- Russische Vermögenswerte sind unweigerlich zusammengebrochen und die Risikoaversion hat sich ausgebreitet
- Die Zentralbanken befinden sich in einer Zwickmühle zwischen Bemühungen zur Eindämmung der Inflation und Maßnahmen zur Stützung der Wirtschaftstätigkeit im Vorfeld einer wahrscheinlichen Konjunkturabschwächung
- Die aktuellen geopolitischen Spannungen und die geringe Visibilität haben uns veranlasst, unser Aktienengagement, insbesondere in Europa, zu reduzierene
Olaf Scholz’s comment that the world after this crisis would be very different is a perfect illustration of the paradigm shift in the global geopolitical balance.
Western countries had initially been moderate in their reactions to developments but the cascade of sanctions that followed Russia’s invasion of Ukraine marked a real turning point. Russia is now an outcast. Its exclusion from the global financial system is meant to trigger an economic collapse. And by deciding to rearm and triple its military budget, Germany has reversed a foreign policy dating back to the end of the second world war.
Russian assets have inevitably collapsed and risk aversion has spread. Volatility is back in force. Europe’s markets are down 6.5%. The US has been relatively stable in comparison. The US dollar and Swiss franc have risen thanks to their safe haven status.
Above all, the military and economic escalation has sent energy prices soaring. Russia is a major exporter. Agricultural commodity prices have also surged because Ukraine is a big player. Oil is up 50% since the beginning of January and wheat prices have rocketed by 65%, including a 20% jump last Thursday alone.
This is all very tricky for central banks which are stuck between efforts to curb inflation and measures to underpin activity ahead of a likely slowdown.
The Fed and the ECB are not united in their approach. Jerome Powell has reiterated his intention to rapidly get rates back to normal and is not ruling out a 50bp hike if needed. The ECB, meanwhile, is treading cautiously as the growth outlook in the eurozone deteriorates. As a result, US-Europe spreads have widened and the euro has lost ground.
European governments are working on measures to underpin growth so we should expect a fresh round of budgetary stimulus.
Current geopolitical tensions and low visibility have led us to reduce our equity exposure, especially in Europe.
We remain underweight government and investment grade bonds and cautious on duration as inflation is still with us.
European equities
The war in Ukraine left markets solidly in the red by the end of the period. Sanctions against Russia will batter its economy but Europe will not emerge unscathed from the crisis. Emmanuel Macron admitted as much when he addressed the French nation on Wednesday. Commodity prices soared over the week with gas, metals and oil leading advances. The ECB is now expected to push back monetary tightening and continue its support for Europe's economies. Companies with exposure to Russia’s economy or its exports were naturally the most affected by developments. Many have announced plans to withdraw from Russia. BP is to sell its Rosneft stake. The entire autos sector will be affected by the war. Russia is the leading producer of palladium, an essential commodity in car manufacturing, and its exports could be banned any moment now. Commodities and defence were the only sectors to end the period higher. Commodity prices have jumped and governments now plan to raise military spending.
In company news, AB Foods reported upbeat results but warned that trading this year might be affected by inflation. Zalando (e-commerce) also announced an increase in profits but the company expects to see a drop this year as the online buying trend could lose steam. Thales, in contrast, revised up guidance, chiefly in its defence division. Its share price has risen significantly on prospects for bigger orders from European governments. Atos lost almost €3bn in 2021 and the outlook for this year is clouded. It looks likely that the group will only return to profit by the second quarter of this year at best.
US equities
The war escalated in Ukraine but markets proved resilient, possibly because they were hoping for a less hawkish tone from the Fed. Over the last 5 trading sessions up to Thursday evening, the Dow Jones gained 1.72%, the S&P500 1.74% and the Nasdaq 0.48%.
Macroeconomic data was somewhat mixed. Manufacturing ISM for February came in at 58.6, up on January's 57.6 and better than the 58 expected, and construction spending in January rose 1.3% MoM vs. +0.1% expected. However, services ISM (two-thirds of the US economy) fell to a 12-month low of 56.5, or much lower than the 61.1 expected, and down on December’s 59.9. Private sector job creation surprised on the upside, coming in at 475,000 vs. 375,000 expected. And January’s figures were revised markedly higher to 509,000 when the initial data had 301,000 jobs being destroyed.
