On the market : Apart from rare exceptions like Switzerland and Russia, January’s PMI indices pointed to a pick up in the industrial sector. However, not all readings moved back above 50 and into expansionary territory. The eurozone’s manufacturing PMI rose from 46.9 to 48.8. Germany came in at 51 compared to 48.4 in December and France registered 48.5 vs. 48.9…..
Edmond de Rothschild Group (Market Outlook: 03/02/2012)
Europe posted its fifth up week in a row, taking year-to-date gains to more than 6% and even 8% for eurozone indices. In the aeronautics and defence sector, India has chosen to buy Dassault Aviation’s Rafale fighter instead of the Typhoon
made by the Eurofighter consortium (EADS, BAE Systems and Finmeccanica). It is now in exclusive talks to buy 126 planes. This would be the first export sale for a plane launched more than 20 years ago. The contract could be worth EUR 11bn and would also be good news for Thales and Safran. The United Arab Emirates also seem to be interested in the Rafale.
After Switzerland’s Richemont and the UK’s Burberry, LVMH’s results provided confirmation that the sector was thriving. It is benefiting from strong demand in emerging countries, resilience in the US and tourism in Europe. The group’s organic growth was 14% for 2011 as a whole and +12% in the fourth quarter. All divisions saw double-digit growth and sharply improved margins except for perfume and cosmetics (Dior, Givenchy) which were harder hit by the crisis in Europe. The group says January’s sales were on the same par as the end of 2011 and management is relatively upbeat for 2012. Among companies reporting disappointing results were UNILEVER –Q4 volumes were up 0.1% but prices rose 6.5%- and Roche which saw US healthcare reform and falling prices in Japan shave 1% off growth.
There were several M&A deals. ABB bought Thomas & Betts in the US for USD 3.9bn, a 24% premium. The company is specialised in low voltage connectors, components and electrical security and has 6,000 sale outlets. Thyssenkrupp has sold its Inoxum stainless steel division to Finland’s Outokumpu for EUR 2.7bn. Thyssenkrupp will own 29.9% of the enlarged Finnish group resulting from the deal.
US equities edged higher last week amid stable economic data and contrasting earnings reports. Speaking to the House Budget Committee, Ben Bernanke said the US economy was gradually recovering and that he expects growth to be higher than in 2011. Manufacturing ISM came in at 54.1, which is very encouraging even it fell short of the consensus estimate of 54.5. In addition, new car sales jumped to more than 14 million units, an excellent sign for the auto sector as a whole. To cap it all, 257,000 vs. 160,000 jobs were created in January in the private sector. This bullish reading is an enormous surprise.
In company news, the field was hogged by Facebook’s looming IPO which could, according to initial estimates, have a market cap 50% higher than Boeing, the largest plane manufacturer in the world. In semiconductors, results at Qualcomm and Broadcom both beat expectations, offering confirmation that global smartphone demand is still buoyant, especially in the emerging zone. Results in the healthcare sector were generally solid (Eli Lilly, Pfizer and Aetna) even if companies are being more cautious over the outlook for the first quarter. Two companies bucked the trend: Exxon missed expectations and Amazon’s increase in sales was viewed as disappointing considering the size of its investments. Over the last five trading days, financials and technology were the best performing sectors. Utilities and energy lost ground.
The Topix fell 1.6% in JPY but rose 0.9% against the weaker EUR. The stronger yen and disappointing December quarter results weighed on the market which was arguably due for a pullback after rising more than 5 percent in the first 15 days of the year. A positive report on China’s retail sales, up a robust 16% YoY, during the Lunar New Year holidays did not have much impact. Trading volumes picked up to Y1.1tn, compared to Y0.9tn or even much lower levels seen in most weeks since November. The yen strengthened gained 2.4% against the dollar and 2.1% against the euro. The busiest week for earnings reports saw a flurry of severe downward revisions, notably in the tech sector which has been suffering from widespread weaker demand and exacerbated price erosion due to the higher yen. Fuji Film and Ricoh both plunged by more than 10% while Hitachi, Toshiba, Fujitsu and Canon lost around 7%. NEC, down 10%, also announced it would cut 4% of its 110,000 employees but analysts were more worried about its lacklustre core businesses. Major steel makers dropped more than 5%. Elsewhere, Melco plummeted 13% after being banned from bidding for governmental contracts due to allegedly overbilling defense/aerospace agencies. On the positive side, NKSJ Holdings jumped 7% on hopes that the departure of 2 senior managers would put an end to top management feuding and accelerate consolidation of its two non-life insurance subsidiaries. All Nippon Airways rose 6% as investors cheered cost reduction efforts. JR East added 3% after reporting much stronger tourist demand.
