Greece’s Ministry of Finances announced on Friday morning that 85.8% -roughly EUR 152bn out of a total of EUR 177bn- of Greek law bonds had been tendered by private investors to the bond swap. . ….
Pierre Ciret, Economista di Edmond de Rotshchild Asset Management
Se vuoi ricevere le principali notizie riguardanti gli ETF e gli ETC iscriviti alla Nostra Newsletter settimanale gratuita. Clicca qui per iscriverti gratuitamente.
For professional investors and advisers only.This document is not suitable for retail clients.
The global economy continues on the road to recovery. JPMorgan’s Global PMI Composite Report rose to 55.5 in February vs. 54.5 the previous month. This is below the best reading seen in this cycle (59.2 in February 2011) but it is still an upbeat level in historical terms. Europe is still stabilising but the US and the emerging zone, both Asia and Latin America, are benefiting overall from an improved outlook.
Despite lacklustre real consumption in recent months in the US, auto sales remain robust. Although there were no strong sales drives in February, annualised sales hit 15 million , the best figure since 2008. This is due to easier financing and fleet renewals but it also reflects an upswing in household confidence. Higher petrol prices have galvanised mid-range cars without harming upmarket and leisure models.
EUROPE
After starting the week lower, markets finally recovered as the prospect of a disorderly Greek default waned. Private sector investors tended 85.8% of Greek bond holdings in exchange for new bonds (roughly EUR 172bn). The government intends to activate the Collective Action Clause (CAC) which should take participation to 95.7% or around EUR 197bn. In a sign that systemic risk in Europe was fading, sovereign bond yields eased and the yield on Italy’s 10-year debt fell to 4.69%. The ECB once again downgraded eurozone growth estimates for 2012 and 2013 but raised its inflation forecasts due to higher energy prices and indirect taxes.
Some surprisingly good results wound up the European earnings season: EADS blew through expectations as sales rose 7% instead of 4% as expected while operating profit (EUR 1.8bn) outpaced consensus estimates by 26%. Gemalto, the world’s biggest smart card producer, also easily beat expectations thanks to its telecom division which is enjoying a boom in contactless payment technology and 4G. Cobham’s excellent figures were based on margins of 20.6%, well above expectations, that stemmed from cost-reducing measures. The dividend has been raised by 33% and the company is mulling acquisitions to meet strong growth in the aerospace market. Linde saw 2011 sales rise 7% and Ebitda 10% higher thanks to a strong showing in the gas division and the impact of the HPO (high performance organisation) cost-cutting programme. The dividend has been raised by 30 cents to EUR 2.50 compared to expectations of 2.44. Linde sees further earnings and sales growth in 2012 and confirmed its 2014 targets of EBITDA above EUR 4bn (3.2bn in 2011) and ROCE of at least 14% (13%). Net earnings at Adidas jumped 18% to a record EUR 671m. Operating profits (EUR 1bn) and sales (13.3bn) both rose 13% to record levels. The group nevertheless expects less buoyant growth this year of 5-9% despite the Olympic Games in London and the European Football Championship (Euro 2012). Results at Thalès were also good overall as operating profits rose ahead of schedule and hit EUR 749m or a 5.7% margin. Cash flow rose from EUR 108m to 378m despite disbursements of EUR 250m over loss-making contracts and EUR 166m in compensation to Taiwan’s government.
Among disappointments, Lagardère saw sales fall 4% in 2011 while operating results came in 11% lower. The sports division was responsible as other businesses performed rather well. Mass retailing is still under water in Europe:
Carrefour’s net earnings fell 14% to EUR 371m due to (i) poor macroeconomic conditions in Southern Europe which hit non-food items and (ii) operational hitches in France. Deployment of the new Planet hypermarket concept has been put on hold and the dividend reduced by 50%. Delhaize saw operating profits fall 13.6% in the fourth quarter of 2011 to EUR 272m instead of the 289m pencilled in by analysts. The group, which makes 65% of total sales in the US, says poor sales are responsible, adding that it was difficult to pass on higher food prices to US customers, especially in south-eastern states.
