The earnings season continues

Market analysis - 5/3/2019

A shortened week got off to a positive start with S&P maintaining Italy at BBB with a negative outlook. Spain's elections saw the Socialist party come out on top with more seats than previously but still no absolute majority. As a result, spreads tightened between peripheral countries and Germany.

Investors were in wait-and-see mode ahead of a Fed meeting which left rates unchanged. The Fed remained “patient” but recognised strength in the jobs market and the economy. Only persistently tame inflation might cause the bank to shift its stance. Its current position is considered as less accommodating and US and European sovereign yields subsequently rose.

With two-thirds of US first quarter results in (50% in Europe), the buoyant trend lost a little steam. There were still positive surprises but less so than in preceding weeks. US equity indices drifted lower in quiet trading. The mood was reinforced by Chinese data, less upbeat than previously, and no end yet to the US-China talks as Steven Mnuchin headed for Beijing. In Europe, there were more positive surprises than in previous quarters, due to the euro-US dollar exchange rate and not as much bad news from China.

Given advances made by risk assets since January, we remain invested but cautious. Upside now looks more limited than downside should there be any disappointing macro or political news.

  European equities

European equity markets were practically flat as investors dealt with an avalanche of results. So, far, 53% of Stoxx 600 companies have beaten estimates, reporting an average 3% rise in earnings compared to the previous year.

Banks were actively traded as investors reacted positively to reports. The only real disappointment came from Danske Bank. In the aftermath of money laundering scandals, it reduced its annual profits guidance by 10% due to higher financing costs and pressure on margins. Spain’s BBVA beat quarterly expectations with the biggest surprise coming from a slight increase in revenues thanks to trading activities, efficient cost controls and lower provisions, notably in Turkey. Santander reported a 3% rise in operating profits to €1.84bn, also slightly beating expectations (€1.79bn). Operating expenses fell and CET1 came in as expected at 11%.

In France, BNP Paribas beat consensus expectations on revenues thanks to strong market activities and Société Générale managed to improve solvency with a CET1 of 11.7%, or better than the 11.4% expected. In the UK, Lloyd's results featured fewer writedowns and good cost control. The best news came from the regulatory authority which cut its ROTE target by 50bp, opening the way to possible shareholder returns. Standard Chartered’s results improved thanks to lower costs and impairments and the bank unveiled a surprise $1bn share buyback programme representing 3.5% of its market cap.

Philips reassured the market after Personal Care revenues offset weakness in Connected Care, resulting in operating margins of 8%. The group reiterated its guidance of 4-6% growth in sales and a 100bp improvement in margins in the 2017-20 period. Reckitt Benckiser reported a like-for-like increase of 1% in sales thanks to emerging countries and strong performance in its Infant & Child Nutrition division. Adidas managed once again to increase sales by a significant 4%, with China offsetting poor performance in Western Europe. Results came in 9% above consensus expectations. Carlsberg was another example of Asia coming to the rescue. In this consolidation-happy sector, Heineken bought a majority stake in the brewery Biela y Bebidas del Ecuador.

  US equities

In the ongoing earnings season, 68% of S&P500 companies have now reported and 78% of them have beaten analysts’ expectations; only 18% have missed. Even so, for the first time in a month, US markets ended the period in the red. The S&P500 slipped 0.76%. The Nasdaq ended 1.35% lower.

Only four S&P sectors - healthcare, financials, property and consumer staples- managed to post gains. Reverting from recent underperformance, healthcare was up 0.5% as investors rotated out of defensives. Financials, also up 0.5%, gained as 10-year Treasury yields rose by 6bp following a FOMC press conference. Banks and insurance were also the only Nasdaq sectors to make gains over the week.

Energy slumped 4.06% as oil prices shed over the week. A number of exploration and production stocks like Concho Resources, Pioneer and Marathon Oil tumbled by more than 10%. Communication services also underperformed sharply, down 2.88%. Google’s sector weighting played a big part as the stock plunged 7% when sales fell short of expectations due to slowing growth in its advertising division. In contrast, Apple gained 5%. Its results were in line but the company gave upbeat guidance for the second quarter and announced a hefty share buyback programme.

  Japanese equities

Japanese markets were closed for the week to celebrate the coronation of Prince Naruhito as new Emperor of Japan. The unprecedentedly long holiday is expected to boost the economy, especially tourism and consumption.

When markets reopen, earnings reports for FY2018 (ended 31 March 2019) will be in full swing. Investors have been cautious so far due to fears of negative surprises but we expect undervalued companies with upbeat prospects to rally once the uncertainty is over.

  Emerging markets

Overall, indices were flat. China’s macroeconomic recovery remained somewhat fragile with April manufacturing PMI down to 50.1 from 50.5 in March and non-manufacturing down from 54.8 to 53.8. However, it was the second highest PMI in the last 6 months. Most Chinese banks announced their results this week. Revenue growth re-accelerated but with profits reined in by high credit costs associated with tighter NPL rules.

In Korea, Samsung Electronics’ revenue fell 12% QoQ and EBITDA was down 42%. While the new flagship smartphone Galaxy S10 performed well, the company appeared slightly less bullish on the memory market recovery. Samsung has still not committed to a capex plan this year but expects a sharp decline in memory equipment investment.

India fell on rather disappointing company results. Britannia Industries and Dabur both posted weak growth in a tough consumption environment with higher costs from investments and promotions. They expect a better environment after the elections. Auto sales for April were still depressed, with Maruti Suzuki and Tata Motors posting close to a 20% drop in domestic sales. Yes Bank tumbled 29% after announcing a surprising loss for the quarter due to higher provisions on broader NPL recognition.

