Markets on the 6th of May 2016

Asset Management - 5/6/2016

Equity markets moved lower over the week with the MSCI World in local currency down 1.41%. Europe led declines as the US dollar temporarily rallied against the euro. And yet, as far as economic data was concerned, eurozone indicators remained firmly in expansionary mode - and stable in peripheral countries - amid continued growth in industrial production.

​Even so, it is worth pointing out that in spite of upbeat retail sales in France and Spain, the European aggregate edged lower over the month, even if annualised growth remained at 2.1%. 

As for the outlook in coming months, the US economy continued to offer some encouraging signs: new orders remained dynamic while services continued to grow at a smart pace, helping to create jobs. Even in China, manufacturing remained resilient as PMI data came in unchanged. And then the Caixin-Market jobs sub-index, which in March had dipped below the 50 watershed for the first time since August 2013, moved back above it in April to 50.9. 

But despite these developments, risk aversion resurfaced on markets due to the yen's sharp appreciation after the last BoJ meeting and underperformance from commodities, banks and autos, Europe's most cyclical sectors. Volatility still depends on currency market movements, shifts in the oil price and dithering over interest rate hikes but we remain confident in eurozone equities, especially as earnings expectations look too low to us given the fundamental micro and macroeconomic picture.

After cutting exposure when markets were close to peak levels in April, we are now more likely to start buying again. 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.


Results from France's BNP Paribas and Société Générale highlighted further drops in the cost of risk, a significant fall in investment banking revenues, especially in equities and derivatives, and squeezed margins in retail banking. Italian bank restructuring made some progress with the creation of the Atlante fund which will participate in capital calls and acquire non-performing loans. However, the failure of private investors to take up Vicenza's rights issue put this successful launch into perspective.

First quarter results from capital goods sector companies Legrand and Siemens offered reassuring pointers on like-for-like growth and margins. But guidance for the full year remained cautious, especially from Siemens which sees no recovery in its short cycle businesses because of developments in China and Germany.

Elsewhere, Philips' lighting division IPO is now official but no date has yet been set. Sanofi reaffirmed its interest in Medivation after its bid was rejected by the target's board. Sanofi is now trying to convince shareholders to accept its bid which suggests it may be sweetened, especially as Pfizer and AstraZeneca have shown an interest. Elsewhere in pharma, Novartis is thinking about selling the 6% it holds in its rival Roche (33% of the voting rights) and using the proceeds to grow through acquisitions. The week also saw a number of share sales, notably Wendel's disposal of half of its Saint Gobain stake.

In the political sphere, Ireland has finally formed a government following the February 26 election but Greece is still in talks over measures to increase tax receipts and, more importantly, reform its pensions system. The aim is to present its European partners, and the IMF, with a package that will help Europe's finance ministers validate the next aid payment at their March 9 meeting. Peripheral spreads widened a little over the week.



Markets retreated over the period as risk aversion resurfaced. Only defensives managed to end higher with utilities up 2% and consumer staples up 1.14%.

Manufacturing and non-manufacturing ISM data were both in expansionary territory, the latter surprisingly so. ADP's non-official survey said the private sector had created 156,000 new jobs in March.

With more than two-thirds of quarterly earnings in, the message was clearly one of low earnings growth (excluding energy sector companies) due to the higher US dollar. But 70% of results were nonetheless higher than expected.



After the BOJ's disappointing decision to remain on hold, Japanese equities plunged at the start of the week. The TOPIX dropped 3% to 1299.96 on Monday on massive selling pressure from short-term investors and the yen's sharp appreciation. In a long holiday week, the yen hit 105 in thin overseas markets on May 3 but eventually ended the week around 107, providing some support for the stock market.

Companies with solid earnings results posted positive returns. Beverage company Kirin Holdings soared 8.6% and revisited its year high on better-than-expected first quarter earnings as margins in its soft drink business improved.

On the other hand, Murata Manufacturing, an iPhone parts supplier, dropped 13.2% after releasing weaker-than-expected results due to sluggish growth in sales of the iPhone 6s and iPhone 6s Plus.



Markets corrected when momentum turned, mainly because of profit taking in China. April's Caixin manufacturing PMI remained in expansionary mode but came in weaker than expected,  slowing down compared to March.

Alibaba delivered a solid March quarter with the fastest revenue growth revenue in four quarters. Investors applauded the news and sent the stock up; skeptics had previously pushed it down by 7% YTD.  The good news came from its online computing service, AliCloud, which could increase quarterly revenues by 175% YoY to USD 165m. Shares in Baidu fell 7.9% after the Cyberspace Administration of China said it was launching an investigation into the search engine giant. This followed the death of a student who had tried a cancer remedy advertised on the site which proved ineffective. The case against Baidu claims the company promoted an unproven treatment in exchange for payment. Baidu offered its condolences and insisted that it always carried out "careful screening of potentially misleading ads…with additional scrutiny on medical advertisers".