Peugeot has launched a EUR 1bn rights issue as part of the alliance with GM that was unveiled on February 29. The proceeds will go towards joint venture projects. When the deal is completed, GM will hold 7% of Peugeot while the family will have 25.2%.
US
Equity markets consolidated despite upbeat economic indicators led by job creation data. Market uncertainties led to a steep fall on Wednesday over the Greek debt question.
In the Republican nomination campaign, the Super Tuesday results amounted to an inconclusive victory for Mitt Romney. He won 6 out of the 10 states but failed to widen the gap with Rick Santorum who won 37% of votes in the key state of Ohio compared to 38% for Romney. On the economic front, growth in new orders helped push non-manufacturing ISM to 57.3, higher than expected. The private sector created 233,000 jobs in February
Company results concerned Ciena (telecoms) as well as Dick’s Sporting Goods and Williams-Sonoma in the distribution sector. Both results and guidance were generally in line with expectations. Also of note was Qualcomm’s decision to increase its dividend by 16% and launch a share buyback programme for close to USD 4bn.
Over the last five trading days, telecoms and consumer staples were the best performing sectors. Materials, energy and industrials all fell sharply.
JAPAN
The Topix fell for four of the five days, losing 1.6% and posting the biggest weekly decline year to date. Renewed concerns over the Greek debt deal and economic growth in emerging markets capped an already overstretched market: the Topix is still up 13% so far this year. Domestic institutions also tended to trim excessive equity exposure caused by recent rises towards the end of the fiscal year. The Yen posted a new low against the dollar in the middle of the week but eventually ended flat. It appreciated 2.4% against the euro as investors once again focused on Greece.
Due to China trimming its growth target and Brazil posting weaker Q4 GDP, economically sensitive stocks such as steel producers, mining and shipping lost the most. JFE and Kobe Steel plunged by more than 9% after January exports came in 16% down YoY. An unfavourable forex turn-around sent Nintendo down 8%, Panasonic 7% and Sony 6%. Daikin and Komatsu slumped by more than 6% due chiefly to China’s weaker outlook. Chip-related firms were also weak on bleak global demand and soft prices. Equipment vendor Tokyo Electron and memory supplier Toshiba lost 5% or more.
Meanwhile, top gainers included power companies which reversed last week’s steep decline: Kansai, Kyushu and Chubu all rose by almost 4%. NEC jumped nearly 4% after media reports that it would provide Seven-Eleven Japan with power-saving systems at more than 1,000 convenience stores. Elsewhere, Daiichi Sankyo was up 3% after it unveiled a tie-up with GlaxoSmithKline in vaccines.
ASIA
More good news on inflation. Consumer prices in February rose by only 3.2% in China and by 3.56% in Indonesia. But it is still unclear whether this trend will last as most of the drop can be attributed to lower food prices, a decline that is slowing or even reversing. Palm oil prices, for example, are rising once again due to the rebound in soybean prices. Oil, too, is now more expensive even if this is having less impact due to regulated and subsidised petrol in most of the region’s countries. But if prices were to remain at such high levels, governments would be forced to adjust prices and reduce subsidies to avoid driving up deficits. Indonesia, in fact, is expected to announce a fuel price rise in April and China’s refiners, Petrochina and Sinopec, now benefit from a more frequent price adjustment mechanism which will mean price rises feeding through more quickly to consumers. Many public utilities have anticipated the rise. Djakarta’s bus company, for example, has already increased ticket prices by 10%. We can also expect to see more expensive electricity in China and Indonesia. It is tricky to estimate by how much prices will rise especially as oil seems to be stuck at such high levels because of tension in the Middle East and that, we hope, could rapidly subside. It is also difficult to gauge central bank policy: India desperately needs liquidity, China less so and Indonesia’s central bank has been too generous. These are very different situations which will need to be closely monitored.