In Brazil, MercadoLibre reported positive first quarter results, with improving profitability and payment growth outpacing the marketplace business. GMV grew 27% and TPV grew 83% YoY. The company is strategically increasing its focus on offline transactions, which has a considerably larger addressable market. Itau reported weaker-than-expected results due to less growth in lending, with only 7% EPS growth (versus Bradesco’s EPS growth of 22%). Nevertheless, Itau’s ROE remained at a healthy 22%. Brazil’s auto sales continued their recovery during the first four months of the year and rose 10%.

In Mexico, first quarter GDP contracted by 0.2 QoQ on weak industrial activity. Banorte’s results were in line with expectations, but NPL coverage was down.

In Argentina, the government announced measures to stabilise the currency. The country will join the MSCI index after the close of trading on May 29th.


Oil prices were highly volatile as traders swung between fundamentals and sentiment. News that Washington had not extended Iranian oil export waivers sent Brent crude towards $75 but then Donald Trump tweeted to say he had urged OPEC to keep prices low. The reaction was a swift 3% fall on April 26. OPEC’s general secretary and Saudi officials insisted they had had no contact with the US President.

The situation in Venezuela does not seem to be improving, another factor that also weighed on the market. Production fell to 732,000 b/d in March, down from 1.2 million b/d at the beginning of this year. Asian countries, which had been buying Iranian and also Venezuelan crude, have just turned to Saudi Arabia to offset the impact from June. Oil producing countries will meet on May 19 and again on June 25-26 to decide whether to increase output. Their decision might be influenced by a significant 9.9m barrel increase in US weekly inventories which took Brent down to $70-72 and WTI to $61-62. Worries on global growth due to declines in manufacturing PMI and no clear progress in US-China trade talks could also count in their decision.

US output had recently stabilised but could surge over the second half as pipelines between Permian and Gulf of Mexico refineries come on stream. Bear in mind also that from June, Saudi Arabia’s domestic air conditioning requirements will rise so higher output will not all be earmarked for export. Worries over economic growth and demand also sent non-ferrous metals almost 3% lower over the week on the LME. This should drive demand for gold (central banks bought 145 tonnes in the first quarter, up 68% over a year) but the stronger US dollar meant gold prices failed to rise.

  Corporate debt



The trend edged lower on investor disappointment that the Fed had left rates unchanged. Slightly better-than-expected European PMI data had little impact on markets. Between Monday and Thursday, the Xover widened by 6bp and the Main by 1bp.

Spain’s banks reported satisfactory results. Net interest income was slightly lower than in the previous quarter due to seasonal factors but capital ratios were stable and asset quality continued to improve. BBVA continued to suffer from its Turkish exposure but activities there did better than expected. Nordic banks posted decent figures but there was scant information on ongoing enquiries into money laundering scandals. BNP’s net profits rose 22.4% over a year, a pleasant surprise, and market activities proved more resilient than expected.

LetterOne, Dia’s biggest shareholder, could alter its bid terms to reduce the acceptance threshold from 64.5%. The bid deadline was once again put back to the beginning of May. Thomas Cook, which is heavily leveraged, came under pressure. The group reportedly set May 7 as the deadline for bids for its air transport division, a clear sign that it is in a hurry. Three investors subsequently abandoned its revolving credit facility, registering serious losses. The news sent its June 2022 maturity down as much as 16 points.

SMCP (B1/B+) reported an upbeat 9% increase in sales. The APAC zone outperformed with China up 35%. Over the last 12 months, SMCP has increased stores by a net 111. The group also reiterated its 2019 targets. Spie (Ba3/BB) had an encouraging first quarter with production up 4.3%. The outlook for the full year was confirmed. Ardagh (B2/B+) saw sales and EBITDA rise by a respectable 4% and 9% at constant currency rates. 2019 targets were confirmed but leverage rose to 5.2 times, up from 5 times at end 2018 so deleveraging is still a priority for the group. Huntsman had issued a profit warning in March and sales and EBITDA unsurprisingly fell 11% and 37% over the quarter with all operating segments underperforming. The group cut EBITDA guidance for 2019 by 7-10% compared to 2018 levels.

Altice Europe released a reassuring trading update and announced an 8-year senior unsecured issue rated Caa1/B. There will be euro and US dollar tranches and the company expects to raise the equivalent of €2.8bn. Some of the proceeds will go on repaying its 2022 €3.6bn bond. 


There were several new issues and one Jumbo deal. Sirius Minerals (one of the most important potassium mines) raised $400m plus $244.2m due 2027 at 5% and with a 20-25% conversion premium. The second amount will go on repaying its 2023 convertible while the main amount will help develop a polyhalite mine in Northern England (Yorkshire).

Pros Holding (software) raised $125m over 5 years at 1% and a 30% conversion premium to refinance its 2019 2% convertible.

Biocartis Group (biotech) is offering a €125m 5-year convertible. The coupon is likely to be between 3.375% and 4.125% and the conversion premium between 22.5% and 27.5%. The proceeds will go mainly on marketing its Idylla™ system as well as on manufacturing capacity and working capital needs.

Tesla is trying to raise between $2 et $2.3bn through a $650m equity issue and $1.35bn (+ a $300m greenshoe) via a 2024 convertible at between 1.5% and 2% and a conversion premium between 27.5% and 32.5%.

In results news, Dexcom (medical equipment for diabetics) reported upbeat figures and raised guidance for the second quarter while remaining cautious. As a result, the share price remained under pressure on rumours that rival Abbott could acquire iCGM technology and go for a very competitive price for its new product, the Libre 2.0.

Adidas jumped more than 6% on excellent figures and margins.


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