Advances on Asian markets picked up speed amid higher volumes. This is very good news given lacklustre fourth quarter results and margins which were frequently lower than expected. That is however, hardly surprising as production used commodities that were bought at high prices. Consequently, we can expect to see margins rise in the next two quarters. The market rise is due to a very favourable configuration that could last. Monetary policy in the region is easing and inflation is still retreating. To back this up, Indonesia reported trailing 12 month inflation at 3.65% in January. China’s banks are starting to lend more. Loans are expected to reach RMB 800bn in January and probably over RMB 1,000bn this month. This contrasts with under RMB 500bn in some months in the second half of 2011. The Chinese New Year generated a robust 16% rise on the same period in 2011 and that was already a record year.
OTHER EMERGING MARKETS
This week’s headline news was the cancellation of 122 2G licences that had been fraudulently awarded in 2008. This raises numerous questions over telecoms and banks. For example, will a leading telco like Bharti, which has had no licences revoked, benefit from sector consolidation? Will there really be any change to the competitive environment insofar as the operators who will suffer the most from this move are small players? In the banking sector, will these cancellations entail a rise in the cost of risk? It is difficult to be certain at this stage but once again, it would seem that this risk has been handled better by India’s private banks than its state-owned establishments.
The Reserve Bank of India’s priority this year is to maintain growth. It will probably wait for the budget to be voted before calculating how much rates can be cut. With interest rates set to fall, we are advising clients to return to the Indian market.
The Brazilian market gained 2.33%, this week. The global situation continues to improve as liquidity eases. This week
American, European, Chinese and Brazilian manufacturing PMI improved – a good sign for the market that the economy could be picking up in relative terms. In Brazil, industrial production increased 0.9% in December vs. 0.3% in November but less than the 1% expected. Elsewhere, OGX started producing oil in the Campos Basin. Moreover, while drilling in its Santos Basin, OGX discovered pre-salt reservoirs besides the estimated 1.8bboe of estimated reserves in the area. The stock jumped 7.65% this week. Bradesco Q4 results disappointed due to higher delinquencies and expenses. Compared to other LatAm countries, the index rallied 2.42%. Consumer confidence continued to improve, Peru released its results this week for December and they were up 3.6% MoM. Lending also grew 2.3% MoM and 17% YoY. Mexican consumer confidence is expected today and the market is looking for a 50bp increase compared to December. In Chile, retail sales grew above consensus for December at 10.1% vs. 8%. In contrast, their IP was well under, (for the same month) 0.5% vs. 1.2%. Davivienda, a Colombian bank, announced an agreement to purchase HSBC’s operations in Central America for USD 801m (1.4x P/B).
As usual, European tension was at the heart of investor preoccupations this week. On Monday, rumours of a possible debt restructuring in Portugal sent peripheral yields sharply higher. Yields on Portugal’s 10-year bonds jumped 200bp in a day.
But they eased due to ECB intervention and a government announcement that a second rescue plan had been rejected. No agreement on Greece’s debt was announced which only contributed to the prevalent unease. However, the European commissioner Olli Rehn said on Thursday evening that an agreement would emerge by the end of the week. Generally speaking, European credit markets continued to trade as they had since the beginning of the year. The investment grade index, Itraxx and sub-investment grade Xover continued to ease and returned to levels seen at the beginning of August 2011. The Xover fell back below 600bp.
