It was a busy week for central bank news. In the previous week, the ECB had pleasantly surprised market by announcing it would be buying corporate debt as early as June but this week the Bank of Japan caught investors short by doing nothing

Asset Management - 4/29/2016

​In spite of an increasingly fragile economy, prices which are struggling to rebound and the strong Yen, rates were left unchanged at minus 0.1% and there was no change to the size of the QE programme either. We have to assume the BoJ dislikes yielding to market pressure, especially when the government still has not decided whether to put back a scheduled VAT hike. Officially, the bank is still assessing the impact of negative interest rates and the door is still open for a July move.

Meanwhile, the Fed now seems to be heeding improvements in emerging countries, and China in particular. After this week's meeting, there was no mention of the global economy facing risks. But the bank is still closely watching US growth, particularly the improving labour market. The resulting message is much more neutral than the concerned tone adopted in recent months.

The week was also full of economic statistics. Business climate and US GDP data confirmed that the situation was improving but the global industrial picture remained sluggish. Note that French and eurozone GDP grew more than expected due to higher consumer spending and investment. US GDP grew at a relatively tame pace but the second quarter is expected to rebound thanks to strong labour markets and the recent drop in the US dollar.

Equity markets sank on the disappointing news in Japan despite an upbeat start to the earnings season and rising oil prices. Global equities ended the week 1.5% lower with Japan down by more than 4.5%. We remain confident in eurozone equities, especially as earnings expectations look too low to us given micro and macroeconomic fundamentals. However, following the strong gains notched up in recent weeks, our short term view is that volatility could resurface and we are sticking with last week's decision to take some profits. On bond markets, we still like eurozone peripheral government bonds as well as European corporate debt. As a result, our portfolios are overweight credit, and high yield in particular.



In a week which saw a raft of company results as well as the Fed meeting and talks over the Greek question, markets edged lower. In construction, Saint Gobain's like-for like growth improved, mainly due to French sales stabilising. Nexity offered confirmation that the cycle was on track with a very strong 35% jump in home reservations. It was the same story in IT: Capgemini followed suit from Atos and reported solid like-for-like growth of 2% and a reassuring number of new orders for the rest of the year. In the outsourced R&D business, Altran saw like-for-like growth of 6% with France up sharply by 6.8%.

Results were more mixed in Aerospace/Defence. Airbus suffered from execution problems in steeping up A350 production but Safran grew by 6.7%, or more than expected, as both original equipment and after sales services performed well. The headline event was DCNS, 35% owned by Thales, which won a EUR 8bn contract to provide submarines to Australia. Elsewhere, figures from STM (semiconductors) and BASF showed that the cycle really was turning up. Following the breakdown in merger talks with Bouygues Telecom, Orange posted reassuring figures. Operational trends will underpin Ebitda growth in 2016 with improved ARPU in mobiles and strong momentum in new landline contracts due to heavy investment in fibre technology. Telefonica's results were in line as upbeat performance in Spain offset German weakness.

Elsewhere, EDF unveiled a EUR 4bn rights issue and said its GBP 18bn Hinkley Point project was delayed. The French government has decided to impose a minimum CO2 price, a move which would secure the electricity generation business in France. Engie surprised the market with improved profitability as lower commodity prices were offset by cost cutting. 

It was a hectic week for M&A with FNAC finally winning the battle for Darty with an expensive counterbid that was 42% higher than the initial offer and Sanofi officially bidding USD 9.3bn for US biopharma company Medivation. Sanofi also released its results. Its US diabetes business remained weak (-17.8%) but this was offset by strong 20.5% growth at Genzyme which allowed the group to reiterate its full year guidance.



US equity markets edged lower over the period. A raft of economic data- new home sales, durable goods orders and consumer confidence- fell slightly short of expectations and failed to present the US economy in a new light. In line with the moderate growth trend, quarterly GDP growth came in at 0.6%. This left the Fed in cautious mode even if the bank stressed how well the labour market was doing.

As the earnings season progressed, the M&A market remained active. In healthcare, Abbott paid USD 25bn, a 37% premium, for St Jude Medical. AbbVie acquired Stemcentrx for USD 5.8bn. Other sectors were equally active. Comcast paid close to USD 4bn for Dreamworks Animation and Oracle acquired construction software company Textura for USD 663m.

In results news, Facebook and Amazon both surprised investors by maintaining strong growth in the first quarter of 2016. But Apple was hit when sales fell more than expected, increasing the pressure on its next product launch scheduled for September. In industrials, Masco, Parker Hannifin and United Technologies all beat expectations although these were in fact extremely pessimistic.

Over the last 5 trading sessions, tech led declining sectors (-4.5%) followed by healthcare and consumer discretionary. Utilities, energy and telecoms led gains.



The TOPIX ended 3.8% lower. Markets plunged on Thursday due to the BoJ's announcement that it was maintaining current policy without any additional measures. The stronger yen added to the gloom. As the market swayed on speculative index futures, the declines in Nikkei 225 and large cap stocks exceeded those of small caps. In recent weeks, the Tokyo stock market's rally had been led by futures on expectations of additional central bank easing.

Nintendo Co. declined 13.2% on a weaker-than-expected earnings forecast for FY 2017 ending March. Fanuc Corporation also dropped 11.5% after cutting its earnings forecast. In contrast, ALPS Electric Co. enjoyed a 5.3% rise on hopes the company would raise its dividend.



When the Fed announced it was leaving interest rates unchanged and that it was not in a hurry to raise them, emerging markets benefited. As oil prices hit new highs for 2016 and commodities rallied, the stock markets in commodity producing countries like Russia and Brazil led the field. In addition, Russian state-owned companies like Gazprom rallied throughout the week after Prime Minister Dmitri Medvedev signed an order that they should pay out 50% of earnings as dividends.