Jerome Power told the Senate's banking commission that the Fed would remain cautious but he confirmed that the time had come to raise rates to combat strong inflation.
In his State of the Union speech, Joe Biden described Vladimir Putin as a dictator and said US airspace would be closed to Russian planes. He also reiterated his determination to slow inflation.
Another 30 million barrels of strategic oil reserves will be freed in an attempt to stabilise prices. WTI prices fall back to $108 amid progress on nuclear talks with Iran.
Because of a Nasdaq provision, Yandex, Russia’s Google, said it could default on its debt because of the prolonged suspension of trading in its shares. The provision entitles some creditors to demand the immediate reimbursement of debt and payment of interest accrued if trading on the Nasdaq is suspended for more than five sessions.
Elsewhere, the First Horizon bank jumped 28.6% on news that Canada’s Toronto Dominion was to buy it for $13.4bn.
Renewable Energy Group surged 40% on Thursday after Chevron acquired it for $3.15bn.
Ford is to separate its electric vehicle division from its legacy business and rename it “Ford Model e.” Its traditional internal combustion production will now be known as “Ford Blue” and will seek to make models with a reduced carbon footprint.
Japanese equities
The NIKKEI 225 and TOPIX rose by 2.34% and 1.30% over the period. The week started with the shocking news of Russia’s invasion of Ukraine. Tokyo, like other markets, saw investors buying the dip from time to time before concerns mounted on the negative effects of sanctions on Russia for the global economy. At the end of the month, global equity markets including Japan seemed to have factored in the Ukraine crisis and reacted positively to Fed chairman Jerome Powell’s indication that there would only be a 25bp rate hike in March.
Marine Transportation, Mining and Nonferrous Metals rose 18.67%, 8.64% and 8.07% on expectations of higher freight rates and further strength in commodities because of anti-Russian sanctions. In contrast, Insurance, Rubber & Products and Transportation Equipment declined by 4.49%, 3.34% and 2.57%, respectively.
M3 Inc. jumped 12.52% after increasing its 2021 dividend by 4 yen to 16 yen. Marubeni Corp. gained 10.45% together with other trading companies as commodity prices continued to head north. On the other hand, Nissan Motor fell 6.97% on worries over disruption to component supplies and the decision to shut down a factory in Russia. Dai-ichi Life Holdings fell 5.42% as US long-term bond yields retreated from recent highs.
The government decided to extend COVID-19 pre-emergency status to March 21 for 18 prefectures including Tokyo and Osaka but halt it for 13 prefectures including Fukuoka. In addition, the daily cap on the number of entries to Japan will be raised from 5,000 to 7,000 on March 14.
Emerging markets
The MSCI EM Index was flat as of Thursday’s close. The MSCI Russia crashed another 29%, taking the decline to more than 50% over the past two weeks. The MSCI China was down 1.4% while India retreated 1.1% in USD. Brazil (+4.4%) outperformed as commodity prices continued to rise and foreign capital relocated to the country after the MSCI removed Russian shares from its indices.
In Russia, the central bank raised its key interest rate from 9.5% to 20%, the highest in almost 2 decades. The EU, US, UK and Canada agreed to impose restrictions on Russia’s central bank, freezing the majority of its transactions and preventing it from selling its assets. Selected Russian banks will be removed from SWIFT. The MSCI and FTSE Russell cut Russian equities from tracked indexes. Moody’s cut credit ratings to junk.
In China, February’s official manufacturing PMI rose to 50.2 (vs. 49.8 estimated, and 50.1 in January) and non-manufacturing PMI rose to 51.6 (vs. 50.7 and 51.1). State banks restricted financing for Russian commodities. The AIIB put lending to Russia and Belarus on hold. Elsewhere, China is reportedly exploring an exit from the ‘dynamic-zero Covid approach’ and trying to open up some cities for free cross-border travel. MIIT continued to implement subsidies for NEV purchases. Nio plans a secondary list in Hong Kong on March 10. Li Auto’s fourth-quarter results beat expectations on solid operational efficiencies. Baidu’s fourth-quarter results beat expectations, with strong advances in AI monetisation. Meituan announced six key measures to support COVID-impacted SMEs in response to the NDRC's recent guidance. Shenzhou issued a profit warning due to higher-than-expected commodity inflation. Techtronic’s good results were driven by top line growth and margin expansion. Bilibili’s fourth-quarter earnings beat expectations on higher advertising revenues; management expects to break even in 2024.
