Earnings season in full swing

Market analysis - 1/25/2019

The week produced fresh economic data pointing to an economic slowdown.

The IMF revised its growth forecasts for 2019 lower, primarily because of softer business conditions in the second half of 2018, US-China trade tensions and a sharper fall in China’s growth which is now seen rising 6.2% this year. Global growth is now seen rising 3.5% in 2019, down 0.2 points, and +3.6% in 2020 (down 0.1). Eurozone growth forecasts have been confirmed at +1.7% in 2020 but revised down to 1.6% this year due to the slowdown in Germany and Italy.

In addition, China’s own data confirmed that the economy was slowing, albeit in a “controlled” fashion. GDP rose 6.4% in the fourth quarter, its lowest rate since 2009. Nevertheless, investment held up in December, retail sales rose and industrial production rebounded. Some indicators suggested Beijing’s stimulus was starting to bear modest fruit with construction and cement production increasing a little more than expected.

In the ongoing trade talks saga, US trade secretary Wilbur Ross tried to temper market expectations for next week’s US-China meeting. He said both sides were still some way off to finding an agreement and that there was little chance that one would be reached next week.

Markets still proved particularly robust in spite of Brexit uncertainty, the US shutdown and the trade talks. We view this as a sign that they are gradually overcoming the end of last year’s excessive pessimism.

  European equities

Company results generally reassured investors despite the IMF’s downward revisions to global growth, confirmation of a Chinese slowdown and falling PMI indicators in Europe. Relief over STM's results and its outlook helped tech stocks surge. STM said that although the first quarter would be weak, its gross margin should still be around 39% compared to 40% in the fourth quarter. In similar vein, ASML said first-quarter sales would be lower than in 2018 due to some clients putting back orders from the first to the second half, but its CEO reassured markets on future margin trends. Ericsson had an upbeat fourth quarter with like-for-like growth resuming and a gross margin of 32%. But Ingenico fell after once again revising guidance on its operating profits lower due to its payment terminal division.

The retail sector provided some encouraging news. Despite the “yellow vest” disruptions in France, Carrefour’s like-for-like growth held up and annual EBIT came in 3% higher than expectations, a reflection of a recovery in inflation in Brazil. Ahold Delhaize saw fourth-quarter sales rise due to its Dutch on-line business. Maisons du Monde reaffirmed that its EBITDA margin would be above 13% for 2018 and said it was happy with consensus EBITDA estimates of €146.5m.

However, Henkel warned on its margins and said it was to reinvest €300m, or 10% of EBIT, in an attempt to increase revenues. UBS had a weak fourth quarter, due mainly to strong underperformance in its investment banking division.

In corporate transformation news, Holland’s TomTom (GPS navigation) is selling its Telematics division (fleet management, telematic solutions and connected vehicles) to tyre-maker Bridgestone for €910m. Casino has signed a €501m agreement to sell property assets to Fortress Investment GroupIliad is to acquire Jaguar Network (corporate telecom and cloud solutions). Elior reaffirmed its annual targets and has reportedly short-listed three private equity funds to buy its Areas concessions business. Michelin is buying Indonesia’s Multistrada, a move that will help it produce Tier 2/3 tyres in a low-cost country before exporting them to mature zones. IAG has finally decided not to bid for the low cost Norwegian airline.

  US equities

In a short week because of Martin Luther King Day, the S&P500 fell 1%. Only defensive sectors like utilities and property advanced while materials and energy lost more than 2.5%. Jobless claims fell to 199,000, or less than the 218,000 expected, the lowest level since November 15 1969. And in PMI indicators, manufacturing came in at 54.9, or higher than the 53.5 forecasts while services were flat at 54.2.

Trade secretary Wilbur Ross said the US was miles off an agreement with China, a contradiction of previous reports which suggested progress was being made. Elsewhere, the Senate failed to adopt a draft bill to end the Federal shutdown.