Eureka! Europe’s new convertible issues market has reopened for business. African Minerals (iron mines) issued a USD 350m convertible due 2017. The market also looked very favourably on a possible Glencore/Xstrata merger. The BNP Paribas tender on so-called Cashes convertibles that can be exchanged into Ageas shares was taken up by 63% of holders.
Asia’s new issues market was also active this week. The SM Investments conglomerate in the Philippines issued USD 250m in convertible bonds with a 5 year maturity. Elsewhere, China’s PMI turned out better than expected (50.5 vs. 49.6). In the US, some disappointing data like ISM, consumer confidence and the Case Shiller index on US property prices tempered the market’s advance. As far as our positions are concerned, note that this week Qualcomm Inc rose on upbeat results and Mylan bounced on news of an agreement with the FDA. Gilead’s results, however, were mixed and the company has revised guidance for 2012.
By deciding to keep short rates close to zero until at least until the end of 2014 and leaving the door open for a third bout of quantitative easing, the Fed chairman Ben Bernanke seems to telling investors, “Continue buying gold, we’ll be printing inflation!” Bernanke’s statement coincided with the US Mint’s announcement of the highest sales in a year of the American Eagle, the country’s most popular gold coin. Central bank demand is also still high – Russia, Kazakhstan and Mongolia have bought more gold bars. Venezuela also announced that it had completed repatriation of 160 tonnes of gold bar reserves held abroad (roughly USD 9bn). This is no doubt why gold has risen 11.7% YTD and 2% over the last week. It is now only 8% shy of its all-time high hit in September 2011. And unlike 2011, gold mines are echoing the trend set by physical gold and outperforming equity markets.
Elsewhere, Brent crude is still trading in a narrow spread around USD 110/b. And yet, integrated oil majors have so far
posted rather disappointing results mainly on account of a poor showing from their refining and distribution businesses. This is why refineries are being closed in Europe by Petroplus and in the US by Hess.
Metal prices backtracked this week but chiefly because of profit taking after a strong start to 2012. China’s PMI data for
January points to growth in purchasing intentions despite the interruption from the Chinese New Year. Fresh optimism in commodities along with prospects for more accommodating monetary policy in emerging countries has arguably served as a catalyst for a revival in M&A deals. Glencore, in any case, has suggested merging with Xstrata, in which it already owns 34%. The deal would create a new leader in thermal coal and zinc, a powerful player in copper and the 4th largest mining group behind BHP Billiton, Rio Tinto and Vale. Stay tuned.
After a brief correction, risk assets remained in favour and investor perception underpinned equity markets. Between January 26 and February 2, the major indices performed as follows in local currency:
– Standard&Poor’s 500 +0.5%
– Euro Stoxx 50 +0.7%
– TOPIX -0.3%
– MSCI Emerging markets +2.8% (in EUR)
Trading patterns established in recent weeks remained in place. Spanish and Italian yields continued to ease. In Italy, 10- year yields fell 60bp over 5 trading days to around 5.6% (compared to a 7.5% high in November). The shift was even more pronounced on 2 year yields which contracted by 75bp from 3.65% to 2.9% (compared to more than 6% between mid- November and mid-December). Only Portugal bucked the trend. Easing dominated on other bond markets and the yield on US Treasuries lost around 10bp. The EUR was unchanged against the USD (0.31) and the yen flirted again with 76. The RMB was strong, moving closer to 6.3 against the USD.
The move higher was so violent, especially as concerns sector rotation, that we reduced positions in eurozone equities. The Greek debt agreement has still not been concluded and the country’s economy will face some very difficult hurdles ahead. Portugal is following suit with yields soaring to 17% on 10-year maturities. We were banking on a technical rebound because of prevalent investor pessimism and now we are taking advantage of it to move to a tactically negative score ahead of some key deadlines in coming weeks. Our other equity scores are unchanged and we still have a strong preference for emerging zone equities. On forex markets, the euro’s strength against the USD led us to reduced dollar hedging.
Edmond de Rothschild Europe Flexible: we cut exposure to 32% after starting to hedge the Dax using options. This sort of hedging is particularly cheap given today’s low equity volatility.