On the eve of the G7 summit, it was a big week for official interventions, agreements and opinion polls

Asset Management - 5/27/2016

We kicked off with the European Commission and the IMF striking a deal on the Greek debt problem. This involved agreeing to grant a EUR 10.6bn loan to Greece with the possibility of debt relief from 2018.
Commodities Corporate

​Sentiment received another boost and worries over Brexit abated when an opinion poll in the UK said 65% of people were in favour of remaining in the EU. Sterling rallied on the news, returning to levels seen in February. In the US, and ahead of Janet Yellen's intervention on May 27, several other Fed members gave their opinions on future rate hikes. This led markets to raise expectations of a move in June or July.

This week saw the release of business climate surveys which showed sentiment was still improving in France and Germany while stagnating in the US and trending lower in peripheral countries. Markets were encouraged by the progress made over international agreements to switch to risk-on mode especially as oil and the US dollar both continued to strengthen last weeks. This helped eurozone equities bounce by more than 4% with banks jumping more than 6%. US markets gained 2.2% in local currency as the US dollar edged higher. The rally was rapid and we think any future gains will depend on reducing uncertainties like the sustainability of Chinese growth, the UK voting to remain in the EU, various looming referendums and US dollar and oil price trends. We have not upped equity exposure but remain overweight the eurozone. Against this backdrop, fixed income markets remained relatively stable ahead of Janet Yellen's statements. We remain slightly overweight peripheral country debt at the expense of German Bunds.



  European equities

top of page

European markets pushed higher as the euro weakened against the US dollar and ahead of possible moves by the ECB to assist banks saddled with non-performing loans. As a result, financials and commodity stocks outperformed.

Ryanair's first quarter results were as expected but management said earnings would rise by around 13% or less than expected by analysts. Kingfisher's first quarter beat estimates but the group left full-year guidance unchanged. Nestlé unveiled a fresh CHF 2bn restructuring programme. Cost savings will go on achieving the 5/6% improvement in like-for-like growth that the group has failed to pull off in recent years. The group nevertheless expects free cash flow to remain high thanks to astute management of its WCR. Marks and Spencer fell sharply this week after management revised down earnings growth forecasts for 2016 to between 8% and 10%. Luxury stocks took another hit after watch exports for April fell 11% after declining 18% in March. Hong Kong was unsurprisingly the weak link with a 17% drop.

In a busy week for M&A news, Bayer made an official 100% cash bid for Monsanto at USD 122 a share. Bayer expects to fund 25% of cost with a rights issue. The deal is seen as earnings enhancing from the first year. SEB has signed a memorandum of understanding with KKR to buy Germany's WMF, global N° 1 in professional quality cookware, for close to EUR 1.6bn. Axa is selling part of Sun Life, its UK-based life and health insurance business, to Phoenix Group for GBP 632m. Philip's listed its lighting division on May 27 with an IPO price of EUR 20. The placing represented 28% of the equity, higher than the 25% expected.



  US equities

top of page

US markets were in bullish mood with the S&P and Dow both up 1.8%. The momentum came from encouraging macroeconomic data which underpinned Fed statements on a possible rate hike in the near future. New home sales hit an annualised 619,000 in April, the highest level since January 2008. Existing home sales rose more than 5%, the most marked acceleration since October 2010. Durable goods orders were up 3.4% in April.

Hewlett Packard jumped 10% after saying it was to spin off its services business and merge it with CSC. Microsoft said it had cut 1,850 jobs in its smartphone business. Tiffany's like-for-like sales fell 9% but earnings came in more or less as expected. The FT reported that Apple had approached Time Warner Inc in 2015 to buy HBO as well as other media assets.

Over the last 5 days, tech, materials and financials led advances. Traditionally defensive sector like consumer staples, telecoms and utilities posted more modest gains.



  Japanese equities

top of page

The TOPIX ended the week 0.5% higher. Investors had already shifted their attention to the possibility of government action after the G7 summit. Equities started the week lower but rebounded from Wednesday as the Yen weakened towards 110 against the US dollar.

The best performing sector was Oil & Coal Products (+2.4%). Construction has also performed well in the last three weeks on expectations of higher government spending.

Sony enjoyed a sharp 6.6% bounce back to its year high. Investors reacted positively to its stronger-than-expected operating profit forecasts for 2016. They are seen rising 2% QoQ on strong performance in its Games & Network business.

In contrast, Ono Pharmaceutical shed 5.7% on an analyst downgrade which cut expectations of sales for an anticancer drug. Elsewhere, Murata Manufacturing, one of the biggest iPhone component suppliers, slid 4.6% on worries about possible falls in smartphone sales.



  Emerging markets

top of page

The Eurogroup welcomed the agreement reached between Greece and the institutions and gave the green light to a EUR 10.3bn aid tranche. The tranche will be released in several disbursements starting from June, just in time for Greece to meet a large debt redemption in July.

Chinese investors continued their European shopping spree and agreed to pay USD 752m for Aixtron, a German supplier of semiconductor equipment. The bid is being made through a unit of Fujian Grand Chip Investment Fund. Only last week, China's Midea Group made a USD 5bn bid for factory robot manufacturer Kuka AG.

