Increased nervousness

Market analysis - 3/24/2017

Equity market trading was more nervous with the US and Japan losing ground and Europe and emerging markets treading water. Worries over Donald Trump’s electoral promises surfaced after the new administration struggled to pass its new Healthcare bill.

For investors, healthcare reform is a sector, rather than general, issue and the real topic is the electoral promise of economic stimulus through lower taxes and infrastructure projects. But by first focalising on healthcare, Donald Trump has embarked on an agenda which offers little visibility on market priorities; there is now a risk that this attempt to overturn Obama care could get bogged down, muddying the waters for other measures to come. We are putting this risk in perspective: healthcare reforms in the US are famously tricky to get through Congress but in the past have not jeopardised the implementation of other measures. Nevertheless, we are still tactically less exposed to equities. We think markets are technically more fragile after their uninterrupted, low-volatility advance in recent months. 

But economic data is still healthy, especially in Europe where PMI readings are still rising amid a more general recovery. France, for example, was left behind by Europe’s recovery until mid-2016 but has caught up fast. Its manufacturing and service PMI is now at 57.6, even higher than German’s 57. 

Bond markets have gained and long bond yields have fallen back since the Fed reassured markets after raising its rates. Fragile US equities and falling oil prices have also contributed. But European bonds have been almost untouched by this trend, mainly because the ECB has been less clear on whether its monetary policy will be maintained. In France, government bond spreads have eased thanks to the Populist Party’s defeat in Holland and stable opinion poll indications on the likely outcome to the French presidential elections. 

  European equities

Markets retreated in a quiet week for major European macroeconomic indicators and despite the eurozone’s composite PMI rising from 56 last month to 56.7, a 71 month high. Indices seemed to be in thrall to developments in the US over replacing Obamacare. 

Utilities were the most resilient, one of the few sectors to advance. Elsewhere, Hermès released full year figures that were in line. Cash flow was impressive and the EBIT margin gained 80bp to 32.6%, its best ever level. Smiths Group had a good half year for FY2017 with the medical division improving margins; the company maintained its full-year guidance. BMW’s full-year results revealed robust cash generation in the last quarter. But Gemalto issued a profits warning due to a weaker-than-expected market for payment cards in the US and persistent inventory reductions. 

In M&A, Unilever is as expected to sell various food butter and spread brands for close to GBP 6bn. The sale would dilute earnings over the short term but allow the group subsequently to improve its growth profile. Vodafone is to merge its Indian businesses (around 11% of EBITDA) with Idea Cellular. The deal between the country’s N°2 and 3 will create a player with a dominant position and unleash significant synergies. Akzo Nobel has rebuffed a second EUR 22bn bid from PPG, a fortnight after the first. The bid was raised by 7% to €88.3 a share and unanimously rejected. Akzo is also currently in talks to sell its specialty chemicals division. 

  US equities

US equity markets ended the period lower, the first down week since the Presidential election. There was no particular reason for the fall although the administration’s dithering over the Affordable Care Act reform and market impatience over promised reforms may have contributed.

Apart from contradictory indications from the property market, there were no major economic data. Existing home sales missed expectations but new home sales jumped by close to 6.5% over a month, or much higher than the +1.6% pencilled in by analysts. In company news, consumer discretionary plays PVH, Nike and Tiffany reported strong figures.

Over the last five trading sessions, traditionally defensive sectors like utilities, and consumer staples proved resilient. Financials tumbled by more than 4%, followed by healthcare.  

  Japanese equities

The Japanese equity market took a breather after the Trump rally. The TOPIX lost 2.7% on declining US equity indices and the stronger yen. Due to mounting uncertainties over the US President's healthcare bill, market participants became worried that a failed healthcare push could also spell trouble for the promised tax cuts and relaxed regulation which had buoyed Japanese equities. The yen advanced to 111 against the US dollar on Thursday, dragging down exporters.

By sector, the best performer was Other Products (+1.6%) while almost all sectors slipped. This week’s largest detractor was Marine Transportation (-6.5%).

Toshiba Corp jumped 12.9% after a Singapore-based fund Effissimo, set up by former colleagues of a famous activist investor in Japan, disclosed that it had become the largest shareholder with 8.14%.

On a negative note, Japan’s leading shipping companies Nippon Yusen and Mitsui O.S.K lost 9.1% and 6.4% respectively on receding hopes for a sector improvement as well as unattractive valuations. 

  Emerging markets

After a brief correction early in the week, Global Emerging Markets rebounded thanks to a slightly weaker US dollar but also, more importantly, to corporate profit growth picking up speed. The FY 2016 results season in Asia was in full gear and overall pointed in the right direction, with positive surprises in terms of revenue and margins outpacing disappointments. For the first time in 6 years, Asia’s full year forward profit growth expectations were revised upwards at the end of the first quarter. We started the year with a +10% forecast for FY 2017 and are now expecting 13-14%, a fair reflection of upbeat year-to-date performance on markets.

China’s improvement is undeniable, particularly among the large capitalisation State-Owned Enterprises. The life assurance segment is a good example. China Life and Ping An reported strong fourth quarter numbers and are upbeat about 2017. Both companies have achieved significant growth in user numbers and will aim to convert them into financial customers in 2017.