With the results season in full swing, American Airlines jumped 6.35 % after its fourth quarter earnings and revenues both beat expectations. Southwest Airlines (+6.25 %) and JetBlue Airways (+5.10%) also beat expectations. Tech stocks were driven higher by better-than-expected results from semiconductor manufacturers and IBM which said it was on an upward earnings trend.

  Japanese equities

Despite an obvious economic slowdown, Japanese equities were relatively firm amid decreasing volatility. Sentiment was underpinned by lower stock valuations and Beijing’s economic stimulus measures. The TOPIX only edged 0.32% lower over the week.

The market stabilised after pricing in lower earnings growth estimates, but upside still appeared limited. Investors stayed on the sidelines ahead of fourth quarter earnings announcements. However, they were signs that they were starting to compare 2019 with 2016 and wondering when a recovery might occur.

Despite the fourth quarter slowdown in machinery orders and drop in electronic part exports to China, economic sensitive technology names rebounded from oversold levels. Fujitsu gained 5.92 while Tokyo Electron and Nitto Denko rose 4.06% and 3.57% respectively. Even Nidec, which had surprised the market last week by announcing a drop in EPS, managed to rise a little. On the other hand, Unicharm (-5.23%) and Recruit Holdings (-4.39%) underperformed.

The Bank of Japan stuck with its current ETF purchasing programme. There has also been a sharp increase in share buybacks. After the BoJ, Japanese companies were major net buyers in the stock market, an attempt to increase capital efficiency and investor returns. 

  Emerging markets

Ahead of the Chinese delegation’s arrival in Washington, the US government is demanding a formal extradition of Huawei’s CFO from Canada, adding more uncertainties to this new round of high-level trade talks. China’s economy grew 6.4% in 4Q18, hitting the full year target of +6.6%. Retail sales growth stabilized in December at 8.2% while online retail sales remained at a resilient +25.4% YoY vs. +17.8% in November. National property sales volume also surprised on the upside, +0.9% YoY in December after three months of decline. Overall liquidity continued to improve as the PBoC set up swap tools to provide capital via perpetual bonds. Regulators approved 2 games from Tencent, 1 from NetEase in the 4th round of game license approvals. China Merchants Bank reported its 4Q18 results which showed its NPL ratio improving and a 16.2% YoY increase in net profits. Both education names TAL and EDU published results and guidance beating analysts’ estimates with healthy organic growth pace and margin improvement. With 6.5% profit growth in 2018, local SUV maker Great Wall Motor announced its 2019 sales target of 1.2m units. This is slightly higher than the 1.16m in 2018.

SK Hynix in Korea said earnings had fallen due to poor end-demand for memory semiconductors. The company announced a 50% dividend increase thanks to a 40% reduction in capex. Intel’s cloud related business declined YoY in 4Q18, but Asian semiconductor names reacted positively in general this week to Intel’s forecast that capital spending would hit $15.5b in 2019, up from $15.2bn in 2018). Yes Bank in India finally announced that it had settled its corporate governance issue by appointing ex Deutsche Bank CEO Ravneet Gill as its next CEO. Havells reported strong revenue growth of 28% YoY in FY3Q19, but the EBITDA margin missed estimates due to higher commodity prices.

In Brazil news, the highlight was provided by speeches from Jair Bolsonaro and Paulo Guedes in Davos reaffirming pension reform as a a priority before asset sales and privatisations. All in all, the finance minister said this year’s primary deficit should be close to zero if the proposals are approved. Moreover, inflation (IPCA-15) came in lower than consensus, reassuring expectations that interest rates would remain at 6.5%.

Argentina’s primary budget balance for 2018 stood at -2.4% of GDP (lower than the target of -2.7%). In MexicoBanorte reported strong adjusted profits (+27% YoY) which were however 3% below consensus due to higher costs. Management guided on 20% EPS growth in 2019 with a 7-9% increase in lending and a higher effective tax rate.

We are now more positive on emerging markets.