President Tsai's speech at her inauguration ceremony in Taiwan was in line with the market's expectations and may also help reduce geopolitical tension between Taiwan and China as she said she fully respected the 1992 agreement between the two countries. In an article in Barron's Asia, supply chain sources said that Apple has asked its suppliers to get ready for much higher-than- expected production of the iPhone 7.This triggered a rally in Taiwanese tech stocks led by both Apple plays in the tech and financial sectors.

In Venezuela, a sugar shortage has interrupted Coca Cola's production lines. This shortage is the latest chapter in Venezuela's woes over supplies of basic consumer goods. The country is experiencing the worst recession in decades due to the low oil price. Oil accounts for about 95% of foreign currency earnings.




top of page

Commodities were mixed this week with oil up 2.2% and basic materials 0.8% better on the LME but gold gave back 2.5% even if the US dollar index was more or less unchanged. Brent crude broke above the psychological USD 50 level for the first time since November 2015 after US weekly inventories came in sharply lower. Although we have always been cautious about reading too much into weekly data, this drop looks as if it was due indirectly to Canadian production stoppages following severe forest fires. But there was rather encouraging news from Alberta this week as companies in the Fort McMurray region appeared to have stopped evacuating staff and were already planning to resume production.

In Nigeria, however, the situation remained critical. Fresh militant attacks forced Chevron to interrupt on-shore operations, hitting 90,000 b/d, although the government appears at last to be taking stock of the situation. The president said he was mulling sending in the army to protect production sites while the oil minister agreed the government would have to deal with local grievances by ensuring wealth was distributed more fairly.

In Iran, the vice minister said exports were now running at 2 million b/d and that he wanted to up this to 2.2 million during the summer. This suggests Iran is still unwilling to join an agreement on a production freeze. As a result, OPEC's June 2 meeting could well prove disappointing and weigh on short term oil prices.

In France, six out of 8 refineries are still blocked by strikers and the government has agreed to use is strategic reserves to deal with shortages. The unions involved were due to meet on May 27 to decide on what further action to take. Blocked refineries could hit Total's downstream business if the situation were to last.

Gold fell further due to US dollar strength in the last 3 weeks on the back of the Fed's monetary tightening stance. Gold mines in the FTSE Gold Mines index fell 3.6% in EUR. We think this is a healthy correction both for physical gold and mining stocks and that US rate hikes will proceed at a modest pace, a good point for gold. Iron ore plunged 10% over the week as inventories in Chinese ports hit record March 2015 levels. 



  Corporate debt

top of page


The high yield bond segment (+0.6%) continued to outperform investment grade (+0.2%). This was put down to (i) first quarter company results meeting expectations, (ii) the quiet new issues market which fuelled demand for existing bonds and (iii) another week of net inflows, a result of the Corporate Sector Purchase Programme (CSPP) announcement, which took the YTD tally to USD 3.5bn.

Among new issues in the investment grade and financials segment, JCDecaux raised EUR 750m with a 7-year maturity at 1%, HeidelbergCement raised the same amount over 8 years at 2.25% and Danske Bank issued a 7-year EUR 1bn bond at 0.75%. The Xover tightened by 25bp, returning to its long term median while the Main tightened by 7bp and subordinated financials by 23bp.

In company news, Banco Popular unveiled a EUR 2.5bn rights issue. Maisons du Monde's IPO pitched its market cap at EUR 769m. Kerneos' first quarter results were in line with sales up 2% YoY (+0.4% like-for-like) and a 20% jump in EBITDA thanks to the successful integration of European Bauxites. Areva's bonds fell by another 3 points last Friday due to the ongoing crisis over its EPR site at Olkiluoto in Finland.


Markets rose this week. There were 2 new issues from the US and one in Europe. Timkensteel raised USD 75m with a 6% 5y convertible, highlighting the recent releveraging trend within the mining industry after deals from Severstal and Allegheny. WebMD (online health information services) issued a USD 300m 2.625% 8y convertible. Siem Industries issued a EUR250m 2.25% 5y exchangeable into Subsea 7.

In the US, convertibles performed well as the equity rally shrugged off higher interest rates as markets factored in a higher probability of a Fed hike in June or July. The tech and biotech sectors saw follow-on buying after convertible issuer XNPT was acquired at a 60% premium to Friday's close. Semi conductor shares also outperformed following AMAT's earnings last Friday. The IONS 1% '21 was also actively traded with the stock down 39% on Thursday after GSK decided not to initiate an outcomes study on its Cardio-TTR drug.

Brait reported strong NAV per share for the year ending 31 March 2016, as it is expected to have increased in ZAR by 74% to 80% to between ZAR134.19 and ZAR138.82 and in Euro by 35% to 40% to between EUR8.00 and EUR8.27 (2015: EUR5.92) thanks to strong operational performance from its investment portfolio.  

The convertibles market focused on OCI after the company said its merger with CF industries had been called off for tax inversion reasons. The stock was down 16% at the beginning of the week but finally lost 4% while the convertible traded 5 points lower. Fund flows in Japan picked up as investors looked to reposition themselves post earnings in stocks like Yamada Denki, K's and KKK. Larsen & Toubro reported upbeat fourth quarter results with revenue of Rs 328bn. The CB richened by 4 points.

Written on 27/05/2016

Elément complémentaire