CHINA’S RECOVERY IS ON A STRONG PATH

The latest PMI from China showcased the strength of the recovery there. Meanwhile, the eurozone’s definitive composite PMI for November was revised slightly higher. Services still fell in Spain and Italy but much less so than in the spring. Manufacturing continued to grow thanks to a rebound in export demand. Germany’s retail sales rebounded by 8.2%. Online sales and household equipment were particularly buoyant.

Discussions over the actual Brexit agreement continued to stumble on fishing rights despite the need for some compromise before December 31, and especially before the European Council meets on December 10-11. Progress was, however, made on fair trading and a mechanism to regulate government aid is being considered. 

Ahead of its December 10 meeting, the ECB has signposted additional easing via asset purchases as well as aid programs and support for banks. The bank’s vice chair said vaccines would be good for prospects but added that the inflation outlook could remain under pressure until 2022 and therefore require continued support.

In the US, Democrat leaders Nancy Pelosi and Chuck Schumer backed a bipartisan proposal for a $908bn stimulus plan. It will include $160bn for local authorities, $288bn in state-backed loans for SMEs and $180bn for unemployment insurance. A compromise for a £500-908bn plan now looks possible. $500bn not yet spent from the CARES program will probably be recycled to fund the proposal. 

Elsewhere, it is becoming clear that massive vaccination drives will take time. Pfizer has halved the number of doses it can produce with BioNTech by the end of December, an indication of logistical hurdles in obtaining the basic ingredients and rolling out production chains for an entirely new technology.

Equity markets have been trading moderately higher. The biggest shift has been in the US dollar which has lost ground against all currencies including the euro and especially emerging country currencies.

We remain positive on risk assets for the rest of the year. We still prefer Asian and US markets but also the attractively valued UK market which could play catch up if a Brexit agreement were to be found. 

US indices once again emerged from the last 5 trading sessions in positive territory. The Dow edged 0.32% higher, the S&P Nasdaq gained 1.02% and the Nasdaq 2.34%. 

Investors are betting not only on vaccines but increased monetary and budgetary support, especially in the US. Last Tuesday, a bipartisan group from both houses in Congress put forward a $908bn stimulus plan, a much small package than previous proposals. Consumer and tech stocks were in demand after Black Friday online sales rose 21.6% YoY to $9bn. 

The Fed’s Beige Book said there had been little or no growth in recent weeks in four of the 12 regional Fed districts and only modest growth in the others. But recent economic data were upbeat with a fall in weekly jobless claims while November’s composite PMI came in at 58.6, or higher than consensus estimates of 57.9. OPEC+ members agreed to increase production by 500,000 b/d from January but failed to reach a compromise on a broader and more long-term approach for the rest of 2021. 

There was confirmation of two mega deals over the week. Salesforce bought Slack Technologies for $27.7bn. And in the second largest deal this year, S&P paid $44bn for IHS Markit, a 20% premium. 

Airbnb and its investors are looking to sell up to $2.6bn-worth of shares in the company’s much-anticipated IPO. The event should bring the curtain down on one of the busiest years ever for IPOs in the US.

Markets overall seemed to be waiting for catalysts to fuel further rises as the impact from support factors like China’s economic resilience and vaccine progress waned. The medium-term outlook is still upbeat, but the US economic recovery looked like running out of steam due to mounting coronavirus cases and European data were mixed.

Services PMI were revised slightly higher in November but remained in negative territory due to fresh sanitary restrictions. Hopes for a US stimulus plan have failed so far to move fully center stage and Brussels has turned more aggressive towards Hungary and Poland in an attempt to get the European plan up and running. Nevertheless, strength in cyclicals like basic resources and banks suggested risk appetite was still intact. Oil stocks rose when OPEC+ reached an agreement on increasing production but more gradually than expected so as to allow the market to soak up increased supply. 

With the economic outlook still poor, the pressure will be on the ECB when it meets on Thursday to reinforce monetary support. Government bond yields were unchanged. There is still a lot of uncertainty over the Brexit agreement with some countries threatening to veto any accord if the UK obtains sizeable concessions.