In company results, Q4 2011 results from life assurance giant China Life sent the stock 6% lower on Wednesday. Growth in new business remained anaemic and return on investment was in free fall. Even so, we consider the market’s reaction surprising as the bad news had been well-flagged. The sector was plagued with numerous problems last year like poor performance from financials assets and the end of bancassurance distribution channels. 2012 should be much better: the Shanghai stock market has bounced since the start of the year and life assurance is coming back into favour as other asset classes like property run into difficulties.
Consumption in Indonesia is still doing well. February’s like-for-like sales rose 13-16% compared to January (depending on the stores and products) as higher disposable income came into play. Elsewhere, the possibility that China might lower import taxes on luxury goods is not expected to harm Hong Kong (the preferred destination of Chinese tourists looking to buy watches, jewels and upmarket cosmetics). This is because even after taking taxes and currencies into account, Hong Kong prices can still be as much as 40% cheaper.
The arrival of Apple’s new iPad is good news for Hon Hai which made the previous versions. There is no major change in design and specifications so adapting manufacturing procedures will be simple. On the other hand, the fact that the retail price is the same as for the iPad2 when new, but with much more powerful screen and processor features, will force Apple to lean on suppliers if the company wants to maintain margins. If the launch goes well, suppliers will struggle to resist Apple’s demands.
OTHER EMERGING MARKETS
Two events fuelled Indian market volatility this week:
– Due to a short fall in banking liquidity of up to Rs 1.9 trillion a day (roughly EUR 29bn), the Reserve Bank of India reduced the reserve rate requirement from 5.5% to 4.75% ahead of its March 15 meeting. This will inject Rs 480bn into bank circuits.
– Electoral defeats for the ruling Congress party in 5 states, including Uttar Pradesh which saw strong gains for regional forces like the Samajwadi Party. This will make reforms even more difficult.
We also need to keep a close eye on oil prices. Note that although Brent crude has risen 12% so far this year, it has only gained 5% in Rupees. This is softening inflationary pressure.
Theoretically, the Reserve Bank of India will press on with monetary easing which should provide support for equity markets. But the bull trend could falter if oil prices were to rise further. Financing the balance of payments would become trickier, the fiscal deficit would widen and inflation would not fall as much as expected.
The Brazilian market fell 3.4% this week on increasing concerns over Europe, Greece’s debt negotiations and headwinds from China. On Wednesday, Brazil’s central bank accelerated the pace of interest rates cuts and reduced the Selic by 75bp from 10.5% to 9.75%. In line with the consensus, we expected a 50bp cut. We believe the main triggers behind this move were (i) an improvement in the inflation outlook, (ii) lower-than-expected industrial production in January and, (iii) the currency’s appreciation.
We expect industrial production to recover in February, driven by an increase in car production and a significant recovery in truck output. On the micro side, MRV results were mixed: net earnings beat expectations but cash burn was surprisingly high. Ambev reported strong results, with a record EBITDA margin, higher prices and lower COGS which more than offset lower volumes. CCR (toll roads) also reported a solid set of results: ebitda expanded from 56.5% in Q4 2010 to 56.5% in Q4 2011) due to operational leverage. The bottom line saw 58% growth YoY. In Colombia, inflation came in below expectations, increasing the probability that in March its central bank will mark a pause in ongoing rate hikes.
CONVERTIBLES
Convertible bond investors focused once again this week on Europe as worries resurfaced over inadequate private sector participation in the Greek debt swap. At the beginning of the week, equity markets fell and credit spreads widened when Spain’s Prime Minister Mariano Rajoy revised targeted deficits to 5.8% vs. 4.4%. This contravenes last week’s budget stability pact but Rajoy said the decision was a sovereign issue. This is the sort of statement that could increase risk premiums on Spain’s banks and leveraged assets.
