The bullish trend continued

Análise do mercado - 01-03-2019

The bullish trend of the last two months continued but with less force. After being reassured by central banks turning more accommodating and hopes of a successful resolution of the US-China trade dispute, traders took the view that last December’s micro and macroeconomic forecasts had been overly pessimistic and pushed indices higher. The week saw Chinese PMI data, fourth-quarter US growth and European indicators which were all not as bad as feared. Strong domestic consumption on increased buying power now seems to be the strong point of economies throughout the world. However, markets have gained more than 10% since the beginning of the year so we should be more cautious over the rally continuing in the short term. That is why we have adopted a neutral asset allocation stance both in assets classes and geographical zones.

 

  European equities

Long-bond yields rose over the week due to signs that the economic situation was improving. Banks were naturally the first to benefit from the trend. BNP Paribas and Société Générale also unveiled job cuts.

Consumer staples, however, came under pressure. After profit warnings from many sector heavyweights like Henkel and Kraft, Beierdorsf upset investors by announcing an investment drive that would have a big impact on 2019 margins.

In chemicals, BASF beat fourth-quarter estimates (after warning on results at the beginning of December), and its 2019 guidance left 2018 looking like the low point for earnings. Bayer also beat fourth-quarter estimates due to its agrochemicals division. For 2019, the group sees solid like-for-like growth of 4%. Arkema said 2018 sales had risen 5.9% with EBITDA up 6%. But Covestro fell after guidance for 2019 fell short of expectations. 

In media, Vivendi was strong after news that KKR and Tencent Music Entertainment were mulling a bid for 50% of the group's UMG subsidiary. WPP said like-for-like growth in 2018 had beaten expectations. The group is cautious for 2019 but analysts had already discounted the news. ITV had a good 2018 and finally decided to invest in SVOD. However, advertising so far this year has fallen due to worries over Brexit. Aston Martin also made exceptional provisions for Brexit risks.

In retail, Carrefour managed to stabilise its operating profitability at 2,5% thanks to €1.05bn in cost cutting. The group now expects to save €2.8bn by 2020, up from €2bn previously. Thanks to strong performance in Belgium, Ahold Delhaize's results were at the top end of expectations. 

Air France KLM plummeted after the Dutch government announced that it had amassed 14% so as to match the French government's holding (14.3%). Biomérieux, SEB and Dassault Aviation all advanced on upbeat figures.

Marks & Spencer has teamed up with Ocado, the UK's pioneer in online supermarkets, to offer its food products on line. It is to spend £750m for 50% of a joint venture in which Ocado will house its UK online activities.

 

  US equities

The S&P500 stopped to pause and edged 0.35% higher. Economic indicators remained upbeat with fourth-quarter US GDP rising 2.6%. Consumption remained robust (+2.8%) and corporate investment accelerated to +6.2%.

Fed chairman Jerome Powell reaffirmed his willingness to be patient over rate hikes.

With 95% of S&P 500 company fourth-quarter results now in, 72% have beaten expectations. Earnings in 2018 are now seen rising by 14.7% with a 7.3% increase in sales. Consensus expectations for earnings growth this year are now running at 4.5%.

Over the week, tech and communication services led gains, up 1.56% and 0.86%, while energy slipped 0.52% and commodities ended 1.7% lower.

 

  Japanese equities

Japanese stocks prices edged lower with the TOPIX losing 0.12%. US and Chinese equities had rebounded sharply since the beginning of the year, but Tokyo has lagged. Any advances have been capped by worries over falling earnings and weak production data due to a slowdown in overseas demand. January's industrial production fell 3.7% MoM, or short of market consensus.

Against this backdrop, big-dividend stocks were relatively strong on buying from individual investors focusing on favorable shareholder returns.

Domestic demand sectors outperformed this week while economy sensitive stocks, which had been leading gains so far this year, fell back. Pharmaceuticals like Daiichi Sankyo, Eisai, and Otsuka Holdings rose. In services, Rakuten and Recruit Holdings advanced. On the other hand, Mining, Oil & Coal Products and Machinery declined. Fanuc tumbled 5.22% and major natural resources developer Inpex lost 4.58%.      

  Emerging markets

China's A-share market rallied this week in staggering daily trading volume surpassing RMB 1 trillion after the PboC sent a clear and consistent counter-cyclical pro-growth signal and MSCI decided to quadruple A-share weightings from 5% to 20% over 3 adjustments in May, August and November this year. A-shares alone will eventually have a 3.3% weighting in the MSCI EM index, while China's overall weighting will be over 35%.

US-China trade talks continued to tilt to the positive side with the latest news pointing to an agreement signing summit between Donald Trump and Xi Jinping in mid-March. China's Caixin manufacturing PMI posted a large rise to 49.9, higher than consensus expectations of 48.5. New orders, the forward-looking element, enjoyed a strong rebound while new export orders fell due to persistent external stress. Signs of easier property financing became clearer as the average mortgage rate for a first home dropped for the second month in a row. Auto inventories in dealerships fell to 42 days in January vs. 60 days in December. 

AAC delivered a profit warning for the first quarter of 2019. Net profits will fall 70% YoY due to an unfavorable product mix and low capacity utilisation. JD.com announced a better-than-expected fourth quarter in 2018 results thanks to lower losses at JD logistics. Management remains confident on margin improvement and its guidance of around 20% in top growth for the first quarter is in line with market expectations. Yili reported a strong set of FY 2018 results with sales up 17% and net profits 7% higher amid more market share gains in room temperature dairy production.

