Global growth hopes edge higher

Market analysis - 11/18/2019

The big news item of the week was Germany’s third quarter GDP which rose 0.1%, narrowly missing a move into recessionary territory.

Expectations were for a 0.1% drop and second quarter GDP was revised down to -0.2%. However, over a year GDP has only risen 0.5%. Brexit uncertainties and the trade war are still weighing on the German economy which is also handicapped by its dependence on autos amid a global sector slowdown. Note that Washington is soon expected to postpone tariff hikes on auto imports from the European Union. That at least would spare Europe, and German industry in particular, from an additional knock to growth.

To deal with slowing German growth, the draft budget - which has been approved by a Bundestag committee - includes a 1.1% rise in spending to €362m, slightly higher than the €360bn finance minister Olaf Scholz mentioned in September. The budget will be put to the vote before the end of the year. An agreement has also been found between the two ruling coalition parties on an additional pension mechanism for people on low incomes.

However, these are still timid measures considering worsening economic prospects and repeated calls from the European Commission and the ECB for Berlin to introduce budgetary stimulus.

In the US, Donald Trump disrupted market sentiment by blowing hot and cold on the trade war with China. He said Beijing’s concessions were as yet insufficient but that they could improve to help both sides reach an agreement. China’s economic data continued to signal a slowdown, a major problem for the government. Consumer prices have been rising sharply due to hefty rises in pork prices. And October’s industrial production grew at a very disappointing 4.7% over a year, down from +5.8% in September. Investment also slowed further to 5.2% (vs. 5.4%) while retail sales revisited April’s all-time low of 7.2%, down from +7.8% in September. Social tensions at home mean Beijing desperately needs to underpin growth rates and the economy, all of which would require a lasting truce in the trade war.

Elsewhere, Japan’s third quarter GDP suffered an indirect knock from the US-China trade war but rebounded over a year to +1.4% (vs.+0.8% in the previous quarter), thanks to a favourable base effect and a temporary lift from consumers buying early to avoid the October 1st VAT hike.

Turning to the UK, Brexit uncertainties should evaporate after the December 12 elections whoever wins. Fiscal stimulus is on the cards with both main parties keen to raise spending.

In central bank news, the Fed and ECB both said their monetary policies were appropriate after France and the Netherlands warned against excessive use of unconventional tools. The Fed said the US economy was doing well thanks to the dynamic labour market and rising consumption. Barring an accident, there will be no more rate cuts.

With the earnings season about to end, US companies reassured markets with flat earnings growth on average in the third quarter, or better than the 3% drop expected. Sales rose 4%, or close to the average 4.3% rate seen since 2009.  

  European equities

Trading was yet again prey to trade tensions. After the recent lift to sentiment in Germany and a very slight improvement in October’s manufacturing PMI, the ZEW survey for November came in well above expectations. Markets started the week on the front foot but reversed when Donald Trump poured some cold water on the state of talks with China. Cue profit taking for all the usual sectors like autos and chemicals. Risk aversion resurfaced elsewhere, dragging down banks, notably Deutsche Bank and also ABN AMRO after it released poor results.

Elsewhere, Iliad soared on upbeat new fibre subscriptions and a €1.4bn share buyback. Infineon also did well after a better-than-expected fourth quarter. Burberry's excellent figures helped luxury stocks rise. But Continental came under fire. Its third quarter figures had already been released but management also struck a cautious note over the outlook for 2020, while failing to give more detail on its 2022 transformation plan. Daimler also fell after adjusting guidance for its auto and truck divisions in 2020/22. The group sees less momentum in the market and has also raised the cost of going electric. Prysmian also tumbled after a disappointing third quarter and downbeat guidance for the full year. Markets punished Saint-Gobain for making a big plasterboard acquisition in the US.

  US equities

Markets ended the period almost flat with the S&P 500 0.1% higher and the Nasdaq unchanged. Amid mixed news on the trade war front, volatility surged at the end of the period with indices hitting new records mid-session before running out of steam.

Donald Trump told the Economic Club of New York that a trade agreement was close but added that any failure would automatically trigger higher tariffs on Chinese imports. Sentiment was also hit by the worsening situation in Hong Kong. The rotation from defensives to cyclicals -which kicked off at the beginning of the month- went into reverse. As of Thursday's close, utilities (+1.3%), property (+1.3%) and consumer staples had all outperformed financials (-0.7%), energy (-1.9%) and consumer discretionary (-0.4%).

In semiconductor news, Nvidia and Applied Materials both beat expectations. In tech, Cisco revised guidance on sales growth lower for the next quarter, citing a global slowdown. NetApp (data storage and management) missed sales expectations but its margins enjoyed a sharp rebound, helping the company report a robust increase in earnings. In retail, Walmart’s results were better than expected.

Elsewhere, Carl Icahn reportedly took a $1.2bn stake in Hewlett Packard. He would like to put pressure on the group to merge with Xerox, another of his holdings. Thermo Fisher was rumoured to be eyeing a bid on Qiagen (genetic sequencing). 

  Japanese equities

Japan’s preliminary third quarter GDP (July-September) rose by an annualized 0.2%. Domestic demand was relatively solid but overseas demand fell. However, as expected, the consumer rush to spend ahead of the October 1 hike in consumption tax turned out to be limited.

Japanese stocks retreated on profit taking after a strong period of gains led by semiconductor related sectors. The TOPIX lost 1.08% for the week. Information & Communication outperformed while economy sensitive sectors such as Rubber Products, Nonferrous Metal, and Iron & Steel declined. Stock dispersion on earnings news was larger than sector deviation.

