The glass is half-full

Analisi di mercato - 18/01/2019

Markets continued higher in spite of signs of a slowdown and persistent Brexit-related risks. (English version)

Signs of an economic slowdown began to take shape both in China and the US. The Fed’s Beige Book said the US was losing steam but also pointed to moderate growth in some regions. The report said the outlook was generally less optimistic because of equity market falls, higher benchmark rates and trade uncertainties. It added that growth in the manufacturing and energy sectors was tapering off in most regions. The shutdown, already the longest ever, only adds to these concerns.

Business conditions in China continued to worsen while growth forecasts are generally shrinking. 12 out of 31 provinces have already released expectations and 8 have reduced growth prospects.

All these signs of slowdown and political risk are mostly discounted by markets and investors seem to be banking on initiatives in some countries. China, for example, is striving to revive its domestic economy. Liquidity injections and repeated cuts to banks’ required reserves are reassuring investors.

Although the main goal is to stop funding drying up before the Chinese New Year, these measures also show that the PBoC is focusing on offering banks cheaper funding so that they can then lend to companies at lower rates. The US-China trade talks are ongoing and there is hope of at least a partial solution to the dispute.

In the circumstances, we remain keen on equities. We expect China's economy to take a turn for the better thanks to the stimulus plan and we see further mileage in the European and US corporate profit cycle. 

  European equities

European markets continued to rally; taking a positive view of the UK parliament’s rejection of Theresa May's Brexit plan and heartened by Beijing’s monetary and economic stimulus measures. Autos, tech and financials led rises at the beginning of the period and the Italian market stood out after the government easily raised €10bn over 16 years. The book was oversubscribed more than 3 times (€35bn). But US-China tensions caught up with markets at the end of the week after Huawei was charged with stealing trade secrets from US companies. Subsequent profit talking was offset by news that US customs tariffs on Chinese imports might be partially or totally lifted. In related news, Berlin is reportedly keen to impose security conditions that Huawei could be unable to respect in its 5G roll-out.

In mixed news from companies, Société Générale issued a profit warning, saying there would be a 20% drop in revenues after fourth quarter trading was hit by highly volatile markets. The news put fresh pressure on a sector which had recently performed well. Continental said 2018 results would be in line but revised down guidance for 2019 on lower auto sales in China. Renault and Peugeot unveiled record 2018 sales. But without Opel's contribution, Peugeot’s sales would be down, albeit of better quality due to the group’s successful move into the SUV bracket. Casino’s fourth quarter sales were as expected despite the yellow vest disruptions and the news helped the sector rebound. Ryanair made its second downward revision to guidance in 4 months, citing this time a bigger-than-expected fall in winter fares.

In company transformation news, Panalpina received an unfriendly bid at a 24% premium from Denmark’s DSV. The Danish logistics company had previously been rebuffed by Ceva Logistics. Europe’s payment companies Wirecard and Worldline gained from sector consolidation after Fiserv acquired First Data to create a global leader. Europe's regulator and Germany’s BaFin supervisory authority would appear to favour a transborder deal for Deutsche Bank, rather than a tie-up with Commerzbank

  US equities

The S&P gained 1.5% and the Nasdaq 1.6%. While investors continued to suffer uncertainty from the longest-ever US shutdown, market sentiment was lifted by speculation that some members of Donald Trump's administration might want to change their approach to China ahead of the end of month meeting.

Financials rose by a robust 4%, mainly on upbeat results from leading US banks. Citigroup, JP Morgan and Bank of America saw strong growth in traditional businesses like lending while credit quality was in line with expectations. However, investment bank figures unsurprisingly fell sharply after a particularly difficult fourth quarter. Brian Moynihan, CEO of Bank of America, said the environment was good for consumers and companies and the economy was robust.

Only utilities lost ground over the week after California’s PG&E (electricity producer) went bankrupt. The group was unable to meet costs arising from last autumn's fires. 

