Markets forge ahead

Analisi di mercato - 15/03/2019

Markets recovered from the previous down week. Sentiment was boosted on the Monday after China’s central bank unveiled fresh stimulus measures. (English version)

European data suggested the economy had stopped deteriorating but they still justified the ECB’s caution and thus persistently low rates. US retail sales for January came in better than expected but failed to make up for December's fall. Mixed indicators -no inflationary pressure and upbeat durable goods orders- again suggested the Fed had adopted the right position. Government bond yields edged higher after a steep fall, but in Europe remained at very low levels. German 10-year Bund yields stayed below 0.1%.

The House of Commons once again rejected Theresa May’s Brexit plan and also any no-deal solution. Instead, an extension beyond the March 29 deadline was approved. Even so the prime minister’s proposal will once again come before Parliament on March 20. Sterling was volatile over the week but ended higher as investors adopted a positive take on votes in the Commons. Meanwhile, uncertainty resurfaced over the outcome of the US-China talks. The Donald Trump-Xi Jinping summit was put back to April. The talks are now running late. Moreover, Donald Trump once again threatened Europe claiming there had been insufficient progress in trade talks.

Economic and political uncertainty has led us to remain neutral on risk assets. We consider that the market has already factored in most of the good news like central bank repositioning, a resumption in the US-China talks and the probable postponement of the actual Brexit deadline beyond March 29. 

  European equities

European equities remained in bullish mood in a week dominated by House of Commons’ voting on Brexit arrangements. After rejecting the no-deal option, a large majority voted to extend the March 29 deadline. The UK government will demand a technical 3-month extension, i.e. up to June 30 if MPs approve Theresa May’s divorce agreement and a longer period if her deal is yet again rejected. European council President Donald Tusk said he was in favour of a 12-month extension to allow the UK to reconsider its decision to leave the EU.

Downward earnings revisions continued but markets moved to year highs, wiping out the December sell-off and returning to levels seen at the beginning of October 2018.

In company results, Inditex unveiled a mixed picture of a 4% rise in fourth quarter sales, up from +2% in the previous quarter but still less than expected, and a gross margin that also fell short and resulted in a 120bps drop in operating margins. But the dividend pay-out rose to 17% despite a rise in earnings of only 2%.

Growth at Adidas has worsened in recent months. Sales fell 5.7% in the fourth quarter after dipping by 1.3% in the third. The group also mentioned supply chain issues, particularly in North America which is a growth market for the company. 

Casino managed to beat expectations in like-for-like growth, trading profit and debt reduction. The group also announced it had raised its asset disposal programme from €1.5bn to at least €2.5bn by the first quarter of 2020 and guided on 10% annual growth in retail profits up to 2021.

Generali also reported robust figures. Operating profits came in at €4.86bn, or better than the €4.82bn expected. All segments made positive contributions and its solvency ratio rose to 216%, or above the 214% pencilled in by the consensus.

In aerospace, amid headline news of difficulties at Boeing due to its 737 Max model, Leonardo beat expectations and said 2019 would also be better than previously thought thanks to a recovery in the helicopter and electronic defence markets. 

  US equities

After a tricky start to the month, the market rebounded sharply to hit a fresh year high. Tech and healthcare led the trend, rising by more than 3%. Cyclicals lagged. The Donald Trump- Xi Jinping summit was put back from this month to next with no impact on markets. The US president wants to clinch the deal in person whereas Beijing prefers to finalise most of the details so that the summit can announce the agreement.

It was a quiet week for company results. Boeing lost 12% over the week due to the plane crash in Ethiopia and the decision by several countries to ground the 737 Max model involved for the foreseeable future.

WTI jumped 2.4% at the end of the week to last autumn’s levels thanks to an unexpected drop in US inventories. Oil-related stocks largely ignored the news and had one of their worst weeks in a month. 

  Japanese equities

Uncertainties on the global economic outlook weighed heavily and sent the market lower at first before a rebound in the US and China triggered a recovery. The TOPIX eventually gained 1.01% over the week.

On the macro front, January machine orders (excluding ships and electric power) plunged 5.4% MoM and were significantly below the market consensus of -1.5%. This is a volatile statistic but is considered to be the leading indicator for domestic capex and private sector demand.