Geopolitical tensions between India and Pakistan involving jet fights and air strikes brought much-needed support to the ruling BJP party and Narendra Modi for the upcoming election. GDP growth in India fell from 7% to 6.6% YoY in the latest quarter due to more moderate government spending and soft growth in agriculture. More PSU banks have been taken out of the PCA framework post infusion of capital to support loan growth. Overall bank loans for January rose 13% YoY, led by NBFCs and personal loans. In Russia, Sberbank reported solid fourth-quarter results with a stronger-than-expected NIM.

Brazil's GDP grew 1.1% in 2018, largely in line with market expectations, and was boosted by an improvement in domestic demand with imports up 8.5% in real terms. Exports rose 4.1%. PageSeguro reported strong results, easing market concerns on competition. Magazine Luiza also rallied on a better-than-expected 27% YoY rise in sales in the fourth quarter. Petrobras reported mixed results as management continued to focus on deleveraging and improving cash flow generation and returns.

 

  Commodities

After a volatile week, oil prices eventually remained unchanged with Brent crude at $66 and WTO at $57. Earlier, prices had lost close to 3% after Donald Trump asked OPEC to "take it easy". Oil had effectively risen by 26% year to date and by 33% since December's low. However, as long as Iranian and Venezuelan output remains under pressure, it is hard to see a genuine correction occurring. Francis Fannon, the head of the Bureau of Energy Resources, also said that the US was aiming to get Iran's exports down to zero and that it would be premature to expect fresh exemptions in May for the 8 countries which have been allowed to continue importing. The bureau also said that up to 6 million barrels from strategic reserves would be sold in May.

All this means volatility will probably continue, especially as the impact on US commercial inventories is beginning to feed through. For example, this week's data showed a surprise 8.5 million barrel drop in crude inventories due to the double whammy of imports falling to a 1996 low, mainly on reduced imports from Saudi Arabia, and particularly robust US exports. The US was a net exporter for the second time. Meanwhile, China is now focusing on importing oil from Russia and Saudi Arabia and less on Venezuelan crude.

Elsewhere, the situation in Nigeria could deteriorate after the incumbent was re-elected President. The Nigeria Delta Avengers are threatening to attack oil facilities and President Buhari wants to increase taxes on oil companies. Royal Dutch Shell riposted by saying it would cut production if taxes were raised. Nigeria currently produces 1.7million b/d, or less than the 2.5 million b/d back in 2005.

 

  Corporate debt

 

Credit

The market remained firm thanks to optimism over US-China trade talks and comments by Theresa May suggesting Brexit might be delayed. The Xover tightened by 15bp and the Main by 6bp.

Swedbank, which has been linked to the Danske Bank money laundering scandal, called in external auditors to conduct an enquiry and to replace EY which was only recently hired.

After Senvion's profit warning in the preceding week, the wind turbine company remained under pressure. It is talking to debtors and shareholders on how to secure funding and an expert's report on its restructuring has been asked for. Meanwhile, the company has put back its 2018 results release. Elsewhere, General Electric's bonds outperformed. The group is pressing on with restructuring and is to sell its Biophama division to the Danaher industrial conglomerate for $21.4bn.,

OHL (Caa1/B+) surprised the market with an improvement in fourth quarter results. Sales rose 15% over the year after two down years and EBIDTA generation turned positive. Its core construction business was chiefly responsible for the rebound. Hapag-Lloyd (B2/B+) said preliminary figures would be at the top end of the scale with sales and EBITDA up 15% and 18%. However, profitability remained under pressure as higher fuel costs reduced its EBITDA margin by 0.7 points. Techem (B+/B2) reported disappointing results due to a 1.5% decline in Italian sales. UPC Holdings lost ground after sales and EBITDA fell 3% and 7% in the fourth quarter due to competitive pressure in Switzerland; but the good news was that an agreement had been reached on selling UPC Switzerland to Sunrise to CHF 6.3bn. Sunrise said UPC's existing bonds would remain in place in the new capital structure. The 2029 bonds have gained 10 points since the deal was announced.

Talks on restructuring Nyrstar's debt started during the week. More than 80% of the outstanding bonds could be swapped for shares and banks might also lose money on certain loans. In return, Trafigura would inject more cash into the group.

In M&A news, Steinhoff is reportedly trying to sell Conforama for around €600-700m before the summer. Ahead of talks with any buyers, a huge redundancy plan is on the cards.

On a rather active new issues market, KBC raised €500m with an AT1 at 4.75%. The book was oversubscribed to the tune of €3.5bn. UBI Banca issued a 10-year Tier 2 bond at 5.875%. In high yield, Rexel (BB) and Playtech (BB) both sold 7-year bonds, raising €600m and €350m at 2.75% and 4.25%.

 

Convertibles 

The European convertible new issues market remained quiet on account of the results season but the US saw three new deals. LivePerson (real-time sales and services software), raised $200m over 5 years at 0.75% and with a 35% premium for general corporate purposes. Prospect Capital (Investment services) raised $175m due 2025 at 6.375% and a 30% premium. The proceeds will be used to refinance part of its 2020 convertible issue. And after paying $21.4bn for GE's biopharma activities, Danaher (Life Science Equipment) launched a $1.35bn placement of ordinary shares and issued $1.5bn in mandatory convertibles.

Palo Alto (the largest weighting in global funds) beat expectations with a 33% jump in sales while its operating margin came in at 24.6%, or better than the 21.4% pencilled in by analysts. All regions made strong contributions, and Europe in particular. The group gained 3,500 new customers and said upward momentum was higher than in the last two years.