In company news, easyJet signed an agreement for cheaper and more rapid Covid-19 tests. This is a crucial issue for tourism, and especially airlines. Dassault Aviation gained on a press report that Indonesia was looking at buying 48 Rafale jets.

Trading turned mixed after a strong run. The NIKKEI 225 index advanced by 0.62% while the TOPIX dipped 0.62%. Market sentiment was underpinned by the UK government’s official approval of a COVID-19 vaccine, but upside was limited by the worrying coronavirus spread. Osaka warned on a possible shortage in medical facilities and called for people to stay at home. 

Marine Transportation, Metal Products and Non-ferrous Metals led gains on a recovery in auto production and exports. Semiconductor-related names also stayed strong. Tokyo Electron jumped 6.65% and semiconductor wafer producer Shin-Etsu Chemical added 4.4%.

In contrast, Mining, Oil & Coal Products and Electric Power & Gas were relatively weak, probably because Japanese investors are becoming more ESG conscious; since Prime Minister SUGA announced his goal of a carbon neutral society by 2050, they have started to take a critical attitude towards large fossil-fuel users. Elsewhere, Pharmaceuticals underperformed due to the government’s decision to revise NHI drug prices lower. Dai-Ichi Sankyo sank 9.65% and Astellas Pharma lost 4.4%. 

The TOPIX Value Index was relatively firm, outperforming the TOPIX Growth Index for the week.

The MSCI Emerging Market Index had edged 0.71% higher as of Thursday’s close. Brazil and India outpaced other regions, rising 5.24% and 1.85% respectively while China was down 1.83%. 

China’s economic rebound is gathering pace toward the end of the year, with official PMI rising faster than expected in November to 52.1 from 51.4, the highest level since September 2017. Non-manufacturing PMI climbed to 56.4 from October’s 56.2, beating the 56 forecasts. The PBoC unexpectedly injected RMB 200bn (~$30bn) via a one-year MLF facility and 10-year Chinese government bond yields stabilized at 3.3%. US-China tensions returned after the Trump administration added chipmaker SMIC and O&G producer CNOOC to a blacklist of alleged Chinese military (PLA) associated companies. The ADR delisting issue flared up again after the unanimous passing of the Holding Foreign Companies Accountable Act (HFCAA) through the US House of Representatives. China imposed anti-dumping duties on Australian wine, further escalating tensions with Canberra. 

On the corporate front, Meituan reported another solid quarter with slightly lower-than-expected margins on food delivery. Chinese EV maker NIO delivered a record 5,291 cars in November with production running at full capacity. Both Li Auto and Xpeng reported triple-digit YoY growth in November deliveries as well. 

The Hong Kong-Singapore travel bubble was delayed for a second time as around 100 daily new infections were reported this week. 

In Taiwan, GlobalWafers, the world’s third-largest semiconductor wafer producer is in talks to acquire German peer Siltronic for $4.5bn, or a 10% premium. The group’s market share will rise from 17% to 30%, making it the second largest semi wafer supplier and a serious challenger to the leading Japanese players. 

Korea’s November exports rose 4% YoY after a +1.6% YoY average for September and October. LG Chem plans to double production capacity of battery cells for Tesla’s EV in China next year. 

India’s GDP contracted by 7.5% in the second quarter of 2020-21, following the record 24% decline in the first quarter, but it was better than consensus expectations of an 8.2% drop. November’s manufacturing PMI fell from a 12-year high of 58.9 last month to 56.3, but it still marked a fourth consecutive month of expansion. 

The RBI left rates unchanged despite high inflation and maintained its dovish stance. It revised up its outlook for GDP for FY21 to minus 7.5% from minus 9.5% previously. Passenger vehicle sales grew 8% YoY and 2-Wheeler sales 12% YoY in November. Tata Group is in advanced talks to pay $1.6bn for 80% of BigBasket, an online grocery operator backed by Alibaba. 

