declared that the US was withdrawing from the agreement and that US sanctions against Iran primarily targeting the energy and banking sectors would be reintroduced. Europe responded by maintaining its commitment to the agreement while agreeing to work towards a broader framework. Iran intends to hold talks with European countries, Russia and China to preserve the current agreement but has threatened to resume uranium enrichment if discussions fail. The uncertainty ahead explains why Brent crude added another 8% over the week to hit $77. It looks well on its way to $80, a level considered totally out of reach back in January 2016 when it was trading below $30.

As for what this all means for output, Iran’s production during the previous sanctions period fell by 1 million b/d to around 2.7 million b/d and exports fell from close to 2.2 million b/d to roughly 1.1 million. Iran’s production during the previous sanctions period fell by 1 million b/d to around 2.7 million b/d and exports fell from close to 2.2 million b/d to roughly 1.1 million. China, India and Turkey account for 50% of Iran's oil exports and will continue as before. China might even up its imports due to mounting demand. Its oil imports hit a record 9.6 million b/d in April, up 15% over a year. Europe represents around 20% of Iran’s oil exports and should see this slump, even during the 6-month adjustment period before the US considers the ban binding.

As a result, Iran’s exports could fall by 0.2-1 million b/d over the next 6 months. Saudi Arabia has the capacity to offset this drop but will only do so jointly with other OPEC/non-OPEC countries, and especially Russia. For the moment, it will wait to see what the actual impact on the market is. The next OPEC meeting is scheduled for June 22. Given today's environment and normalised inventories, it is highly likely that Brent crude will trade in the $70-80 bracket over the short term but these sort of price levels should soon start to dampen demand growth.

  Corporate debt

 

Credit

Spreads started the week generally unchanged in thin trading but the Xover tightened by 5bp on Thursday. Italian issuers came under a little pressure due to the risk of new elections. Donald Trump’s decision to exit the Iran nuclear agreement had no significant impact on credit markets. Smurfit Kappa (Ba1/BB+, paper) released upbeat Q1 2018 quarter results with sales up 7% and EBITDA 22% higher over a year. The group benefited from sustained demand in most markets as well as higher prices. Schaeffler (Baa3/BB+ industrial and auto equipment), saw revenues rise 3.9% in the first quarter on like-for-like currencies but EBITDA fell 6% on significant R&D costs.  The group said it would pursue its restructuring plan which includes 950 job losses.

Kronos (B1/B, workforce management software), reported sales up 16% and EBITDA 87% higher over a year thanks to higher prices in Europe and North America. UPC Holdings (Ba3/BB-, telecoms), reported disappointing results with sales down 1.9% and EBITDA 8.6% lower on intense competition. VodafoneZiggo (B1/BB-) said sales had fallen 4% and EBITDA 2.8%, but the company won new subscribers and EBITDA was down less than previously announced. Vodafone (Baa1/BBB+) is to buy the businesses of Liberty Global (Ba3/BB-) in Germany, Hungary, Romania and the Czech Republic for €19bn.

The assets represent 28% of Liberty’s adjusted EBITDA in 2017 and the deal values them at 11.5 times 2017 EBITDA. The acquisition will require the European Commission’s approval.

Convertibles 

In new issuance, Chinese steel producer Angang Steel issued HKD 1.85bn in zero coupon convertibles for general corporate purposes. In the US, Hope Bancorp, a holding company of a commercial bank for SMEs, came to market with $200m in 20Y (5Y put/call) 2% coupon convertibles for share buy-backs and general corporate purposes. Another deal in the US came from pawn shop operator Ezcorp which issued £150m 7Y 2.375% convertibles to fund acquisitions. Steinhoff released an update detailing further progress made in reducing its South African debt since March 31 and its intention to hold a meeting on 18 May to present a restructuring proposal for its European and US debt. It also said that PWC had confirmed accounting irregularities identified by Deloitte and the expected overstatement and resulting asset impairments would be published with its interim results in June.

In the US, cloud-based communication solutions RingCentral reported a strong first quarter with revenues up 34% to $150.3m driven by both new customers, global expansion (Australia) and expansion within the installed base (especially in mid-market and enterprise customers). Elsewhere, Nabors Industries (Oil and Gas services) is to sell 35 million common shares and a new 6% Mandatory Convertible to repay outstanding borrowings (revolving credit facility).

In Asia, Ayala Land, a property developer in the Philippines, saw its earnings rise 17% to P6.52bn in the first quarter as domestic demand rose 23% YoY. And in Japan, construction company Shimizu, released its FY18 numbers, down 3.1% YoY for revenues and down 5.8% YoY for operating profits. It also forecast profits of JPY 123bn next year, up 1.3% YoY, as progress will be made on large scale projects.

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