Ermutigender Start in die Gewinnsaison

• The earnings season has really got under way
• China says it is ready to put climate targets temporarily to one side
• The biggest moves over the period concerned government bond yields

It was the first real week for quarterly results even if only 20% of companies have so far reported. First impressions are positive: more than 80% of US companies have beaten expectations, a performance which is better than the historic mean. The figures pushed US equities higher with the S&P 500 returning to its all-time highs. Sentiment was also boosted by progress in talks over new stimulus measures after Joe Biden intervened.

Elsewhere, Beijing sent a clear message that it would temporarily put climate targets to one side and concentrate on the threats to growth from rising energy prices which have caused some power outages. Chinese equities found further support from China’s central bank which said the situation was manageable and that a systemic crisis had been avoided.

The week’s biggest shifts were on government bond yields. 10-year Bund yields returned to 2021 highs, adding 10 basis point and moving above the symbolic minus 0.1% threshold. 10-year US Treasury yields flirted with the 1.70% mark, a level which had briefly been crossed at the end of March. Faced with such significant rises in energy prices and the impact of supply side constraints on production costs, investors continued to fret about persistent inflation.

These worries weighed more on European equities which were unchanged over the week. Markets are starting to anticipate an ECB move. Europe was also affected by cyclicals which performed less well after a few earnings disappointments, especially in the autos sector.

We are still neutral on risk assets due to current risk balances. Inflationary pressure could hit company margins and have a negative influence on central bank monetary policy. That said, end demand remains strong, company inventories are still rock bottom and negative real interest rates are beneficial. In fixed income, we are still focusing on corporate debt. We remain cautious on government bonds but have raised duration due to the recent increase in bond yields.

EUROPEAN EQUITIES

Government bond yields moved higher as inflation expectations increased. This was in spite of falls in several commodities last Thursday as concerns over China’s growth resurfaced. Equity markets are still resilient as third quarter results have so far been satisfactory. But news on guidance and margins is mixed: many companies are mentioning supply side problems and higher input prices, a useful reminded that we need to identify companies with strong pricing power and less exposure to particular component shortages.

Supply side blockages forced ABB to cut sales guidance for this year. Schindler saw earnings fall, mainly because of a surge in commodity prices. Semiconductor shortages continued to weigh on auto production. For Renault, this could mean 300,000 fewer vehicles in 2021. Umicore also revised down guidance for this year, citing increasingly volatile production schedules. Philips followed suit for sales and earnings growth. The group has been particularly badly hit by semiconductor and container shortages. Strong demand enabled ASML to beat third quarter expectations but the group has also suffered from shortages of materials and logistical problems.

Unilever's pricing power helped the group maintain its margin forecasts for the full year. Higher costs have been passed on to end consumers and the group is in a position of strength with its suppliers. It was the same story at Nestlé which also raised guidance on sales. Hermès beat consensus expectations and said it had not been affected by tighter Chinese regulations. The appetite of China’s middle class for luxury products is still as strong. Healthcare plays continued to benefit from the Covid effect. Biomérieux swept pass expectations thanks to its Molecular Biology division and Valneva's share price rocketed after the success of phase III trials for its vaccine.

US EQUITIES

Upbeat quarterly results pushed US indices higher over the last 5 trading sessions. The Dow Jones gained 1.98%, the S&P500 2.51%, and the Nasdaq 2.65%.

Energy prices pushed higher after reports that Russia had told Europe that more gas would be delivered only if the German and European regulatory authorities gave the green light to the Nord Stream 2 pipeline. This passes through the Baltic Sea, thus depriving Ukraine of export revenues.

In its Beige Book, the Fed said labour and product shortages had weighed on the recovery in recent weeks but stressed that companies were able to pass on higher costs to customers. Growth had nevertheless continued at a moderate pace but an improvement was expected in the coming months.

However, one FOMC member, Randal Quarles, said he was worried about inflation because there were significant upside risks compared to current expectations that prices would calm down in 2022.

With more than 20% of S&P500 earnings reports in, 65% beat expectations. This compares with 46% historically.