It was the same positive trend in autos. Geely, the rising domestic brand and Volvo Cars subsidiary, beat expectations thanks to sharp volume gains and a better average selling price which jumped from EUR 8,600 in 2015 to 9,400 in 2016. Chinese clients in big cities are upgrading their models and buying more expensive cars while people in rural areas are acquiring their first car, driving a boom in demand in tier two and tier three cities. What Chinese consumers want is not so much optimal engineering but flamboyant interiors with every possible electronic option and local Chinese brands are good at this. For years Chinese auto stocks have traded in the same PE 6-8 valuation range as mature market brands. With the strong pick-up in growth and market share gains, the sector has retrieved its GEM quality. And looking at auto stock valuations in India or Indonesia- between 20 and 25 times earnings- gives us some idea of the upside for Geely, GAC and Brilliance.

Elsewhere, China Southern was the only one of the country’s top 3 airlines not to have forged closer relationships with a US airline. This is about to change as American Airlines is expected to unveil a first step investment of USD200m in Southern, which is listed in both Shanghai and Hong Kong and capitalises USD 10bn. Back in 2015, Delta Airlines took a 10% stake in China Eastern and United Airlines signed a partnership agreement with Air China in 2016.According to Boeing, China’s domestic air traffic will exceed US passenger traffic volume by 2035, US airlines are already positioning themselves.  


After the previous week’s unsurprising OPEC output data for February, the subsequent fall in the oil price was mainly due to persistently high US inventories and uncertainty over an extension of the OPEC agreement. Brent crude briefly dipped below USD 50 after the US Department of Energy’s report but finished slightly above that level. It was still its lowest level since last November’s OPEC agreement. Oil inventories rose by 5 million barrels over the week while petrol and distillate stocks retreated further. 

The refinery maintenance season seems to be ending as utilisation rose 3% over the week. This means we should see this trend reverse and a drop in US crude inventories in coming weeks. This tallies with comments from the Saudi oil minister as exports to the US fell by 300,000 b/d in March compared to the previous month. 

OPEC is meeting in Kuwait on March 26 so as to assess compliance with quotas. No other news announcement is expected even if Reuters reports that more and more OPEC countries are now in favour of extending production cuts. The current agreement ends on June 30 and OPEC’s 172nd extraordinary meeting is scheduled for May 25, so there is no cause for a major announcement before. 

It was a good week for precious metals. Gold rose for the second week in a row and traded around USD 1,245. Since December 2016, gold has dipped amid expectations of a FED rate hike and then rebounded on the news. This was the case when rates were increased on December 15 and again on March 15. We view this as a rebound phase and the trend has been reinforced by uncertainty over the Trump administration’s capacity to reform, the moving force behind the reflation trade. 

Iron ore and coal fell over the week although Chinese production of iron ore and steel is rising. The World Steel Association said global steel production rose 4.1% YoY in February or a seasonally adjusted +7.8%. This was chiefly due to an 8% YoY increase in China. 

  Corporate debt



The ECB paid out the last EUR 233.5bn tranche in its TLTRO II programme, a higher amount than expected by markets which were going for EUR 110bn. Economic conditions no longer warrant this sort of operation: inflation is flirting with 2% and Europe’s composite PMI has jumped by 3 points in the last 6 months and, moreover, with few performance gaps between countries.

The iTraxx Over widened by 300bp on the new series before returning to its previous level of 294bp.

A busy new issues market continued to focus on refinancing with the exception of Cerba (B2/B+) which raised EUR 180m with a 2025 NC3 bond partly to fund its acquisition by the PSP and Partners Group private equity funds. Arrow Global (Ba3/BB-) raised EUR 360m with 8NC2 Floating Rate Notes and OI European Group EUR 200m with Senior Notes due 2024. Aramark (restaurants and receptions) raised EUR 325m with an 8NC3 bond and Federal Mogul (car parts) sold a EUR 715m bond. Next up will be K+S Group (potassium and rock salt for industry and farming, BB+), Aston Martin (B3/B-) and NH Hotel Group as well as a hybrid issue from phone company Telia (Baa1/A-). In financials, CGD raised EUR 500m with a PerpNC5 AT1 at 10.75%. 

Big deals included Altice buying Teads, a video ad tech player, for EUR 285m. Teads saw 2016 sales jump 44% to EUR 188m in 2016. Elsewhere, the European Commission approved the acquisition of SAG by Spie (Ba3/BB), a EUR 850m deal that was announced last December. The price represents 8.8 times 2016 EBITA. 

In the ongoing diesel gate saga, the Paris prosecutor’s office started an official investigation into Fiat Chrysler which is suspected of cheating over diesel engine emissions.  


There were no holidays for convertible bond markets as new issuance maintained the pace. Indian billionaire Anil Agarwal (Vedanta’s chairman) launched an audacious purchase of 13% of mining company Anglo American and took the market by surprise. The Volcan family trust raised USD 2bn with a mandatory 3-year convertible at 4.125% to acquire the stake.

Starwood Property (USD 5.8bn market cap) is expected to raise USD 200m with a convertible at 4.375%. The convertible will have a full dividend protection clause and a 15% premium.

Micron, the largest US maker of memory chips, released a strong set of results helped by a reduced capacity and rising demand for its phone and computer parts.

Some press articles suggested that Microsoft might be in talks to buy Citrix.

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