In Brazil, President Bolsonaro announced positive fiscal news by abolishing the Renda Cidada. Brazil’s economy recorded its fastest growth in 3Q20 as a powerful combination of monetary stimulus and government spending resuscitated consumer demand during the COVID pandemic. GDP rose 7.7% QoQ (but was down 3.9% YoY) driven by the construction sector. The savings rate increased from 13.9% in the same period last year to 17%. As expected, Intermedica announced an equity offering of R$2bn. (Bain had earlier announced its intention to reduce its stake). Fundamentals remain solid for the company. Magazine Luiza continued to gain market share in November, with GMV growth above 100% YoY thanks to Black Friday sales. At the same time, SSS also continued to recover. Nevertheless, the clear winner in November was Mercado Libre where volumes soared more than 130%. Vale’s iron ore production guidance for 2021 is 315-335mt vs. market estimations of 350mt. 

In Mexico, there was good news for OMA after GAP said it would bring forward its Master Development Program revision for 2020-2024. This followed the more than 5% contraction in the country’s GDP over 12 months. In short, GAP will be allowed to raise minimum tariffs and postpone investments. The contract revision is positive for all Mexican airports as it reinforces the efficiency of the Mexican legal framework and the government’s willingness to deal with contract revisions. Immediately after GAP’s announcement, OMA said tariffs would increase 13%, or much more than the 5% expected, and capex would be unchanged. OPEC and its Russia-led partners agreed to increase output in January 2021.

CREDIT

Markets added to gains on positive vaccine news and hopes the US Congress would adopt a new stimulus plan. The Xover tightened by 24bp and the Main by 3bp between Monday and Thursday. 

Sales at Picard for its second quarter rose by an appreciable 14.8% and the gross margin edged 10bp higher to 4.4%. Ellaktor saw a 12.7% rebound in its third quarter sales after a very depressed second quarter. However, EBITDA in its main concession’s division fell 12% due to a slump in tourism. Stena’s third quarter results remained under pressure from the sanitary crisis with sales down 9% and EBITDA 31% lower over year. Ferry sales plunged 35% while shipping sales rebounded by a significant 9%. Third quarter EBITDA at Wind Hellas also slipped 1% due to Covid. Rexel revised up its objectives for this year and announced the early redemption of its 2024 bond (€300m) thanks to higher-than-expected cash generation. 

Casino finalized its €717m asset sale to ALDI France. Since July 2018, the group has sold €2.8bn in non-strategic assets. S&P kept the group at B with a negative outlook. SoftBank Group is to gradually wind down its derivative product strategy after complaints from investors. 

UniCredit said CEO Jean-Pierre Mustier was to step down at the end of his mandate in April 2021 after disagreements over strategy. This increases the chances of M&A and the possibility of an agreement with Italy’s Treasury Department over Monte dei Paschi. 

Atlantia’s Autostrade subsidiary easily raised €1.25bn over 8 years at 2%. Webuild raised €500m with a 5-year maturity at 5.875%. Grand City Properties raised €700m with a hybrid bond at 1.5%. In financials, Banco BPM raised €350m with a Tier 2 bond at 3.25% and Credit Suisse $1.5bn with an AT1 at 4.5%.

CONVERTIBLES

After raising $143bn year to date, the new issues market maintained the pace. Accor sold a 2027 maturity that can be converted to, or exchanged with, new or existing shares. The proceeds are to go on general corporate purposes including the refinancing of a February 2021 maturity which still has €550m in bonds outstanding. The new bonds will be priced at par and bear annual interest of between 0.7% and 1.2%. Worldline added a €200m tap to its July 2026 convertible into existing shares, taking the issue’s nominal value to €800m. IWG Group (Europe’s largest business center group) raised £350m with a December 2027 maturity at 0.5%. In the US, fintech Shift4Payments, often considered as the future Square, raised $690 due December 2025. Nextera Energy raised $600mn due 2025 to refund its outstanding 2024 maturity. Liveperson (AI and conversation software) raised $450m. China’s Xiaomi raised $855m to reinforce its presence on key markets, notably in mobile phones to compete with Huawei. 

In company news, Remy Cointreau sold all its shares in the Passoã SAS joint venture to Holland’s Lucas Bols for €71.3m. There was also good news for France’s EDF which has received the nuclear watchdog’s green light to extend use of pressurized water reactors beyond 40 years. This will allow the group to delay the decommissioning of 32 900MW reactors.