India’s GDP expanded 5.4% YoY in the December quarter, or lower than market expectations of 5.9%. Manufacturing activities expanded in February as output and new orders rose on strong demand. The PMI was at 54.9 in February, up from 54 in January. Gross Goods and Services Tax revenues rose 18% YoY for the fifth month in a row. Given the current market environment, LIC could postpone its IPO to the next fiscal year.
Sea Ltd released disappointing fourth-quarter results with slower revenue growth in gaming and widening EBITDA losses in e-commerce due to its global expansion. The company also delivered mixed guidance for 2022.
In Brazil, the government announced a 25% reduction in import taxes (IPI). The real gained 1.8% despite international turbulence. Brazil’s exports could actually benefit from disruption to Ukraine’s exports and higher commodity prices.
In Chile, SQM released solid fourth-quarter figures thanks to high commodity prices in all divisions, particularly lithium and SPN. Chile’s currency also appreciated as copper prices climbed.
In Colombia, it was the same story (currency appreciation and market inflows), despite poor visibility on the upcoming presidential election.
Corporate debt
Credit
Russia's invasion of Ukraine dominated the headlines. There was no agreement between the two countries in spite of two rounds of talks so risk aversion continued to spread among investors. Commodity price tensions accentuated with Brent crude almost hitting $120. Naturally, the surge in commodity prices is a major concern for central banks as they grapple with inflation. Jerome Powell confirmed that the Fed would increase rates this month. Over the week, bond yields eased with the German bond retreating by 25bp, so duration assets gained. The IG index ended the period 0.79% higher despite the Main tightening by 10bp. HY credit (-0.48%), however, continued to suffer from the flight to quality and widening credit spreads with the Xover index up 41bp. Emerging country bonds are at the forefront of current geopolitical tensions and suffered further damage. Premiums on the JP EMBI index flirted with 420bp. Ukraine’s government bonds are now trading at 25% of par. Russia's debt, crippled by international sanctions and S&P's downgrade to CCC-, is trading between 20% and 40%. Sovereign emerging debt markets, as measured by the JP EMBI, are down close to 10% so far this year.
The new issues market remained closed as volatility continued. In company news, Telecom Italia announced a massive €8.7bn loss for 2021 on significant writedowns. Faced with much tougher competition in its home market, the group is hoping to revive the value of its assets by spinning off its landline network from its service activities.
Geopolitical developments also becalmed new issuance of financial/corporate subordinated debt. Nobody wants to issue bonds at today’s high premiums. Banks with Russian and Ukrainian exposure, either directly or through affiliates, were naturally the most affected, led by Austria’s Raiffeisen and Hungary’s OTP, both of which are heavily exposed to Russia. Raffeisen’s perpetual bonds have lost 20 points since the invasion. However, Russian exposure is generally manageable for most European banks. At the time of writing, credit premiums on euro-denominated CoCos were around 560bp and close to 260bp on hybrid corporates.
Convertibles
Despite the impact of geopolitical stress on markets and valuations, there were two new convertible bond issues. Fibre optic specialist Lumentum raised $750m due 2028. Last year, the company bought its rival Coherent for $6.6bn.
Peabody Energy raised $275m at 3.25% due 2028. The company is the largest coal producer in the world and operates 17 mines.
In company news, sales at Zalando, Europe's largest online fashion company, rose 30% in 2021 to €10.4bn and net profits were €234.5m despite inflationary pressure. However, the group's guidance on growth for this year fell short of expectations. In the US, sales at Okta (identity and access management) rose 38%, or more than expected, to $1.79bn.
Ford is to separate its electric vehicle production from its internal combustion division. The group also unveiled an EBIT margin objective of 10% by 2026 and confirmed its targets for this year despite events in Europe.
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
04/03/2022
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