The week start got off to a strong start thanks to two positive developments. Angela Merkel and Emmanuel Macron announced a plan to boost the European budget by €500bn to help countries and sectors which had been the worst hit by the crisis. And hopes that a vaccine for the most at-risk professions would be available by autumn were lifted when Moderna said there had been encouraging indications for its trial.
The mood then turned more mixed as investor sentiment swung between upbeat news on economies reopening and data which reflected the sheer complexity of the situation. Mounting tensions between the US and China did not help. The good news was that oil consumption in China returned to pre-Covid levels, providing confirmation that the economy was recovering, and it increased by 9% in the US over a week as parts of the country emerged from lockdown. Advanced PMI for May showed activity was still contracting but not as fast as in April. The eurozone’s composite PMI rebounded by 13.6 to 30.5, led by services. Peripheral countries almost certainly contributed to the bounce. The rebound was less marked in Germany but then so was the decline. It was the same story in the US where PMI rose from 27 in April to 36.4.
In the geopolitical arena, the Franco-German proposition led Northern European countries to suggest an alternative plan. Meanwhile, the UK and Europe continued to disagree over Brexit plans. US-China tensions remained high and not only because of the war of words on the epidemic. Beijing said it wanted to extend its national security law to Hong Kong, a decision that could prompt US reprisals. Against this backdrop, the Chinese Communist Party’s congress kicked off with the prime minister confirming that growth targets for 2020 had been abandoned and that the fiscal deficit would grow. Investors will be watching for further developments as the congress continues.
In the circumstances, we have maintained our relatively cautious stance on equities. We have reinforced European equities by cutting US exposure, a more cyclical/value stance over the short term as economies gradually reopen and European political initiatives emerge. Value underperformed in the recent rebound but the gap should narrow. In fixed income, we like emerging markets as they have performed less well since the March lows and boast attractive yields and improving fundamentals.
EUROPEAN EQUITIES
Stocks made strong gains at the beginning of the week after France and Germany proposed a €500bn fund as part of the EU budget to help countries which had suffered the most from the crisis. The EU was reportedly also preparing a €100bn scheme to help the transport sector with €20bn earmarked for the autos sector via bonuses for purchases of low-emission vehicles.
National initiatives also continued. Lufthansa for example, said it was in advanced talks with Germany’s economic stabilisation fund for a €9bn rescue plan that would involve the government buying a 20% stake in the airline. Elsewhere, Ryanair’s results were in line with expectations. The airline criticised government aid to its competitors as analysts revised down earnings estimates from €910m only six weeks ago to €20m.
The epidemic continued to savage companies. First quarter sales at Burberry’s tumbled 27% with around 60% of its stores closed but the message was more upbeat for trends in China and South Korea.
The extent of the crisis has forced companies everywhere to reduce costs. Rolls Royce unveiled a sweeping restructuring plan which will make 17% of its workforce redundant. The situation has also provided an opportunity to reinforce balance sheets. In the UK, Compass (contract catering) launched a £2bn rights issue to reduce debt.
M&A deals in the payments sector were also part of the picture. Nexi and Sia in Italy stepped up talks to merge and Softbank was reportedly mulling the sale of a large chunk of its T-Mobile US stake to Deutsche Telekom. Elsewhere, Total became one of Spain’s biggest suppliers of gas and electricity after buying a 2.5 million client portfolio from the EDP group. And ThyssenKrupp is in talks with international rivals to consolidate its loss-making steel activities.
US EQUITIES
The S&P and Nasdaq made solid gains, rising 3.37% and 4.3% but the period ended less well than it had started. Initial enthusiasm over Moderna's preliminary vaccine results was tempered by increased scrutiny of the vaccine’s benefits and its very small sample group as well as mounting US-China tensions. The Senate adopted a draft bill enabling increased surveillance of non-US companies. The immediate effect would be to exclude Chinese companies from US listings.
This fresh assault overshadowed a slight improvement in macroeconomic data. New jobless claims, for example, came in a 2.44 million or slightly better than the 2.45 million expected. However, housing starts plummeted by 30.2% in April to an annualised 891,000 and building permits fell 20.8% to 1.7 million, their lowest level since 2015. Payment delays also increased by 1.6 million in April, the biggest monthly rise in history. Total mortgage payments delayed by at least 30 days rose to more than 6.45 million.
10 out of 11 S&P sectors rose over the period, led by industry (+6,99%), energy (+6,52%) and consumer discretionary (+5.51%). Healthcare (-0.25%) was the only down sector.
Oil prices rose on recovering demand and lower inventories. WTI gained ground over six trading sessions in a row, ending the period 1.3% higher at $33.92.
In results news, Walmart 's first quarter was up 10% like-for like and online sales soared 74%. Splunk and Nvidia also reported better-than-expected figures.
JAPANESE EQUITIES
Stocks rebounded and the TOPIX and Nikkei 225 ended the period 2.58% and 2.57% higher. The nationwide state of emergency was lifted during the week except for Hokkaido, Tokyo and 3 surrounding prefectures; they are expected to exit lockdown at the end of May.
In line with global stock markets, stocks rose on expectations of a post-lockdown economic recovery. Results from FY2019 and guidance also dictated trends.
Economy sensitive sectors such as Mining, Marine transportation, Glass & Ceramics and Non-ferrous Metals led rebounds while defensives like Electric Power & Gas, Telecommunications and Food underperformed.