Fujifilm gained 6.49% on an upward earnings revision due to better medical equipment margins as well as its decision to make a big investment in its bio CDMO business. In contrast, major medical test equipment producer Sysmex plunged 9.57% as net earnings fell short of market expectations. 

  Emerging markets

The MSCI Emerging Markets tumbled 2.1% over the week as at Thursday’s close, erasing most of its November gains on reported US-China trade deal complications, softer China October activity data and persistent turmoil in Hong Kong. 

In China, October retail sales growth weakened to 7.2% (vs. an estimated 7.8%), industry output rose 4.7% (vs 5.4%) and fixed asset investment slowed to 5.2% in the first ten months, its lowest level since 1998. On the corporate front, e-commerce large players announced very strong sales numbers: Alibaba achieved RMB 268.4bn of gross merchandise volume in this year’s Singles Day Shopping Festival, a 26% YoY jump (vs +27% last year). And JD.com reported a 28% YoY jump in sales to RMB 204bn. Tencent’s third quarter missed on bottom line numbers on weak media ads; however its social ads, gaming and fintech divisions posted stronger numbers. As we approach the end of the earnings season, we note a decrease in positive EPS surprises in the third quarter to 41%, sharply lower than the previous quarter’s 52% as well as the 5-year average of 50%. This was in spite of higher positive sales surprises than the last quarter.

LINE Corp, the No.1 messenger application in Japan, owned by the Korean search engine company Naver, is reported to merge with Yahoo Japan to create a Joint Venture with greater economy of scale for mobile payments and cost synergies. Naver is to own 50% of the Joint Venture and Softbank 45%.

In India, telecom companies Bharti Airtel and Vodafone Idea posted a combined Rs740bn loss on provisions following last month’s Supreme Court decision requiring wireless carriers to pay RS 920bn to cover usage charges for spectrum/airwaves and licensing fees. The government has formed a commission to look into reducing the impact on the sector.

In Brazil, retail sales (ex autos and building materials) rose by a solid 0.73% (MoM) in September, marginally above consensus expectations of +0.6% MoM. August data was revised upwards to 0.21% MoM from 0.11%. Santos Brazil (logistics) reported third quarter results in line. The company had a regulatory lift last week after it received the go-ahead from ANTAQ (Brazil’s water board agency) for a capex reshuffle at its container terminal operation, Tecon Santos. The company is now waiting for final approval from the Infrastructure Ministry. The improved regulatory environment, conducive to capex reshuffle approval, was one of the pillars of its investment case. Elsewhere, Rumo reported a stronger- than-expected 14.3% rise in volumes in October, coming after a robust 18% jump in third quarter EBITDA. Malha Paulista’s early-renewal process case goes before the Federal Audit Court’s plenary session on November 20. This is a positive development for the company and a final decision seems very close.  

  Corporate debt

 

Credit

Markets retreated over the week. Germany's third quarter GDP rose by 0.1% but investors continued to fret over trade tensions between China and the US. The Xover widened by 9bp and the Main by 1bp between Monday and Thursday. Spanish banks underperformed slightly after Spain's socialist party formed a coalition with Podemos, a party which has often argued for increased taxes on banks.

Several companies reported reassuring figures. In telecoms, Altice Europe saw growth accelerate in the third quarter on strong performance from Altice France. Iliad rose on further signs of a recovery in France and persistently upbeat momentum in Italy. Both groups reiterated 2019 objectives. Iliad also unveiled a €1.4bn share buyback which is to be funded by an increase of capital underwritten by Xavier Niel, the company’s biggest shareholder with 52.1%. Vallourec reported a 10% rise in sales. Nordex’s order book ballooned and revenues were up 16.7% but EBITDA continued to fall. Hapag-Lloyd’s figures were in line thanks to a recovery in freight rates and stable volumes. For the second quarter of its FY 2019/20, Tereos saw sales rise 5% and the group said fundamentals on the sugar market had continued to improve.

Sweden’s Skandinaviska Enskilda Banken (SEB) came under attack at the end of the period due to worries that there might be more revelations to come in the Baltic money laundering scandal.

Casino said €784m in nominal had been tendered to its bond buyback. The deal is being funded in part by the proceeds from last week’s issue of a secured high yield bond for €800m.

On a rather active new issues market, Ball Corporation raised €750m over 8 years at 0.875% and €550m over 5 years at 1.5%. Faurecia raised €700m over 8 years at 2.375% to repay its €700m senior bond at 3.625% due June 2023. In financials, La Banque Postale and Lloyds sold AT1 bonds at 3.875% and 5.125%. AIB raised €500m with a Tier 2 bond at 1.875% over 10 years. 

Convertibles 

It was another busy week with 4 new deals. Singapore’s SEA Ltd. (software) returned to the market with a jumbo $1bn 5Y convertible bond at 1% and with a 42.5% premium. The proceeds will go on business expansion, potential strategic investments and acquisitions. Israel’s Cyberark Software (cyber security) raised $500m with a zero-coupon convertible due 2024 for general corporate purposes and the acquisition of complementary businesses, products, services or technologies. US biopharmaceutical company Halozyme (diabetes, cancer, dermatology) raised $400m at 1.25% with a 2024 maturity earmarked for general corporate purposes, repayment of loan agreements and additional share repurchases. Cloud-based software company J2 Global raised $500m over 7 years to repay a senior secured credit facility and be used for general corporate purposes.

This week’s focus was on ratchet and make-whole clauses. Japanese Media LINE Corp was said to be in talks for a possible merger with Yahoo Japan and its convertible jumped 8% thanks to the ratchet clause. It was the same story with the three Qiagen convertibles, with the 2021 maturity up 15% after Thermo Fischer was said to be eyeing a bid on the Life Science Equipment company.

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