In Brazil, the Senate got ready to vote on President Dilma Rousseff's impeachment. Meanwhile, Vice President Michel Temer began talking to potential cabinet members, as he will take over should the President be ousted. In an interview, he said former central bank chief Henrique Meirelles would be his choice as finance minister.

Malaysian sentiment clouded further, mainly due to the ongoing scandal around the troubled Malaysian government investment fund which defaulted on a series of bonds, weighing on the country's stock and currency markets.

Apple announced that it had had its worst quarter in 13 years after reporting falling earnings and, for the first time ever, declining iPhone sales. South Korean competitor Samsung reported first quarter results in line with preliminary indications. They show that smartphones, 3D NAND, OLED, and TV were growing while LCD panel profits were worse than expected. First quarter earnings were driven by the smartphone business, with strong sales of GS7 and cost improvements due to platform streamlining. 



The Doha summit failed to produce an agreement but oil prices still rallied and are now trading at 6-month highs of USD 48 for Brent crude and 46 for WTI. The rise was due to fresh US dollar weakness, further falls in US output (-15,000 b/d over the week) and a 5.6% increase in US petrol demand. 

Iron ore traded down at USD 62.9/tonne, almost USD 8 lower than its recent USD 70.5 peak on April 21. This followed a surge in early 2016 partly due to a burst of Chinese speculation. The reopening of the credit market sent trading volumes sharply higher on local futures markets like the Dalian Exchange and SGX Asiaclear, forcing Beijing to step in to try to curb speculation. Prices are now trading more in line with fundamentals which are, however, now better than a few months ago.

Last week, we pointed out that supply had fallen after 3 major producers -Vale, Rio Tinto and BHP Billiton- revised production targets lower by 40-50m tonnes, or 3% of the export market. Now the China Iron & Steel Association (CISA) has raised the outlook for apparent steel demand in China for 2016 by 2%. Previously, it had been expecting demand to fall by 3-4%. 

Gold resumed its upward march and is now flirting with YTD intraday highs for USD 1,285/oz (March 11). The last time it moved above USD 1,300/oz was in January 2015 but it subsequently suffered a severe correction. The situation is now more favourable as central bank monetary policy is still good for gold prices. Gold mine results show that production costs are still falling. Along with higher gold prices, this is helping improve cash flow and justifies the sector's considerable YTD gains. Our EdR Goldsphere fund is now up 61.5% (retail share in EUR).




Investment grade and high yield debt markets ended around 0.2% lower. The Xover widened by 5bp to 309bp compared to 2bp for the Main (73bp). The commodity rebound, and especially oil, helped lift energy stocks.

Post-ECB momentum supported the new issues market. Ardagh (B) issued a 4-tranche USD 4.5bn bond. Travelodge (B-) raised GBP 360m with a 2023 maturity. In investment grade, McDonald's (BBB+) sold a EUR 2.5bn bond in 3 tranches. Unilever (A+) issued a 3-tranche EUR 1.5bn bond. Credit markets saw inflows for the 10th week in a row, +EUR 330m for European high yield funds and +USD 145m for US high yield.  

First quarter results in Europe look promising. Ardagh is to pay USD 3.4bn for Ball's canned drinks business. Isolux Corsan is close to completion on its Isolux Infrastructure spin-off. Its 2021 maturity underperformed the market massively and is now trading at around 15% of par. Casino is selling Big C Vietnam to Thailand's Central Group for EUR 1bn. To reduce debt, Anglo American is selling its phosphates and niobium business to China's Molybdenum for USD 1.5bn. The group's bonds all outperformed the market after the news broke.



The market expected the BoJ to ease further given the country's weak economy but Chairman Haruhiko Kuroda stayed put, announcing no policy change and delaying the inflation outlook. The Nikkei then ended a short, 4-day week down 5.2% after plunging 3.6% on the news while the Yen strengthened from 112 to 107 against the US dollar. Stocks like Asics (down 4.6%) and convertibles (mainly exporters) reverted in line with these two moves. Sony, which had fallen when its results were delayed, posted annual earnings of JPY 147.8bn on strong PlayStation sales.

In Asia, the only new issue came from Kakao, a USD 200m 5y zero coupon exchangeable into shares of Loen Entertainment. In Europe, Adidas (+5.4%) reported much better-than-expected first quarter results with like-for-like sales up 22% and EBIT of EUR 490m. The group also raised guidance. Galp reported a solid set of numbers with clean net income of EUR 114m and clean EBIT of EUR 137m (4% above consensus). KPN's first quarter results were broadly in line with expectations but interestingly the Dutch telco business stayed strong and the cost cutting plan should mean results improve in the forthcoming quarters. 

Iberdrola's first quarter EBITDA was slightly weaker than expected, down 5% at EUR 2bn, due to one-offs (including the negative effect of weaker sterling) but guidance for 2016 was reaffirmed and net income came in 3.3% higher at EUR 869m. Russian steel producer Severstal came to market with a USD 200m 0.5% convertible bond, a vanilla issue which was very attractively priced with full dividend protection and a very low 17.5% premium. Yandex (+9.9%) reported very strong first quarter results with adjusted EBITDA rising 62% to RUB 5.77b. The group raised 2016 guidance with sales now seen rising 15%-19%.Netsuite reported record first quarter revenues of USD 216.6m (+31% YoY) and the company raised its revenue guidance for 2016. Knowles was the only convertible issuer for the region, with an upsized USD 150m 5.5y 3.25-3.5% issue. 


Written on 29/04/2016

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