  Japanese equities

Japanese equities gained on Beijing’s stimulus measures. Although the UK Parliament’s rejection of Theresa May’s Brexit withdrawal plan had no significant impact, investors continued to worry about the negative effects of US-China trade frictions on the real economy as seen in lower-than-expected November machinery orders. The TOPIX rose 0.88% for the week.

Other Products was the top performing sector, led by Nintendo (+9.30%). Securities & Commodities Futures, Other Financing, Insurance as well as Precision Instruments also performed well in the rebound. On the other hand, Uniqlo (-8.03%) and furniture & interior goods retailer Nitori Holdings (-4.86%) retreated after recent strong performance.

Leading motor manufacturer Nidec revised down its earnings guidance for FY2018 (ending 31st March 2019) from +12.8% to -14.0%. The group has been hit by sluggish sales growth due to rapidly declining investment in CAPEX among Chinese customers in November and December. However, the news had a relatively limited effect on the stock price as it had already been partially discounted.

The estimated tourist headcount to Japan in 2018 was up 8.7% YoY to a record 31.2 million. Visitors spent 2% more during their stays, boosting the overall amount to a JPY4.5 trillion. Growth was led by Chinese tourists who accounted for 26.8% and 34.1% of spending according to the JNTO statistics.     

  Emerging markets

Optimism continued to play an important role this week as Chinese Vice Premier Liu He is flying to the US on January 30-31 for more trade talks. Although no new official stimulus policies have been announced, targeted easing tones are getting clearer from officials at both central and local government level. After slipping in the previous 3 months, broad credit growth in China held steady in December, thanks to improved corporate bond issuance and bank loans, although exports fell 4.4% YoY in December vs 3.9% in November.

On the other hand, the latest earnings results continued to indicate a slowdown: Luk Fook, the jewelry retailer in Hong Kong, reported same-store sales down 10% YoY last quarter; TSMC reported 4Q18 results in line but 1Q19 revenue guidance (-22% QoQ) was weaker than expected. Management is expecting a contraction for the first half of 2019 but a better second half and plans to increase cash dividends despite weak demand dynamics. ByteDance, the still private tech unicorn company in China, said 2018 revenue only reached the lower end of its initial goal while Alibaba is reportedly cutting travel spending and postponing some hiring.

In India, December CPI was in line with expectations: 2.2% vs. 2.3% in November as food prices continued to reduce the trajectory. Infosys delivered a strong revenue beat in quarterly results last week but missed on margins. Management also raised full-year revenue guidance. Hindustan Unilever reported inline quarterly results, with 10% YoY volume growth continuing in the home care segment; a slight drop in gross margins contraction but a 140bp improvement in EBITDA YoY. Management remains positive on the demand outlook despite weak rural data points and slowing auto sales. Reliance reported better-than-expected results due to upbeat retail and telecom results.

In Indonesia, December trade data disappointed with exports contracting by 4.6% YoY and import growth slowing to 1.2% YoY. This could mean a widening current account deficit in 2018, above the central bank’s estimate of 3% of GDP.

In Brazil, retail sales came in stronger than expected in November (+1.5% versus 0.2%), driven by Black Friday’s sales. December consumer confidence was up 6%, the highest level since 2014. December malls traffic was also strong at +3.1% YoY. Another highlight was Petrobras’s Board of Directors approval of the sale of control in subsidiaries.

In South Africa, the central bank kept interest rates unchanged, significantly cutting inflation forecasts. Mr Price’s 3Q results disappointed due to lower than expected sales growth (below guidance).

Emerging markets funds saw $3.1bn in new money this week on cheap valuations, the Fed’s dovish remarks and the PBoC’s fine tuning. 


Brent crude stabilised at $60 and WTI at $52. Washington said it had no intention of granting new exemptions for Iran’s oil exports. But based on previous, unreliable indications, markets are loath to anticipate developments.

What is clear for the moment is that OPEC countries are doing what is required to reduce surplus supply. They cut output by 751,000 b/d in December compared to the previous month, with Saudi Arabia reducing by 468,000 b/d. This cut is a month in advance and the biggest fall since January 2017.

