A mixed start to earnings season

Market analysis - 7/22/2019

Unconvincing results and fresh US-China tensions leave investors hesitant.

The US economy remained buoyant thanks to strong consumer spending. Retail sales were underpinned by a 4% lift to wages and falling oil prices (as tensions with Iran abated and fears rose of an economic slowdown driven by Donald Trump's trade war comments). However, areas of weakness persisted with industrial production and investment losing steam. 

It was against this backdrop that US-China tensions suffered a fresh escalation. Donald Trump once against threatened Beijing with a $325bn hike on Chinese import tariffs if China refused to buy more US agricultural products. The mood was also colored by a mixed first batch of company results. In the US, fears over the impact of rock-bottom short term rates on bank profitability persisted. And flagship stocks like eBay, Netflix and SAP reported disappointing earnings. Healthcare, on the other hand, did better.  

Markets immediately reacted by falling, ending a run of 5 up sessions in the US. The retreat was, however, limited due to expectations over central bank support. Indices rebounded on the Friday morning. On bond markets, upbeat US economic data pushed rates there higher across the yield curve but, in Europe, they continued falling as inflation expectations fell further, a risk factor that Benoît Coeuré had recently alluded to again. In fact, the ECB is mulling the possibility of reducing its inflation target as 2% no longer seems appropriate. All eyes are now on the next ECB meeting on 25 July and the Fed’s monetary policy committee on 31 July. The probability of a 50bp cut from the Fed is now running at 50%.

This week, we took advantage of wavering sentiment on markets to reshuffle our European equity hedging. We also reduced our duration hedges.

All in all, we have maintained our prudent stance on European equities and bonds. 

  European equities

Markets ended the period flat, underpinned by accommodating monetary policy but concerned with half-yearly results that were generally mixed.

SAP plunged 7% when its second quarter results missed expectations. The disappointments came from licences which fell 6%, cloud activity orders and the operating margin which came in at 27.3%, or below consensus expectations of 27.7%. Management, however, reaffirmed its full-year targets. Ericsson dived 8.5%. Its networks divisions saw sales rise 5% above expectations but its digital business fell short and its restructuring programme is turning out to be longer and costlier than expected. Management also stressed that strategic contract margins might be hit. Other disappointments included Publicis which once again cut its organic growth forecast, this time reducing it to zero for this year, down from +1% expected. Management tried to reassure investors at the subsequent conference call by pointing out that any sales weakness was down to specific factors and softness among agribusiness and consumer staple clients but that its recent acquisition of Epsilon offered significant growth potential. The company added that its consumer discretionary business was, however, doing very well. Management also said that traditional advertising could remain under pressure in 2020.

On a more positive note, Swatch jumped 9% and Burberry surged 17% over the week on reassuring figures. Burberry’s increased accent on premium brands seems to be bearing fruit and its new Tisci collection has been a big hit with Chinese millenials. Swatch reported better-than-expected margins and said it was upbeat on the second half thanks to momentum in continental China (22% of sales). Investors also cheered news that AB InBev had sold its Australian businesses to Asahi.

  US equities

The S&P 500 and Nasdaq ended the period more or less unchanged. Company results that were merely in line were offset by expectations of monetary easing from the Fed at the end of July. After the New York Fed chairman said a 50bp cut was needed to stop the US economy collapsing, markets put a 25bp drop probability at 58.5% with a 50bp move at 41.5%, a big increase on sentiment at the beginning of the week. WTI oil prices ended the period at $56.2 and looked likely to chalk up their worst week since May despite reassuring US and Chinese economic data.

Sector dispersion remained relatively high. Energy (-2.82%) led losers on oil price weakness, followed by telecoms (-1.1%). Consumer discretionary (+1.2%) and basic materials (+0.9%) led gains. As the second quarter results season kicked off, Netflix tumbled 14%. Its results were in line but new subscriber figures were 50% below the company's guidance. IBM and Microsoft rose on solid, better-than-expected figures driven by upbeat performance from cloud activities.

  Japanese equities

Japanese equities lost ground on Thursday as the yen appreciated to 107 against the US dollar, aggravating concerns over 2nd quarter earnings. Worsening relations between Japan and South Korea also dampened market sentiment as they will invariably affect the economy. The TOPIX declined 2.67% for the weak. However, the index rebounded on 19 July from oversold levels after the Nikkei 225 average P/E on 1-year forward earnings fell as low as 11.79.   

All sectors posted negative returns, led by Oil & Coal Products and Mining and Precision Instruments. On the one hand major oil refiner JXTG Holdings (5020) plunged 5.84% and Canon (7751) tumbled 5.57% on downward earnings revisions. On the other hand, pharma company Daiichi Sankyo (4568) gained 4.76%, and cosmetics producer KOSE (4922) which is popular among Chinese consumers, rose on news of record tourism numbers in June (+6.5% YoY) led by Chinese tourists.         

The Upper house election is on 21 July. According to the latest opinion polls, current coalition parties (LDP & Komeito) are forecast to win a majority, keeping Shinzo Abe’s administration in place.

