After an upbeat period, the latest leading indicators in the developed zone like the Philly Fed and European PMI data have fallen back. The US has declined more markedly than Europe. Apart from Germany’s IFO which is still close to record highs, this fallback reveals an ongoing inflection in growth. Figures from China – car sales and PMI – reinforce this view….
Edmond de Rothschild Group (Market Outlook: 19/05/2011)
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This period should be short-lived. The financial and monetary environment is still upbeat, and consumer spending is rising, albeit at a moderate pace, as the jobs market improves in many countries. Moreover, corporate investment, in infrastructure for example, is still on an uptrend. In addition, Japanese industrial production is returning to pre-quake levels if Toyota’s announcement this week is a good indication; this will solve supply problems over certain parts and equipment. Lastly, looking beyond the recent inflection in Chinese growth that the government was hoping for, China is expected to post growth of 9-9.5% in 2011. This is less than before but still strong.
European indices struggled all week with fresh downgrades from rating agencies on Greece’s long term debt and Italy’s outlook, diverging views on how to deal with Greece’s debt and the absence of any heartening macroeconomic news. European banks were clobbered in the proceeds. Crédit Agricole fell on exposure to credit risk and worries over financing at its Greek affiliate, Emporiki which was downgraded by S&P. Commerzbank suffered due its EUR 5bn rights issue which is designed to repay government aid obtained during the crisis. The mood also dragged down Santander, Mediobanca, BNP Paribas and Société Générale but they started to rally when the Financial Times said Basel III capital requirements for banks might be relaxed.
Results were scarce this week. In the luxury sector, Tiffany and Burberry posted better than expected Q1 results, up 26% and 39% respectively. But although Tiffany raised annual guidance, Burberry was less enthusiastic with only a moderate improvement in margins on the cards. With the exception of ST Dupont, which rose in heavy speculative trading, the sector trended down. Similarly, Ryanair posted annual figures in line with the consensus but delivered very conservative guidance for 2012 which was below expectations. Passenger traffic is seen falling.
The M&A front was full of noise but low on actual action. There is talk of Deutsche Telecom acquiring fixed line operators in Europe and the possibility that it might have to buy at least 10% of OTE. Diageo might acquire Jose Cuerv (tequila) and Nestlé is said to be looking to increase production capacity in China. The actual deal came from Vallourec which has reinforced its exposure to the Middle East by acquiring a Saudi Arabian company making tubes for the oil industry.
Equity markets were relatively unchanged in a week with little economic and political news of importance. In the property sector, new home sales came in at 323,000 in April vs 300,000 expected and inventories hit an historic low. This is a powerfully positive signal. But consumer spending grew less than expected (+2.2%). The picture is mixed in durable goods orders: March data was revised up sharply from 2.5% to 4.4% but durable goods orders in April fell 3.6%. In company news, a FDIC survey shows that US bank profits were overall robust in the first quarter as they returned to 2007 peak levels. But net banking income painted another picture, falling 3% mainly due to large banks. Six out of the ten largest institutions saw NBI fall. In M&A news, Hewlett Packard is to bolster its corporate offer by acquiring Printintelligent, a supplier of printing solutions. In healthcare, the Valeant group has paid around USD 440m in cash to buy close to 88% of AB Sanitas. Over the last 5 trading sessions, only energy managed to rise significantly. All the other sectors lost a lot of ground, especially financials which ended more than 2% lower.
The Topix shed 0.3% in yen and euros. Komatsu ‘s operating profit missed estimates, coming in at Y 222.9bn vs 230bn expected. The share sank on the news as investors started to worry about a slowdown in Chinese orders. Certain large Chinese rivals led by Sany Heavy could start to whittle away at Japan’s dominant positions in specific sectors. Komatsu is nevertheless still on form and should post 36% EPS growth in the current fiscal year by increasing sales to other emerging countries and the US. Its Indonesian distributor United Tractors is still, for example, posting excellent sales of tractors and excavators. Sales increased by an annualised 76% with 2,974 units sold in the first 4 months of 2011. At this rate, the annual target of 6,500 units is within easy reach. Car maker Isuzu should continue to benefit from demand for Thai vans and pick-ups. Commercial vehicles are still growing by a strong 20% over 12 months. Production should get back to normal during the summer, most probably in July.
Volatility remained very high during the week. Uncertainty over whether inflation was accelerating or decelerating led to very different views from one country to another and one sector to the next. Trading was exceptionally thin and aggravated price swings. One sector on grand form was casinos: May was a bumper month in Macao with peak takings likely at establishments like Wynn’s or the Grand Lisboa which belongs to SJM. And the trend will be underpinned by the upcoming Hong Kong listing of MGM China, another flourishing company in the sector. And first quarter results from Genting Bhd, which runs a casino in Malaysia, and Resorts World in Singapore were higher than expected and with fatter margins, too. Asians have never spent so much time and money in the region’s casinos. Some commentators have suggested in fact that weak stock markets and sluggish property conditions are driving liquidity towards the gaming sector which is increasingly a part of the scenery. The strength of the trend is illustrated by the fact that 2010 income from all of Macao’s casinos was higher than Las Vegas.