Real estate (+3.63%) and power & gas (+3.51%) were among the better performers, notably Sumitomo Realty & Development and Kansai Electric Power. On the other hand, foreign demand sensitive sectors such as marine transportation (-1.05%), and rubber products (-0.74%) lost ground.

Hitachi outperformed on market sentiment that the group might restructure underperforming businesses. On the other hand, Murata Manufacturing sold off sharply. Investors had wrongly banked on it being admitted to the Nikkei 225 Index, prompting speculative buying followed by disappointment. 

  Emerging markets

China’s economy is taking longer than the market expected to bottom out. Industrial and consumption data remained under pressure despite tax cuts and targeted easing measures. Industrial production in January and February continued to be on the weak side with only a 5.3% rise versus consensus of +5.6%, a slowdown from its prior level of 6.2%. Jobless survey results hit a multi-month high of 5.3% in February, but still below the government target of 5.5%. YTD retail sales increased 8.2%, in line with consensus, but below the 9% seen in January. Fixed asset investment, on the other hand, gained traction, rising 6.1% versus 5.9% in January. After a phenomenal run in February, the margin trading balance in the A share market finally took a pause under the pressure of official surveillance of shadow financing.

The Trump-Xi summit for a final trade deal is now expected to be postponed to mid-April or later.

Ping An Insurance published solid 4Q18 results with 24% growth in VNB (value of new business) thanks to accelerating volumes and better margins. AIA also reported stronger-than-expected VNB growth in 4Q18, driven by higher sales volume in HK/Thailand and significant margin expansion across Thailand, Singapore, and Malaysia in the second half. Baozun reported inline results for 4Q18 with 42.8% YoY GMV growth and it revised up its 1Q19 GMV guidance to +55-60% thanks to new brands making a stronger contribution. Food delivery and bike sharing service provider, Meituan, reported a faster than expected deceleration in growth, blaming macro uncertainty and competition. Its breakeven agenda is now expected to be postponed to 2020.

In India, the Election Commission released its general election schedule. Polling will be conducted in phases from 11th April to 19th May with the final results out on Thursday, 23rd May. The market is turning positive on a potential Modi/BJP majority win given the fact that India-Pakistan tension is helping to increase support for the party. HindustanUnilever said that demand growth appeared to be moderating, which is visible in both rural and urban markets due to a weak macro environment.

In Brazil, January’s broad retail sales rose 1% MoM (+3.5% YoY) versus consensus expectations of 0.2%. The outlook for consumption remains positive, due to lower inflation, employment growth and increasing loans. The negative remains significant slack in the labour market. BR Malls reported mix results. Operating numbers were better than expected across the board, but there was a one-off negative impact on expenses (labour contingencies). CCR is to bid for the Brazilian airport contract which is good news.

In Mexico, Walmex hosted its Investor Day with a continued focus on operating efficiencies and an accent on e-commerce and omnichannel strategy. Moreover, the management announced a 5% wage increase for employees, or less than expected, after talks with the union.

In Colombia, Aval reported strong numbers due to better asset quality and acceleration in loan growth.

In Argentina, February inflation reached the high figure of 3.8% MoM, driven by the Peso’s depreciation and higher electricity tariffs. 

  Commodities

Brent crude rose to $68 and WTI to $59 with prices even hitting a year-to-date high, returning to last November’s levels. Venezuela’s power outages not only hit its population but also oil production. India’s Reliance (refining) also said it was to limit buying of Venezuelan crude as well as its supplies of diluent (used to fluidify heavy crude) to the country so as to comply with US restrictions.

Elsewhere, Libya’s production rose after the Sharara field resumed operations and even hit 1.1 million b/d, its highest level since 2013 and close to its theoretical capacity of 1.2 million b/d. Oil prices also rose after US inventories fell by 10.2m barrels, or more than seasonal norms. The drop will mop up most of the surplus to the 5-year average which began growing at the end of 218. The news had an immediate effect on futures by maintaining backwardation, a contrast with the contango seen at the beginning in January and a typical situation for a market suffering from a lack of supply.

This month's OPEC report had nothing much that was new. Demand continued to rise, adding 1.24 million b/d to 99.96m, split between the OECD (+240,000 b/d, essentially in the US) and non-OECD (+1 million b/d). Non-OPEC growth in supply was revised slightly higher by 60,000 to +2.24 million b/d due to Canadian production resuming. Over the last month, OPEC’s output fell by 221,000 b/d to 30.6m, or close to 1.8m below the October 2018 benchmark. Production had been scheduled to fall by 1.1 million b/d after a drop of 906,000 b/d in February.