  Emerging markets

Emerging markets edged up 1% this week as the earnings season began. Central banks in South Korea, Indonesia and South Africa cut rates over the week.

China’s GDP growth in the 2nd quarter slowed to 6.2% YoY, its lowest level in 27 years, but in line with market expectations given the trade war impact. June retail growth surprised on the upside, in part boosted by auto sales as dealers de-stocked ahead of a change in emission standards next month. In the pharmaceutical sector, the National Medical Bureau met to discuss the nationwide rollout of its Group Purchasing Organization plan, which should lead to a less aggressive bidding strategy for generic drug makers. The new online education regulation unveiled this week should also reduce uncertainty and help market sentiment to recover after a year of new policy updates. Kweichow Moutai reported first-half revenue up 18% and net profits 27% higher. In Hong Kong, AB InBev pulled its $8.9bn Asian unit IPO, citing weak market conditions, while there was talk that Alibaba’s Hong Kong IPO might be reduced by half.

South Korean and Japanese tensions continued to rise as South Korea rejected Japan’s request to accept 3rd party mediation on the issue of forced wartime labour compensation. As a consequence, Japan vowed to impose new sanctions on South Korea.

In Taiwan, following its preannouncement last week, TSMC published a slightly weaker-than-expected gross margin for the 2nd quarter, but guided for higher-than-consensus revenue growth for the 3rd quarter, driven by high end smartphones, 5G and HPC. Management also sounded a confident note by saying the company had passed the bottom of the business cycle and should see demand increase.

Infosys in India reported an acceleration in its revenue growth for the quarter, and large deal wins at the highest level ever. As a consequence, the company hiked its revenue guidance by 50bp, and now expects 8.5-10% revenue growth for the current fiscal year. Yes Bank, while returning to profitability after posting a surprising loss last quarter, continued to suffer from asset quality deterioration.

In Brazil, according to the central bank's monthly indicator of real GDP, real activity grew 0.5% MoM in June (after four months of decline). The favorable base effect due to the truck strike last year helps explain the pickup in activity. The news that the government might try to boost GDP growth by allowing workers to withdraw funds from their FGTS funds (worth roughly R42bn), fueled a rally in all consumer names.

Walmex reported second quarter EBITDA and net income around 7% above consensus with same store sales growth of 5.4% in Mexico, a reflection of strong resilience in consumption against a weak macro backdrop.


Oil prices ended down over the end of the week driven by the softening in tensions across the Middle East region, more particularly in Iran, as well as the increased fears about an economic growth slowdown further to the Donald Trump’s stances against a background on the trade war between the US and China. The barrel was heading towards one of its worst weeks since May, despite reassuring economic figures in the US and China, and ended the week at $56.2. 

  Corporate debt



Monetary easing expectations remained centre stage but fresh US-China trade war tensions clouded the picture. The Xover widened by 8bp between 15 and 17 July while the Main was relatively unchanged.

Thomas Cook fell after an S&P downgrade and despite a possible cash injection from Fosun. The planned recapitalisation programme could be for £750m with Fosun then holding a significant stake in the tour operator and a big, but minority, stake in its airline.

Ardagh sold its Food & Specialty Metal Packaging business to Trivium Packaging, a joint venture with Exal. Ardagh will be paid €2.5bn and hold 43% in the joint venture. S&P confirmed its rating and said the deal would have no impact on Ardagh’s operating and financial profile. Elsewhere, Telecom Italia said it might sell assets worth €2bn, including some non-strategic activities.

S&P followed Moody’s lead and reiterated its rating on Deutsche Bank. The bank's bonds were relatively stable after the news. Swedbank, Danske Bank and Nordea all released rather disappointing results with net earnings down 11%, 6.8% and 39% respectively over a year. Revenues fell and costs rose, notably for Swedbank and Danske Bank, due to sizeable investments in the fight against money laundering.

On the new issues market, Loxam raised €1.4bn with 5.5, 7 and 8-year tranches at 3.25%, 3.75% and 5.75% to fund its acquisition of Ramirent. Its existing bonds fell on the news with the senior 2026 maturity down 1.5 points. Trivium Packaging raised $2.85bn to finance its incorporation, selling 4 tranches with maturities between 2026 and 2027. Italy’s ailing Monte Paschi di Siena bank raised €300m with a Tier 2 bond at 10.5% over 10 years.


The new issues market was quiet due to the results season with only one deal. Repligen Corp (a US company producing and marketing products used to make biological drugs) raised $250m over 5 years at 0.375% and a 32.5% conversion premium. The proceeds will go on helping to repay the company’s 2021 maturity and on general corporate purposes as well as any acquisitions.

The consequences of the US-China trade war appeared in the first second quarter earnings to be reported. Figures from Rémy Cointreau, Richemont and Burberry all showed a loss of steam, especially in Asia. But the slowdown had already been factored in and stock prices reacted well.

Ubisoft’s numbers reassured investors over grey areas like Player Recurring Investment (PRI). The company’s biggest licence, Rainbow 6 Siege, and the overall portfolio of games performed well. The results validated the company's move to transform its business model.

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