Thailand continues to post strong economic growth. Q1 GDP came in at 3% when 2.6% had been pencilled in. We expect the country will continue to benefit from Asian growth through its exports. Bear in mind that Thailand produces 5 times more foodstuffs than required by its population. Drought which is hitting the river Yangtze in China is also fuelling demand for global food, another reason why Thai exporters should benefit. Rainfall is down 40% so far this year compared to the average since 1961. On the domestic front, Thailand is getting ready for early parliamentary elections set for July 3.
OTHER EMERGING MARKETS
Almost all company results are now in. Overall earnings growth for Sensex companies was a disappointing 8%. HIgher commodity prices and wages have eaten into margins. However, if the economy turns out to be growing at a slower pace, inflation could retreat and offer an attractive macroeconomic backdrop to India’s equity market even if results will remain lacklustre over the next 3 to 6 months. The Sensex has fallen 11% in local currency and 17% in EUR so a good deal of the bad news is already factored into share prices. Buying opportunities are starting to appear.
Commodities bounced across the board this week. Brent gained 2% mainly because (i) an American Petroleum Institute report confirmed that demand for oil products in the US in April was still rising, (ii) China’s oil imports remained strong in April (+9.6% compared to 2010) and (iii) political unrest continued in Yemen, Syria and Libya. Elsewhere, the US energy secretary approved Cheniere Energy’s plans to export gas; the company’s switch from LNG importer to exporter confirms our expectations that the gas price will fall due to giant shale gas reserves currently being developed in North America and future production in South America, Asia and Europe. There was some good news for the nuclear camp. Opposition in Germany is rising to Angela Merkel’s decision to decommission nuclear power stations, thereby running the risk of power cuts in winter; the Palo Verde plant in Arizona has been approved to run for another 20 years and China which is faced with severe electricity shortages, has confirmed that nuclear power will still be part of the equation as it develops its energy base.
Base metals put on 1% this week due to China’s GDP rising 9.7% in the first quarter. Daily production of steel in China hit a fresh record of 1.95m tonnes in the first ten days of April, an indication that the economy is still strong despite ongoing monetary tightening. Copper inventories on the Shanghai market have fallen heavily since April, down from 177,000 to 82,000 tonnes. Restocking is likely to take place in the second half of the year. Gold was also higher this week (+1%). This is due to two large mining projects which will have delayed start-ups (La Colosa in Colombia for AngloGold and Pueblo Viejo in the Dominican Republic for Barrick/Goldcorp) and persistently high demand from Asia in particular. The Shanghai stock exchange is mulling the launch of a RMB-denominated ETF and China’s Lion Management has been given the green light to double its quota of foreign gold ETFs to USD 2bn.
Europe trended lower due to tension over plans to extend European aid programmes. The IMF is pressuring Greece by demanding serious guarantees that its debt will be reimbursed. REC issued a profit warning which suggests the solar energy sector is having trouble returning to growth. There was a significant convertible issue from Abu Dhabi in the form of a EUR 1.25bn AABAR unsecured exchangeable bond over Daimler AG.
Equity markets are still in the grip of nervousness and uncertainty. But volatility is under control at less than 20% in the US. Between May 19 and 26, the major indices performed as follows in local currency: Standard&Poor’s 500 -1.3% Euro Stoxx 50 -3.1% TOPIX -0.6% MSCI Emerging markets +0.6% (in EUR) Bond market yields fell. The yield on the 10-year Bund fell below 3% to its January 2011 low and the equivalent US Treasury bond returned to December 2010 levels (3.07%). With the exception of Ireland, peripheral country debt led by Spain also saw long term yields fall. On currency markets, the USD briefly gained ground against the UE but ended unchanged at around 1.42. There was little change to the Yen and RMB. Equity markets fell further on Monday after China’s poor PMI data was released but also because of S&P’s negative outlook on Italy’s debt and fresh disagreement over Greece’s debt. As the market was flirting with its year lows despite no change in the economic picture, we seized the opportunity to turn positive on European equities and started to reinforce equity positions, especially in the euro zone. We also took some profits on our long USD vs EUR position around 1.40. To reflect this new score, Europe Flexible’s exposure is now being managed between 50% and 70%. We took exposure to 67% and reinforced hedging on non euro-zone Europe.
Written on Friday May 27, 2011
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