And given the time tankers take to reach final markets, the decisions were reached before the December 7 meeting. OPEC countries have planned various meetings in coming months to monitor supply adjustments. Venezuela’s production was down by 480,000 b/d to 1.22 million by December 2018 and could continue to suffer. Washington has told US refiners that sanctions might be imposed on crude imports from Venezuela (currently running at 500,000 b/d).

But the most important news is that demand continues to hold up well, especially considering concerns over the global economy and China’s slowdown. OPEC’s monthly report has left forecasts for growth in 2019 demand unchanged at +1.3 million b/d. The EIA has also maintained its forecasts at +1.54 million b/d. China imported 10.3 million b/d in December, a 30% increase over a year. For 2018 as a whole, imports rose 10.6% to 9.3 million b/d. Nonetheless, to balance out supply and demand in 2019, OPEC will have to produce an average of 30.8 million b/d, or less than today’s admittedly seasonal 31.6 million.

Elsewhere, the gold sector kicked off 2019 as it ended 2018, i.e. with a significant merger. After Barrick’s tie-up with Randgold, Newmont is to merge with Goldcorp. Four of the six biggest producers have now merged. The rationale behind this new deal is less clear but it suggests 2019 will be a very active year for the sector. 

  Corporate debt



The market started the week lower after a sharp drop in Chinese exports raised doubts over global growth. The trend then reversed thanks to Mario Draghi’s cautious comments on Europe's economic situation and the UK parliament’s rejection of Theresa May’s Brexit plan. Some investors are increasingly convinced that a no-deal Brexit is impossible. As a result, the Xover and Main indices tightened by 20bp and 6bp over the week.

In Spain, press reports said several investors would be interested in Dia’s recapitalisation plan. The group unveiled a restructuring plan at the end of December ahead of an increase in capital in early 2019. In retail, New Look (Ca/CCC) has reached an agreement in principle with a group of bondholders on its debt restructuring. The agreement involves a new £80m bridging loan to ensure short term business continuity. Italian press reports said Salini and major Italian banks were formulating an offer to buy Astaldi (Ca2/D). Telecom Italia (Ba1/BB+) issued a warning on its EBITDA for the 2018 financial year.

The ECB continued to put pressure on Italy's banks to make provisions for non-performing loans. Banca Carige asked the European Commission for permission to use the State's guarantee for its bond issues. The guarantee was granted by decree at the beginning of January. Société Générale warned of a 20% drop in its market activities but there was no impact on its credit spreads.

In new issues, BNP Paribas raised €2.25bn at 2.125% and £1bn at 3.375% with two Senior Non Preferred bonds. Both came with significant issue premiums. In investment grade, Engie raised €1bn with a hybrid bond at 3.25%. The issue performed well on the secondary market. 


The good news this week on the convertible bond market is the revival of the primary market in Europe with a newcomer to the universe ; (online food ordering) issued Euro 250 million of 5Y convertible bond (2.25% coupon, 35% premium). In the meantime, the company made a share placement of 8.35m ordinary shares. The overall proceeds will be used to fund the acquisition of Delivery Hero in Germany (announced in December 2018) and to pay back the euro 150 Million bridge facility (granted in 2018).

In Asia, Lenovo (personal computing and handheld) sold $675 million of 5Y convertible bond with a 3.375% coupon and 40% premium. The proceeds are intended to be used for the repayment of existing 4.7% 2019 senior note and some general corporate purposes.

In the rest of the news, China real estate sector was under pressure on Thursday after rumors that Jiayuan International would be unable to pay back its 8.125% 2019 bonds ; management confirmed later the payment of the bond.

In Europe, Dassault Aviation signed a new Euro 2 billion contract with the French government to develop the Rafale’s F4 standard, and got the confirmation that it could move forward with the production of the last 28 Rafale.

Finally, in the US, Atlassian (software) reported its Q2 2019 numbers with revenues showing 4% upside, and customer growth of 23% yoy.


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