Sompo Holdings gained after announcing a share buyback and a higher dividend. Panasonic Corp also rose on news it had bought a stake in BlueYonder, the leading end-to-end supply chain software provider.
EMERGING MARKETS
Emerging markets were up 1.9% as of Thursday as investors awaited the Chinese National Party Congress on May 22nd and a possible fiscal package. Markets corrected on Friday on a further rise in geopolitical tensions after China announced plans to impose a national security law on Hong Kong.
China’s industrial production for April rose 3.9%, up from minus 1.1% in March and ahead of market consensus of +1.5%. Unemployment worsened slightly to 6% vs. 5.9%. A few days before the NPC, the Ministry of Transport added RMB 800bn in new transport projects to its pipeline. Infrastructure investment growth is now expected to reach a 3-year high of 9.5% vs 2.5% in 2018-2019. China also rolled out public health prevention and treatment plans to transform disease control facilities, a positive development for medical equipment suppliers. As a result of the fiscal package announced during the NPC, the fiscal deficit is estimated to reach a record level of 15.2% of GDP vs. 9.9% in 2019 and a previous high of 14.2% in 2009. Around half of the expansion is on public capex and half on tax/fee cuts. The tone on monetary and credit policy was more dovish than expected.
The US Department of Commerce published new sanctions against Huawei and its subsidiaires, forcing any foreign companies producing chips using Huawei designs with the use of American design tools or equipment to apply for a license. Following the announcement, Huawei stated at their Global Analyst Summit that they expect 800,000 5G base stations to be in place in China by the end of 2020, higher than MIIT guidance of 600,000 units.
In company news, JD.com released a better-than-expected 20% YoY increase in revenues in the first quarter. For Baidu and Weibo, the first quarter decline in advertising was not as bad as feared. Netease also reported better-than-expected figures driven by strong game performance.
In South Korea, Prime Minister Moon plans to add climate change easing to the government’s 'New Deal', a move that would benefit EV battery makers. Samsung Electronics officially announced plans to build a new EUV-based 5nm foundry line to meet demand from 5G, HPC and AI related chips. The facility should be in production in the first half of 2021.
In the ASEAN zone, SEA’s first quarter results were better than expected, with a 30% YoY increase in revenues for games while e-commerce GMW increased 74% YoY.
India announced the remaining tranches of its 10% GDP stimulus package, focused on agriculture, coal mining and supply side structural reforms. However, markets were disappointed as it was seen as lacking measures to boost demand as the country prepares to end its lockdown. The RBI cut its repo rate by 40bp to 4% and extended its moratorium by 3 months. Bharti Airtel announced strong results driven by a 14% increase in ARPU.
In a positive development, Brazil’s Senate will vote next week on a Presidential veto to cancel public employee wage increases and then freeze them for the next 18 months. Lojas Renner reported weaker-than-expected first quarter results with a 10.7% contraction in same store sales.
CORPORATE DEBT
CREDIT
Credit markets jumped at the start of the week on signs economies were reopening and a Franco-German initiative for a massive €500bn stimulus plan funded by EU borrowing. But on the Thursday, the trend inverted as US-China relations deteriorated. In the end, the Xover tightened by 68bp and Main by 11bp between Monday and Thursday.
As expected, Softbank reported large losses for FY 2019-20. This was chiefly due to writedowns in its Vision fund as WeWork and OneWeb filed for Chapter 11. The group is to press on with its asset disposal programme to fund a JPY 2 trillion share buyback and reduce leverage. It has already raised $11.5bn from the sale of Alibaba shares and is reportedly close to finalising the sale of a large part of its $31bn stake in T-Mobile US to Deutsche Telekom.
In other first quarter reports, IGT reported decent figures. Even though business slumped, cash generation remained positive. EBITDA at Telecom Italia fell 12% but the group said full-year forecasts were still valid. Altice Europe’s sales edged 3.6% higher and the group stuck to its 2020 objectives. Renault reached an agreement with the French government for a guaranteed loan of €5bn while Constellium secured one for €180m. Takko suspended coupon payments on its 5.375% bond due 2023, a move which triggered selling pressure. The group also said it had sought advice on a capital restructuring.
According to press reports, But is interested in bidding for Conforama as the furniture retail chain risks going into receivership. But's shareholders could contribute €200-300m. ThyssenKrupp confirmed its had new restructuring objectives and was looking for partners for its steel and military ship building divisions. UPC bonds underperformed after a joint venture between Salt and Sunrise seemed to rule out a UPC-Salt merger.
On an active investment grade new issues market, ING raised €1.5bn with a Tier 2 bond at 2.125%. The order book was 3 times oversubscribed. Achmean raised €750m with a Senior issue at 1.5%.
CONVERTIBLES
In this week’s first quarter results, Grand City Properties reported flat revenues and a 2% rise in EBITDA compared to the same period in 2019. Telecom Italia saw sales fall 8.4% as the lockdown hit business in its sale outlets and EBITDA came in 7.5% lower.
In Italy, there were rumours of a tie-up between Nexi and SIA to form the European leader in payment solutions. Nexi had returned to the new issues market in April.
The week’s issues included Sea Ltd which raised $1bn with a 2025 maturity. Sea is well known in Asia for tis Garena online game platform, its e-commerce Shopee business and its digital payment platform. The proceeds will go on a partial buy-in of its 2023 convertible and also on development plans. Envista Holdings (dental care) raised $517.5m at 2.375% due 2025. RealPage raised $300m and Tricida $200m.