Gold moved back above $1,300/oz after the correction at the beginning of March. Central bank buying remained active with 47 tonnes bought in January. Buying continued in February, notably by China and Russia. Uzbekistan returned to join the buyers as the country plans to increase its gold reserves from 342 to 430 tonnes by 2024. 

  Corporate debt

 

Credit

In spite of poor visibility on Brexit developments, the Xover tightened by 19bps and the Main by 5bps. The House of Commons rejected the plan Theresa May’s had agreed with Brussels last Monday and also any no-deal solution. Instead, an extension beyond the March 29 deadline was approved.

In company news, Spanish press reports said Salini Impregilo, Italy’s largest building company, had considered bidding for OHL. Italy’s ANSA press agency denied the rumours. Salini is for the moment focusing on a tie-up with Astaldi and said buying OHL was “not on the agenda”. Salini’s listed instruments dipped slightly before bouncing. Energia de Portugal’s bonds performed well after the group unveiled a €6bn disposal plan between this year and 2022 to cut debt and invest in renewable energy. The sales will include its power generation activities in Portugal. Nyrstar's talks with its creditors are still difficult and the group could be forced to find other solutions like declaring bankruptcy or cutting production if discussions fail to reach a satisfactory conclusion. The news triggered heavy selling of Nyrstar’s bonds.

Spie’s EBITDA rose 3.1% in 2018, or in line with expectations, after a second half that saw its oil and gas divisions recover, upbeat trading in Germany and a reorganisation in France. The group’s debt fell from €1.53bn in 2017 to €1.35bn, or more than expected. Strong construction momentum in France helped Loxam’s sales and EBITA rise by 8.4% and 7.9% over a year. The group is upbeat for this year and sees further deleveraging. Aldesa’s provisional results were better than expected with net leverage down from 2.1 times in 2017 to 1.6, partly due to the sale of a concession. Sales rose 6.1% and EBIDTA by 2.6% with international divisions contributing 61% to total sales. Casino’s results were in line and the group said financial debt would fall further after it increased its asset disposal plan to €2.5bn by the first quarter of 2020.

UBS revised its 2018 full-year results to include an extra €450m in provisioning (15bps in CET1), which represents 10% of the fine imposed by a French court.

The new issues market was busy and the high yield segment in particular. Cemex raised €400m over 7 years at 3.125%. Faurecia raised €500m over 7 years at 3.125% to refund a €500m bridging loan used to acquire Clarion. Paper company Sappi raised €450m over 7 years at 3.125%. As expected in its 2019 funding plan, UniCredit sold a €1bn AT1 at 7.5%. The issue was very well bid and performed well on the secondary market. Swiss Re raised €750m with a 31-year Tier 2 (non-call 11 years) at 2.534%. 

Convertibles 

Amid further tightening in high yield spreads and equity market gains, convertibles performed well. US convertibles logically outperformed to match US equity gains.

The new issues market remained active with four new deals. As before, they mostly came from the US while the European market remained idle.

Euronet WorldWide Inc (electronic payment and transaction services) raised $500m due 2049 at 0.75% and with a premium of 36 % for general corporate purposes, but also the partial repayment of its outstanding 2044 convertible. American Electric Power (electricity and natural gas supplier) raised $700m, and an additional $105m greenshoe, with a 3 year maturity at 6.125% and a 20% premium. The proceeds will go on funding fixed asset investment, including a recently announced renewable contract.

Australia’s DEXUS (property) raised AUD$ 452m over 7 years at a little more than 2% and with a 20% premium. The issue is expected to be rated A- by S&P.

Brazil’s GOL Linhas Aéreas Inteligentes announced a roadshow for a placing of $300m in 5-year convertibles (3.75%-4.25% coupon, 30%-40% premium) plus a $14m American Depositary Receipt. The placing is expected to be closed by March 25.

Elsewhere, Australia’s AMS (semiconductors) unveiled a partial $100m buyback of its 2022 and 2025 convertibles between end March and end 2019.

At the end of the week, Ence Energia y Cellulosa SA (paper) plunged on rumours that Madrid would not renew one of its concessions. The company says this eventuality would have a negative impact of €185m.

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