Even so, Snap’s figures showed that accidents were still possible. Its parent company plunged 25% in after-hours trading when third quarter sales came in sharply below expectations. Management said this was due to Apple changing its confidentiality policy over the summer.

Elsewhere, Intel tumbled 9% after the bell. Its results were better than expected but the company revised guidance lower due to the spiralling costs of funding investments in production and efforts to reduce the gap with rivals. Pinterest (image sharing) jumped 12% last Thursday after Bloomberg said the company was in talks to by PayPal.
Trump Media & Technology, the former president’s company which wants to launch a social media platform, had a remarkable first day of trading. Merged into the Digital World Acquisition SPAC, the share rocketed more than 356%, valuing the new entity at $1.8bn.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX edged 0.55% and 0.70% higher over the week as new Covid cases continued to decline. Stability on US markets was also a contributing factor. However, investors started to worry that the current Kishida administration might lose power if the LDP fails to win enough seats in the October 31 Lower House election.
Marine Transportation rebounded 5.11%. Securities & Commodities and Machinery rose 3.73% and 3.53%. Rubber Products, Fishery Agriculture & Forestry and Pharmaceuticals shed 2.81%, 2.36% and 1.67%, respectively.

Further yen weakness lifted exports companies like Canon, SMC and Komatsu up 5.28%, 5.23% and 4.51%, respectively. In contrast, Unicharm tumbled 5.26%. Asahi Group Holdings also lost 5.21% as higher aluminum prices could raise beer can costs.
The government unveiled a plan to set up a JPY 100bn fund to support R&D in technologies that are essential for the country’s economic security. The plan will be included in a package of economic measures to be drawn up after the Lower House election.

EMERGING MARKET

The MSCI Emerging Market index closed up 0.78% as of Thursday’s close. China (+2.7%) outperformed, led by property and internet stocks. India retreated 1.64% on profit taking. Brazil underperformed, tumbling 7.12% on fears that the government was poised to present a fiscally irresponsible welfare program.

In China, 3Q GDP slowed to 4.9% vs 5% estimated. Industrial production slowed to 3.1% from 3.8% due to energy shortages. Retail sales improved to 4.4% YoY in September from 2.5% in August, beating expectations of 3.5%. Online sales (+10% YoY) outperformed overall retail, suggesting tailwinds from online penetration was coming back despite the tougher macro environment. Evergrande avoided default by paying an $83.5m offshore coupon before the weekend’s deadline. CBIRC stated during its 3Q press conference that financial institutions would support the reasonable funding needs of developers and homebuyers. The Cyberspace Administration of China is reportedly asking Didi to explore a Hong Kong listing, another sign of regulatory easing in the internet sector. China opened a VPN service to foreign investment in Beijing. Tesla is shifting all standard range models to LFP cells supplied by CATL to cut prices of mass market EVs further. Alibaba launched Yitian 710, an in-house developed server chip based on the TSMC 5nm process. 

Thailand reestablished quarantine-free travel from 46 countries before the end of October.

In India, HDFC Bank’s 2QFY22 results revealed a broader post-Covid recovery with robust commercial and rural loan growth and strong asset quality. Quarterly results at Avenue Supermarts beat expectations on store traffic recovery and gross margin improvement. Hindustan Unilever reported an 11% rise in sales, with 4% volume growth as the company hiked prices by 7% to reflect higher commodity prices.

Brazil's government announced a new welfare program after central bank currency intervention failed to calm market concerns about looser government spending ahead of next year's election. Albeit not a large amount (0.3% of GDP), the new social program would break the spending cap, but the government proposed changing the inflation rate index to correct the spending cap.  The market did not react well to that proposal either.
Mexican telecom giant America Movil reported solid 3Q results, with an increase in both broadband and postpaid net subscribers, beating expectations on both revenue and Ebitda margin expansion.

CORPORATE DEBT

CREDIT

The main credit market indices stayed relatively resilient despite bond yields moving higher. 10-year Bund yields rose 8bp over the week while US 10-year Treasury yields ended the period 11bp higher at 1.68%. The Main and Xover indices were unchanged, leaving the high yield index returning a negative 0.17% while investment grade credit returned minus 0.39% due to duration.