Following Indonesia's lower-than-expected first quarter growth figures, markets will pay more attention to Joko Widodo's efforts to reform the economy.

The Philippines elect a new president on Monday and President Benigno Aquino is likely to be replaced by one of two populist candidates - Davao City mayor Rodrigo Duterte or Senator Groce Poe. Duterte was slightly ahead of Poe in recent polls causing some concern to investors and as a consequence, the country's stock market was the weakest in South East Asia.

Brazil's Supreme Court suspended Eduardo Cunha, the speaker of the lower house, on charges of obstructing a corruption investigation, only days before an impeachment process that he engineered was expected to oust President Dilma Rousseff. His removal was the latest in a series of political scandals in Brazil as the country struggles with the worst recession in decades.

In a dramatic move, Turkish Prime Minister Ahmet Davutoglu stepped down after losing a power struggle with President Recep Tayyip Erdogan. This opens the way for Erdogan to seize even more powers.



After four up weeks in a row, oil traders took profits. Brent crude and WTI fell 5% and 3.5% respectively to around USD 44. Investor sentiment was hit by the US dollar rally and a report which said OPEC production had risen by 170,000 b/d in April to 32.64 million b/d; higher output from Iran and Iraq more than offset a strike in Kuwait and production stoppages in Venezuela. The market appears to be shrugging off: (i) this week's sharp 113,000 b/d drop in US production, the largest weekly move since August 2015, (ii) forest fires in Alberta which have forced workers to be evacuated -production stoppages are difficult to estimate but there is talk of a 690,000 b/d reduction in oil sands production- and (iii) rumours that Iran was about to return to the negotiating table ahead of a June 2 meeting.

LME base metal prices dipped 2.9% on US dollar strength and China's manufacturing PMI which fell slightly short of expectations while nevertheless providing confirmation that the Chinese economy was stabilising. Iron ore (-9%) was the hardest hit by a wave of profit taking as the restocking season in China came to a close. There were newspaper reports that Brazil would be suing Vale and BHP (JV Samarco) for USD 44bn in damages over the economic and environmental consequences of the Rio Doce catastrophe. Vale and BHP plunged 18% and 12% respectively this week even if an initial settlement between BHP/Vale and the government had already been ratified by the Federal court.

After breaking above the psychological USD 1,300/oz mark at the beginning of the week, gold was also hit, albeit to a lesser extent, by the rising US dollar. Gold mines succumbed to profit taking but after rising 80% in EUR since the beginning of 2016 (FTSE Gold Mines).  




European credit markets had a very quiet week due to various bank holidays, especially on Monday when London was closed. Apart from a few accidents, which had been fully anticipated by the markets (particularly in the energy and mining sectors), European company results were generally good, helping to underpin our view that the European cycle was on an upward trend.

All market segments saw healthy levels of new issuance. There were a number of investment grade issues, several new high yield deals (Travelodge, Rexel, Gestamp and Inovyn) and two Tier 2 issues from BNP and Barclays. CGG's first quarter results fell significantly short of consensus estimates at the operating level but cash flow was lifted by a massive reduction in WCR. As expected, ArcelorMittal's first quarter results slumped due to a collapse in steel prices. According to Reuters, Enel is planning to bid for a controlling stake in optical fibre specialist Metroweb.



In Europe, markets fell further with the Eurostoxx down 3.54% for the week. Adidas reported upbeat Q1 results, its best quarter in ten years, with geographical and like-for-like growth strong across the board and outstanding 26% growth in the Adidas brand. Air France reported quarterly sales of EUR 5.6bn, in line with the consensus and an operating loss of EUR 99m when analysts were generally expecting a loss of EUR 226m. This was thanks to lower fuel prices and improved hedging.  However, the stock still suffered from tensions over the new CEO nominee and a potential conflict with pilots.

Inmarsat fell 10.8% after reporting a 2% decline in revenue and continued weakness in its maritime business (-4.5% YoY) while EBITDA was 6% lower than a year ago. Buzzi's first quarter net sales came in above expectations at EUR 540.3m with EBITDA at EUR 50.8m.

The only new issue came from Wendel which sold a EUR 500m zero coupon bond exchangeable into Saint-Gobain shares, a good way of getting exposure to Saint-Gobain through a convertible.

Mercado Libre again beat first quarter estimates with net revenue of USD 157.6m. Ilumina's first quarter revenues fell significantly short of expectations but in line with its April 18 pre-announcement. Wright Medical reported better-than-expected first quarter results and raised both top and bottom line guidance. Finally, Tesla surprised the market by announcing a production acceleration plan, bringing its 500,000 car target forward by two years. However, the market is still wondering what the plan will actually achieve, hence the 5% fall in the stock last Thursday.   


Written on 06/05/2016

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