It was a busy week on the new issuance market which is good news for investors. In Europe, Dialog Semiconductor sold USD 201m in convertibles with a maturity of 5 years. The issue was so oversubscribed that the company was able to offer less generous terms. In Japan, Fukuyama Transporting and Aeon Credit Services issued JPY 20 and 30bn respectively. Both issues were a success and traded well above par on the secondary market. In the US, Ares Capital issued a new convertible as part of a refinancing drive and Priceline.com’s USD 875m issue is designed to help buy back shares, refinance debt and possibly proceed with acquisitions.
In other news concerning issuers of convertibles, results posted by European companies Inmarsat, Kloeckner, Rallye and Deutsche Post all beat expectations and sent their convertibles higher. Pierre & Vacances (France, tourism) announced good news at its AGM. Reservations are doing well, prices have been increased and the group is reorganising its operational structure. Glencore has been given a USD 6bn bank loan ahead of its potential merger with Xstrata. Publicis has acquired two advertising agencies, King Harvests and Luminous. In China, Agile, one of the country’s leading property companies, missed expectations and has issued cautious guidance for 2012 as it expects to see sales fall by as much as in 2011. The market fell when Chinese growth was revised down but rose when inflation for February came in lower than expected. Lastly, the launch of the iPad 3 could have a sizeable impact on Apple’s Taiwanese suppliers TPK, Hon Hai and Pegatron
COMMODITIES
China’s decision to cut GDP forecasts from 8% to 7.5% had a particularly strong impact on base metals which fell 4% over the week. Even so, we are not worried by this downward revision as China has always easily outperformed its targets. Moreover, inflation is apparently under control as February saw a 20-month low of 3.2%. This means that if growth slows radically, China will be able to introduce economic stimulus measures which will increase commodity sales. Mitsui (a Japanese commodity trading house), Minmetals (China) and KGHM (Poland) are all looking to make acquisitions in the mining industry and especially in the copper sector. Watch out for a revival in M&A deals. Indonesia, however, will not be part of the fun as it intends to cap non-domestic stakes in its mines at 49%. This is unlikely to attract the enormous amounts needed in mining ventures.
In the energy sector, natural gas prices are still falling. They currently stand at USD 2.22/Mcf, a 41% drop over 12 months. This is in spite of reduced output at high-cost producers and efforts to promote wider use of gas. GE and Chesapeake, for example, are targeting 250 vehicle fuel stations which will offer compressed natural gas. This is a step in the right direction but will only take the total number of US stations to 750 compared to 159,000 traditional service stations. The day when gas really starts to make inroads into petrol use in transport is still a long way off. And as long as gas in North America is not more widely used, the US will continue to pay much less for it than Europe.
ASSET ALLOCATION
Last minute doubts over the Greek debt swap triggered an equity market correction. Between March 1 and 8, the major indices performed as follows in local currency:
– Standard&Poor’s 500 -0.27%
– Euro Stoxx 50 -1.25%
– TOPIX -0.20%
– MSCI Emerging Markets -2.70%
Bond markets turned more cautious over Italian, and especially Spanish, debt. Madrid’s decision to revise its targeted deficit to 5.8% from 4.4% is clearly disappointing but at least it means a more realistic figure and the government’s commitment to deficit reduction is still as strong. Bond market yields were broadly unchanged: the US 10-year Treasury finished the period close to 2% while the Bund hovered around 1.8%.
On forex markets, the euro edged fractionally lower to 1.32 vs. 1.33 against the dollar and the yen dipped to 81.5. The Renminbi weakened against the dollar, moving back to 6.31 after quoting 6.29.
Wednesday’s steep fall on European indices allowed us to reshuffle hedges: we reduced shorts on the Dax and Eurostoxx 50 and hedged the Footsie and Switzerland’s SMI instead. We also sold Dax puts to tap into one-off surges in implicit volatility. On forex markets, we reduced dollar hedges as the EUR/USD headed towards 1.31. Edmond de Rothschild Europe Flexible: exposure varied between 41% and 56% and ended the week at the low end of our 40%-60% range.
Written on Friday March 09, 2012