The new issues market was relatively busy in spite of the earnings season beginning. Germany’s ZF Friedrichshafen (car parts) raised €500m with a green bond at 2.75% due 2028. Italy’s Almaviva (IT) raised €350m at 7.25%.

Among quarterly results from high yield issues, the UK’s Matalan (fashion and homeware retailer) posted a record £61m in EBITDA, or well above the £28.5m expected, on sales of £264.7m. Air Liquide benefited from the sharp rise in commodities at the end of the quarter and reported a 7.1% like-for-like rise in sales to €5.83bn. 
Elsewhere, S&P upgraded 5 Tata subsidiaries, including Jaguar Land Rover which was raised to B+ thanks to sustained financial support from the Tata Sons holding company. But the big news was British retailer Asda's failure to sell its forecourts to EG group. The deal was a key part of a highly complex debt and asset disposal operation to enable EG group, a forecourt operator which is already highly leveraged, to buy Asda for £6.8bn. Asda will now have to take out another $500m in debt.

In financial debt, Axa CoRE, an open-ended property fund managed by AXA IM, sold a €500m green bond. Scandinavian banks kicked off the earnings season in Europe. Finland’s Nordea and Sweden’s Swedbank both reported higher earnings. Banks in the region have recovered well from the pandemic with a rise in corporate and consumer business and strong investment bank activity. Nordea will pay a €0.72 dividend this month and will launch a share buyback program before the end of the year with another one possible in 2022. Talks between the Italian government and UniCredit on the acquisition of Monte Paschi di Siena are going less well due to a disagreement on the amount of capital Rome would have to inject into the troubled Tuscan bank.

CONVERTIBLES

New issuance resumed despite the quarterly earnings season. Surprisingly, there was a deal in the Chinese property sector. Shimao Services Holdings raised $643m over a year at 2.25% to fund development plans. 

The results season turned a little more mixed after luxury group Kering’s results were hit by the recrudescence of Covid cases in Asia in the third quarter. Gucci, which accounts for more than half of Kering’s sales, reported sales growth of 3.8% when analysts were expecting 9%. Snap also disappointed when its results came in much lower than expected. Its advertising revenue was hit by Apple changing its confidentiality policy. In contrast, American Airlines restored some momentum to Travel & Leisure. The group made $169m in the third quarter thanks to sanitary restrictions being eased. And the outlook is promising now that the US is to open its frontiers to vaccinated travellers from November 8. Fnac Darty (consumer electronics and entertainment retailing) now see sales rising 5% this year with operating profits coming in at the top of the €260-270m spread. The founding family behind Italy’s Falck Renewables sold its 60% remaining stake to JP Morgan for an estimated $3bn, or a 15% premium to the last quoted price.

GLOSSARY

• Investment Grade: bonds rated as high quality by rating agencies.
• High Yield: corporate bonds with a higher default risk than investment grade bonds but which pay out higher coupons.
• Senior debt benefits from specific guarantees. Its repayment takes priority over other debts, known as subordinated debt.
• Debt is considered to be subordinated when its redemption depends on the earlier payment of other creditors. To offset the higher risk, subordinated Senior debt has priority over other debt instruments.
• Tier 2 / Tier 3 : subordinated debt segment.
• Duration: the average life of a bond discounted for all interest and capital flows.
• The spread is the difference between the actuarial rate of return on a bond and the rate of return on a risk-free loan with the same maturity.
• The so-called "Value" stocks are considered to be undervalued.
• Markit publishes the Main iTraxx index (125 leading European stocks), the HiVol (30 highly volatile stocks), and the Xover (CrossOver, 40 liquid and speculative stocks), as well as indices for Asia and the Pacific.
• EBITDA: Earnings before Interest, Taxes, Depreciation, and Amortization.
• Quantitative easing describes unorthodox monetary policy from a central bank in exceptional economic conditions.
• Stress Test: a process which simulates extreme but possible economic and financial conditions so as to assess any impact on banks and measure their resilience to these events.
• The PMI, for "Purchasing Manager's Index", is an indicator of the economic state of a sector.

DISCLAIMER

22/10/2021
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