It is still too early to reduce equity exposure

Asset Management - 9/12/2016

Investors were not expecting much from the ECB but fixed income markets still wavered when the bank observed the status quo and government bond yields moved a little higher. The ECB’s central scenario has not changed much nor has the economic and inflationary environment – GDP growth has been revised down from 1.7% to 1.6% for 2017 and 2018 and inflation is now seen at 1.2%, down from 1.3% for 2017 – but Mario Draghi nevertheless delivered some fresh indications on the bank’s position.
Commodities Corporate

The pace of asset purchasing has not been changed and, so far at least, there has been no mention of extending it beyond March 2017, or changing its structure, but the news that think tanks would be set up to discuss the QE programme's design suggests that some specifications might be altered. For our part, we see no necessity for the ECB to add new accommodating measures insofar as eurozone monetary and financial conditions remained upbeat over the summer months.

Note that with a slight bounce in bond yields, financials both in the US and in Europe have been recovering. Equity markets are proving rather resilient due to (i) deflationary risk which is gradually waning, (ii) stable growth forecasts of 1% in the absence of any Brexit shock and (iii) oil which has rallied to higher and more stable levels.

We continue to prefer equities vs. government bonds and are particularly overweight European equities. We believe that today’s accommodating financial conditions and the recent rebound in earnings expectations mean it is still too early to reduce equity exposure.


  European equities

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Markets edged lower due to the ECB leaving its asset purchase programme unchanged. Energy and commodity-related sectors continued to outperform.

In a very quiet week for company news, Pernod Ricard's annual figures stood out for their strong operating margins. At LVMH’s ‘Cognac Day’, the group reiterated that North America would still be its most profitable zone in the future while saying that China was gradually returning to normal. At its investors’ day, Scor unveiled its strategic plan which aims to maintain profitability ratios while improving ROE.

There were two profit warnings, first at Zodiac which has revised down its underlying operating profits due to provisions, essentially on client penalties. Second, Ingenico has revised down its outlook due to more difficult trading conditions in Brazil and the US.

In M&A news, Altice has launched an all-share bid for full control of its SFR subsidiary, offering 8 new Altice shares for 5 SFR shares. Bayer has scheduled a board meeting on September 14 to assess its offer for Monsanto and discuss the possibility of making a hostile bid. The group is mulling the sale of its dermatology business to fund a tie-up with Monsanto. ChemChina has extended its bid on Syngenta (agricultural chemicals) from September 13 to November 8. And Nokia has filed to delist Alcatel-Lucent from the Paris stock exchange. Nokia already owns 95.32% of Alcatel.


  US equities

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Indices were relatively unchanged in a short Labor Day week. There was no major economic news apart from the monthly composite non manufacturing ISM which came in at 51.4 or much less than the 54.9 expected. Even so, it remained in expansionary territory.

In company news, Apple unveiled the new iPhone 7 and a new connected watch model. The market reaction was relatively low key compared to product launches in the last 5 years. Intel is to sell the cyber security business that came with its acquisition of McAfee a few years ago; the unit is valued at USD 4.2bn, much lower than the USD 7bn+ valuation at the time of the acquisition. In M&A, deal volume picked up speed in sectors ranging from energy to healthcare and from industry to technology. In healthcare, Danaher is bidding for Cepheid. General Electric is offering USD 1.4bn for Arcam and SLM Solutions in Europe (3D printers). Intel and Google have also made medium-sized bids.

In the last 5 trading sessions, energy, utilities and telecoms led gains. Consumer discretionary/staples and financials all lost ground.


  Japanese equities

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Japanese equity markets edged up as the TOPIX gained 0.6% but market momentum was still weak. The yen rebounded against the US dollar to over 101 on receding expectations for a US rate hike at the September FOMC meeting due to lower-than-expected non-manufacturing ISM. However, Japan’s domestic economic data improved slightly with the August Consumer Confidence Index up while Apr-Jun GDP growth was revised up from +0.2% to +0.7% YoY.

The best performer sector was Other Products (+8.4%) which includes Nintendo. Following a ‘Pokémon GO’ rally, its share price soared again on the announcement of a ‘Super Mario Run’ launch for iOS at an iPhone press conference. The new game’s impact on business performance is expected to exceed that of the Pokémon game. Nintendo jumped 19.3% over the week. On a negative note, the Iron & Steel sector dropped 3.7% due to JFE Holdings (-4.9%) and Nippon Steel & Sumitomo Metal (-4%) on profit-taking after last week’s sharp gains.


  Emerging markets

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Emerging markets continued to perform well, posting strong gains of 2.4% and outperforming developed markets (+0.7%). Dedicated EM equity funds (GEMs + EM Asia + EMEA and LatAm regional funds), excluding China A-share funds, reported inflows of USD 1.8bn. This was the tenth straight week of inflows for emerging market funds ex China funds, with cumulative inflows of USD 18.9bn (2.2% of AUM). Note that in the last 3 years, emerging market outflows have amounted to more than USD 150bn.