Venezuela returned centre stage over the week. The country’s oil output had plummeted from 2.3 million b/d at end 2015 to 1.22 million in December 2018. Even at end 2017 it was still running at 1.7 million b/d amid US sanctions against the regime in power. President Maduro still has institutional control of the country and the army's support, but his position seems weaker by the day. After huge demonstrations, Juan Guaido, opposition leader and the National Assembly’s president, proclaimed himself interim President and was recognised by a number of countries including the US. Maduro riposted by cutting all diplomatic relations with the US and giving its diplomats 72 hours to leave Venezuela. The army will largely dictate how the short term picture develops.

In the meantime, Washington is threatening to increase sanctions. The US is still importing 500,000 b/d of Venezuelan crude, down from normal levels of 900,000. Venezuela's output could drop even further even if its main customers, India and China, continue to buy as it is increasingly behind with investment. RepsolEquinorChevron and Total are still operating there but Total's CEO says the situation is complicated due to galloping inflation and lack of access to the equipment needed to maintain production.

Meanwhile, US output is starting to slow due to lower prices at end 2018 and reduced drilling and productivity gains. For the 7th month in a row, the EIA sees shale oil growth slowing from 71,000 b/d this month to 63,000 in February. Last September, output was still growing by 240,000 b/d. Nevertheless, weekly inventories in the US are still rising so any price increases should be capped.

  Corporate debt


It was a mixed week with investors opting for caution ahead of the ECB meeting and fresh worries over global growth after Europe’s PMI indicators fell and the IMF cut its growth forecasts. The ECB’s post-meeting comments prompted a market rally as they suggested it would stick with its accommodating stance. The Xover only widened by 4bp and the Main was flat.

Casino (Ba1/BB) saw its bonds rise after the group said it was to sell €501m-worth of property to Fortress. That means the group has achieved the €1.5bn asset disposal plan announced last June a year earlier than forecast.

Atalian (B2/B) was under pressure as its leading shareholder is under investigation for embezzlement. A court in Milan has also launched an enquiry into Saipem (Ba1/BB+, oil and gas industry contractor) and some of its executives over accounting inaccuracies and market manipulation.

The European Commission gave the green light to Banca Carige to use the Italian government's guarantee for its planned €2bn bond issue. After merger rumours, Ubi Banca said it had no intention of rescuing Banca Carige and Monte PaschiDeutsche Bank, which acted as correspondent in the US for the Estonian affiliate of Danske Bank which is being investigated by the Fed, is now also under a Fed investigation over money laundering.

In M&A news, the Apollo fund is to pay £3.3bn for RPC, a plastic packaging specialist.

In investment grade new issues, Auchan raised €1bn over 5 years at 2.625% and Energias de Portugal the same mount with a hybrid bond at 4.496%. After releasing upbeat figures, IBM raised €5bn in four tranches over 4, 6, 8 and 12 years. In financials, Generali issued a €500m Tier 2 bond over 10 years at 3.875% and Banco Comercial Portugues an AT1 for €400m at 9.25%.


The global convertibles market is flat over a week but sharply higher year to date. US convertibles have underperformed due to profit taking in the technology sector but also earnings disappointments from companies like Citrix Systems.

The ECB left its interest rates unchanged and confirmed its guidance both on interest rates and reinvestment. It also shifted its assessment of the balance of risks "to the downside" and Mario Draghi struck a dovish tone at the press conference.

European convertibles continued to move higher. The new issues market remained active with 2 new deals. A convex issue from Dutch growth company Takeaway.com (online food ordering services) saw heavy demand. The company raised €250m over 5 years at 2.5% and with a 35% premium to fund the acquisition of Delivery Hero in Germany (announced last December) and to pay back a €150m bridge debt facility. 8.35 million ordinary shares were also issued.

In the US, Conmed Corporation (orthopedic products especially for arthroscopy) is in the process of raising $275m with a convertible due 2024, a coupon range of  2.875%-3.375% and a premium of around 25%. The proceeds will be used to fund the acquisition of Buffalo Filter.


Elément complémentaire