MARKET ANALYSIS-21/08/2020
The week saw new highs for the S&P500 and the NASDAQ. Overall, US equities have now returned to pre-crisis levels and the NASDAQ is up 25% year to date.
Google, Apple, Facebook, Amazon and Microsoft) together now represent close to $7 trillion (€6 trillion) in market cap. US markets continued to rise this week but in thin trading. Europe, on the other hand, fell 1% due to the stronger euro, low tech stock index weightings and worries over a resurgence in the pandemic. European equity markets are still down 10% year to date.
The latest data confirmed that inflation in the eurozone and the US had accelerated slightly. The US property market has been surprisingly strong but activity in the Philadelphia region declined more than expected and weekly jobless claims increased a little. There is still uncertainty over US households. There was no progress in talks between Democrats and Republicans over a new stimulus plan although the Fed warned that one would be essential to ensure a recovery. The latest Federal Open Market Committee (FOMC) minutes revealed concerns over the economic recovery scenario and a willingness to maintain aggressive support measures for longer than planned. At the same time, US-China tensions continued as Washington unveiled further restrictions on Huawei.
In Europe, PMI data suggested that the vigorous recovery in leading European countries was easing somewhat. Apart from France, most indicators remained in expansionary territory but services appeared to be struggling the most. The data seemed to echo the minutes from the latest ECB meeting which suggested support for the eurozone’s economy could be stepped up. ECB governors said they were relieved to see the zone had avoided an even worse recession but were concerned over possible turbulence in the future.
Trading was thin but although the recovery seems to be slowing, hopes for a vaccine are providing support, especially as governments are doing their best to avoid a new lockdown. We remain cautious on US equities and still prefer Europe. Our stance on fixed income has not changed.
EUROPEAN EQUITIES
European equities started the week on the front foot thanks to relatively resilient second quarter results but rebounding Covid cases in Europe, and particularly in France and Spain, suggested further upside was in doubt. The FOMC’s cautious minutes and mixed US data only reinforced investor vigilance. What is more, the euro hit a new year high.
In company news, second quarter results at Denmark’s Maersk (shipping) swept past expectations despite the collapse in world trade. This was due to cost cutting, improved freight pricing and much lower oil prices. EBITDA at Switzerland’s Geberit, global leader in sanitary products, beat expectations by 10%, with margins at 30.1%. Higher prices, cost measures and lower commodity prices explained the figures. July sales were higher than in 2019 thanks to a strong recovery in France and Italy and demand for contactless products in non-residential buildings. In chemicals, Covestro hopes to significantly beat EBITDA expectations in the third quarter. Much improved visibility and company confidence stems from trends seen in the second quarter results. Demand was up, costs were under control and there was low commodity inflation. Delivery Hero is to replace Wirecard in the DAX index.
In the hotel sector, the current unprecedented crisis continued to cause concern. Accor, for example, is reportedly looking at a tie-up with its British rival, Intercontinental Hotels Group. Elsewhere, Diageo is to acquire Aviation Gin LLC and Davos Brands LLC. After buying Casamigos, another premium gin acquisition would indicate the group’s interest in increasing its presence in the segment. Australia said it would not be opposed to Alstom buying Bombardier Transport.
US EQUITIES
Between February 19 and the market low in March, the S&P 500 index sank 34% but it has now returned to levels seen in February before the crisis struck. This means that the Covid sell-off only lasted 126 days, i.e. the shortest ever bear market. FANG stocks stood out during the period, racking up gains at a strong pace.
The market managed to make new highs even if talks on a new stimulus program are now only likely to be agreed when Congress returns in September. Nor were macroeconomic data any source of consolation as weekly jobless claims started rising again. And then the FOMC minutes suggested fresh monetary easing might be required to underpin the economy as the jobs bounce looked to be weakening. The message was that any real pick-up in employment would require a broader and more sustained upturn.
On the upside, some retail giants reported stunning results. Second-quarter sales at Walmart jumped 9% while Home Depot reported a 24% surge, the best increase in 20 years. Sector leaders continued to gain market share from companies which had been hit the hardest by the pandemic.
At the political level, the Democratic Convention officially declared Joe Biden as its candidate in November. His message focused on getting the US out of what he called an obscure period but there were few details on his economic program. The environment will be the main plank with plans for $2 trillion in alternative energy investments over 4 years.
JAPANESE EQUITIES
According to preliminary data, Japan’s economy contracted by 7.8% in the second quarter, or by an annualized 27.8%. The slump was milder than in the US (an annualized drop of 32.9%), the UK (-59.8%) and the eurozone (-40.3) but was much worse than the 17.8% contraction in 2009 after the global financial crisis. Personal consumption plunged 8.2% QoQ as people were asked to stay at home after the government introduced a state of emergency in April and May. GDP growth for the current quarter is forecast to rebound by around 13%.
As the news was fully discounted and in line with market expectations, it had a limited impact on markets, with the TOPIX down 1.49% for the week. Electric Appliances names such as Murata, Sony, Keyence and Nidec were relatively weak while Air Transportation, Other Manufacturing (including Games), Retail Trade and REIT rose.