In China, which was up 3%, there was an encouraging pointer at China Machinery& Trucks which saw excavator sales growth surge to an impressive 45% YoY in August, well above expectations. On the macro side, August CPI inflation came in below consensus, but PPI continued to improve. Moreover, the China Insurance Regulatory Commission (CIRC) has confirmed that Chinese insurers can now invest through the Shanghai-HK Stock Connect.

In India, the highlight was the approval of the tax reform (GST) that will combine many indirect taxes across the country. In Brazil (+2.7%), industrial production continued to improve. In Mexico, OMA (airports) posted strong growth of 10.7% in August traffic. During the month, we replaced ASUR with OMA, which we believe will continue to benefit from strong domestic traffic (as opposed to ASUR which is more exposed to declining international traffic). Colombia (+6%) was the main highlight as the oil price rebounded and the country continued to benefit from the peace agreement signed between the government and FARC.

In Eastern Europe, Russia (+4.6%) rebounded on the oil price rally. Sberbank reported upbeat earnings in August. We remain optimistic on emerging market equities.



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Oil has been moving back towards USD 50 a barrel, a rebound fuelled by both fundamental and speculative reasons. During the G20 meeting, Russia and Saudi Arabia said they were willing to cooperate to stabilise the oil price. The intentions are well-meaning and make sense for countries wishing to maximise oil revenues but implementing a production freeze would be complicated and past efforts do not suggest a positive outcome. Iran’s target production levels are central to any agreement but simply mentioning that discussions between countries are possible tends to send prices higher.

At a more fundamental level, the Hermine hurricane, the first in the Gulf of Mexico since 2013, has disrupted production in the zone while limiting imports of crude and oil products as tankers were unable to reach ports. This took imports for the week to a 1990 low. Along with persistently strong US refining activity, oil inventories plunged to 14.5 million barrels, the biggest fall since 1999. But the coming week should see the situation return to normal as tankers will once again be able to unload. Note also that demand from China is still strong: crude imports rose 6% in August and are now 24% higher over a year. Taking a leaf out of OECD countries' books, China is still busy building up strategic reserves; they now represent 37 days of imports but only 40% of the target amount.

The gold ounce initially rose on August’s relatively disappointing US jobs report and diminishing expectations that the Fed would move to raise rates in September. But the advance was halted when the ECB failed to announce an extension to its monetary easing programme.


  Corporate debt

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Markets hesitated after the ECB took no action as investors wondered if Mario Draghi's tone was not more hawkish than the consensus view.

In this slightly uncertain climate, credit spreads were stable with the Main at 66 and the Xover at 307. New issue volume was less impressive than in previous weeks but the market was stable. This week’s new issues came from Iberdrola, Thermo Fisher, RCI Banque, Sanofi (3 issues of which 2 were zero coupons) and Glencore.

High yield new issuance recovered sharply. The segment is still enjoying inflows but performance was rather weak as investors sold secondary issues to make place for new deals. Interest in the asset class and today’s extremely low rates meant premiums were favourable for issuing companies. German car supplier Schaeffler raised EUR 3.5bn across 6 maturities, packaging companies Ardagh and Crown Cork also sold debt and Telefonica sold a hybrid bond yielding 3.75%.

It was an active week for new financial issues with an AXA perp fix for life, PartnerRe and a USD denominated AT1 from Société Générale. It was another good week for market performance. Monte dei Paschi’s CEO resigned and markets are now gearing up for an increase of capital from UniCredit.


It was another busy week for convertibles with USD 2.95bn in new issues. Europe saw 3 new deals from real estate companies: Austrian Buwog issued a EUR 300m zero coupon convertible, Belgian Cofinimmo a EUR 220m convertible at 0.187% while simultaneously buying in the old 2018 convertible, and South African Redefine Properties issued a EUR 150m bond at 1.5% exchangeable into London-listed Redefine International shares.

In the US, there were 5 new deals, two of which were capital increase type packages with concurrent share placements. Ctrip issued a USD 900m convertible at 1.25% and placed USD 1.3bn in new shares to finance further acquisitions and push into the lower end market. Semiconductor producer AMD issued a USD 700m convertible and raised USD 600m of new equity, which was an efficient way for the CCC+ rated company to reduce debt.

Elsewhere, Fresenius rose 6% this week following the acquisition of Spain’s largest private hospital operator. Ingenico was under pressure after a profit warning which sent the shares down 14% on the day as the company cut its FY2016 guidance due to headwinds in the US and Brazil.

In Asia, Khazanah sold 82 million shares of electricity supplier Tenaga for MYR 1.2bn, thereby reducing its stake to 24.8%.

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