EMERGING MARKET
The EM index was down 1.15% this week as of Thursday as further US sanctions on Huawei hurt sentiment. 51% of emerging companies have reported second-quarter results. Overall they have been weak, but better than expected. Information technology and healthcare posted stronger results.
The US Department of Commerce released a new set of restrictions on Huawei that would require any US and non-US company to get a license to provide US software or technology to Huawei or any of its affiliates. As a result, Huawei’s smartphone business could be at risk once it runs out of chip inventory. President Trump issued an executive order forcing ByteDance to sell or spin off its US TikTok business within 90 days, a further clarification on his initial executive order banning TikTok in the US. The virtual meeting between China and the US on the trade deal scheduled on August 15th was postponed, with no new date set so far.
Among Chinese companies reporting results this week, JD reported better than-expected results. Second-quarter revenues grew 33.8%, above guidance of 20-30%, driven by 417 million active customers, up 30% YoY. Lower expenses on marketing and technology drove the net margin beat. AIA reported weak results. The Value of New Business (VoNB) declined by 37% in the first half, or below market expectations of a 35% decrease. While China VoNB was down 13% in 1H20, it turned into positive growth in the last quarter, and this is a key driver for growth. Alibaba reported better-than-expected results, with revenue up 34% YoY and earnings per ADS up 18% YoY.
Management said that domestic core commerce had fully recovered from the pandemic impact. PingAn Healthcare & Technology reported first half revenues of RMB 2.7 billion, or in line with expectations, and up 21% YoY. Its loss contracted to RMB 213 million, beating the consensus. The better-than-expected bottom line was due to 1) GPM expanding by 30%; 2) higher other income; 3) higher government subsidy and wealth management product interest income.
In Taiwan, July exports rose 12.4% YoY, the fastest pace of growth since Jan 2018, ahead of expectations (+3.1% YoY). Singapore announced another SGD 8 billion ($5.8 billion) stimulus package to boost its economy, after reporting a 42.9% YoY contraction in GDP last week. Singapore had already committed to four stimulus packages worth SGD 100 billion, or around 20% of GDP. SEA Ltda reported strong second quarter results, beating expectations, with gaming revenues surging 62% YoY and e-commerce GMW growth accelerating to 110% YoY (after +74% in the first quarter).
India’s trade data improved in July: exports contracted by 10.2% YoY (June -12.4%, 2Q -36.6% YoY), and imports were down 28.4% (June -47.6%, 2Q -53.3%). The trade balance reverted to a $4.8 billion deficit after recording a small surplus in June. Hero Motocorp and Eicher Motors reported revenue down 58% and 67% respectively due to the impact of the lockdown, but said they saw a demand recovery, not just driven by pent up demand.
In Brazil, market speculation rose that Paulo Guedes could leave the government. Magazine Luiza reported good results, with net revenue up 29%, a 14% beat, and strong indications for a robust third quarter as well.
CORPORATE DEBT
CREDIT
Sentiment was mixed due to worries over the strength of the recovery and the surprisingly cautious tone of the FOMC minutes. In the end, the Xover tightened by 8bp and Main by 2bp between Monday and Thursday.
Moody’s downgraded UPC Holding from Ba3 to B1 following its bid on Switzerland’s Sunrise. The agency said leverage was still too high despite the bid’s provisions to reduce it. Cirsa’s bonds slipped after S&P put it on negative credit watch. S&P cut Accor from BBB- to BB+, citing a bigger-than-expected Covid impact. The agency said credit metrics would not improve enough next year despite the group’s efforts to cut costs and preserve cash. Accor’s senior bonds weathered the news as it was already discounted.
The bonds also benefited from their step-up status. Accor was also the subject of press rumours of a possible tie-up with its rival IHG. As well as geographical complementarity, any deal would create significant synergies and help build a global leader in the hotel sector.
Elsewhere, Jaguar Land Rover’s bonds dropped by 2 to 3 points after rescue talks between it, Tata Steel and the UK government ended. In auto components, Adler Pelzer’s bonds rose; the delayed 2019 results saw EBITDA fall 20.6% but this was actually better than expected. Teva’s bonds came under pressure after Washington accused the group of non-compliance with anti-corruption laws. The group might have to pay a heavy fine.
CONVERTIBLES
What a week! The primary market was still on fire with 11 deals worth more than $5 billion. And yet we are still supposed to be in the blackout earnings period.
In the US, we saw a mix of well-known issuers like Online Education Company Chegg ($900 million due 2026) and global online DIY stores like Etsy ($650 million due 2027). There were also companies directly hit by the Covid crisis like cinema chain Cinemark ($400 million at 4.5% due 2025) or Sabre Corp (travel tech solutions) which raised $250 million with a mandatory convertible.
In Europe, property company and serial issuer TAG Immobilien raised €450 million over 6 years to finance acquisitions of units in Germany and the partial buyback part of its outstanding convertible.
In Asia, the market reopened with the Archer Daniels Midland exchangeable into Wilmar International which raised $300 million due 2023. The proceeds will be used for general corporate purposes and possible acquisitions.