Indices seesawed as uncertainty persisted over the outlook for the global economy in coming months. Sentiment nevertheless remained underpinned by budgetary and monetary measures to stop the global economy slipping from an induced coma into total collapse. The banking system will ensure rates remain low and liquidity abundant but pricing markets is tricky. Is a 15% drop in major equity indices too much or too little? China is recovering fast, which is encouraging, but very cautious lockdown exits elsewhere in the world risk triggering further earnings downgrades.
For the moment, we prefer to remain on our guard and are still slightly underweight equities, especially in Europe. But we are overweight Chinese equities and are focusing on high visibility sectors like pharma, tech and telecom operators.
In fixed income, we like investment grade corporate bonds which are benefiting from central bank buying. However, we are more cautious on Southern European sovereign debt after Germany's constitutional court fired a warning shot at the ECB’s government bond purchases.
EUROPEAN EQUITIES
The previous rebound left European equity markets trading up on hopes lockdown exit strategies would promote a gradual economic recovery and moving down on depressing data and fresh US-China tensions. The ECB’s ability to provide more support for the economy was called into doubt when Germany’s constitutional court gave it three months to justify Mario Draghi's asset purchasing programme. First quarter reports generally came with warnings that worse was to come in the current quarter, making it hazardous to provide estimates.
EssilorLuxottica said growth was robust up to February but then activity fell sharply due to the lockdown. The Luxottica division was particularly badly hit. Overall sales for the quarter fell 10.9% but the group expects worse in the second quarter. Legrand sees sales falling sharply after a 41% plunge in April but the picture should brighten in the second half. Axa’s revenues rose 4% but the solvency ratio fell 16 points to slightly above consensus estimates of 182%. The group expects the crisis to have a big impact on 2020 results. BMW cut 2020 guidance and now expects margins in its auto division between zero and 3%. UniCredit 's first quarter loss was bigger than expected due to writedowns ahead of the likely impact of the crisis. No guidance for the full year was provided.
Among resilient companies, Zalando had a better-than-expected first quarter and the company expects revenues to rise this year by 10-20%. New customers jumped 39% in April as people turned massively to e-commerce. The company’s partnership programme rose 4.4% YoY in the first quarter. In healthcare, Nordisk maintained 2020 guidance on the back of growth in the GLP1 market. Fresenius Medical Care also said its results were strong and it too maintained 2020 objectives. BioMérieux said its SARs-CoV-2 blood tests results had been validated and that a launch was imminent.
US EQUITIES
As of Wednesday's close, the Dow Jones had shed 3.93%, the S&P 500 3.10% and the Nasdaq 0.68% over the previous five trading sessions. The Nasdaq has actually proved very resilient during the crisis and was up 2.8% YTD. Fresh US-China tensions flared up at the beginning of the first week of May with Donald Trump threatening to impose more import tariffs. Meanwhile, lockdown exit plans continued with 30 states open for business.
Warren Buffet's annual address was in focus. He announced that his fund had sold all its airline stocks as he considers the sector faces big long-term challenges. He is still cautious on insurance groups but confident on banks. Bankruptcies started to increase, especially in mass retail, tourism and the oil sector. Markets also focused on upbeat news on testing and also vaccines. There are hopes for a vaccine before the end of this year. Gilead’s Remdesivir could be available for severe Covid-19 cases by the end of the week while Roche received emergency FDA approval for its new coronavirus test.
In the US, ADP said the US had lost a record 20,236,000 non-farm jobs in April compared to only 149,000 in March. However, the figure was expected as it simply reflected jobless claims in recent weeks.The closing of Walt Disney's parks for 15 days in March cost the group $1bn in the first quarter. More than 85% of Starbucks franchised stores will reopen this week but no food will be served. The US tech sector suffered a wave of redundancies. Airbnb laid off 1,900 people, or 25% of its employees, and Uber close to 15% of its drivers. The ride-hailing company had seen a 95% drop in its US activity in April.
JAPANESE EQUITIES
After a long holiday break, the Nikkei 225 index gained 0.28% and the TOPIX edged 0.32% lower when markets reopened on Thursday.
Despite weak US economic data, stocks were relatively firm on decreasing coronavirus infections in Japan, signs that the US and Europe were gradually exiting lockdown and a turnaround in China’s trade data. Air Transportation and Insurance declined but semiconductor-related names such as Shin-Etsu Chemical (+3.82%) and Tokyo Electron (+3.16%) advanced. The Japanese government officially extended a nationwide state of emergency beyond May 6 to the end of the month to avoid any further Covid-19 outbreak. It also called on companies in special alert areas including Tokyo and 12 prefectures to continue keeping 70% of staff working from home. However, 34 other prefectures were allowed to partially ease restrictions from May 7.
EMERGING MARKETS
Emerging markets reversed course and closed down 2%. India underperformed sharply on signs of falling activity.
In China, April’s manufacturing PMI softened and NBS/Caixin manufacturing PMIs came in at 50.8/49.4, a sign of more resilient production momentum. However, new orders were weak and there was an especially sharp decline in new export orders. In another drift on the trade war front, the US Department of Commerce announced regulatory changes to tighten control of US technology exports to China and is reportedly considering a 12-month extension to tariff exclusions. On a more positive note, Shanghai Disneyland announced its reopening on May 11, but with capacity capped at 30% by the local authority.
Domestic consumption is slowly normalising. China registered 104 million domestic tourist trips during the 4 day Labour Day holiday last weekend but the figure was still down 47% on last year, according to the Ministry of Culture and Tourism.
SAIC, China’s largest auto manufacturer, reported better-than-expected April sales. They rose 0.5% YoY thanks to proactive special offers, while Geely’s sales volume edged 2% higher YoY, jumping 44% compared to the last month. SMIC, the HK-listed Chinese foundry, revealed plans to be dual listed on the Shanghai STAR board. This is an attempt to gain access to more domestic funding and further decrease its reliance on foreign technology.
India extended its lockdown for 2 weeks while continuing to ease some restrictions. Manufacturing PMI came in at 27.4, its lowest level in 15 years. Reliance Industry’s fourth quarter results for FY 2020 showed retail and telecoms continuing to perform well while its petrochemical division disappointed. Deleveraging continued with Facebook and Silver Lake taking a stake in the group’s telecom unit, Jio Platforms.
Brazil’s central bank cut interest rates by 75bp, or more than the 50bp expected, to provide further support for the economy. MercadoLibre, Brazil’s leading e-commerce and digital/mobile payment platform, posted strong results above market expectations with marketplace gross merchandise volume up 34%, driven by Mexico; and Total Payment Volume 43% better.
In the banking sector, Itau reported weak results due to lower net interest margins and higher provisions. In healthcare services, Grupo NotreDame Intermedica’s results were better than expected with the top line up 35% and EPS 40% higher. The medical loss ratio also improved.
CORPORATE DEBT
CREDIT
Markets were reassured by the gradual lifting of lockdown measures in several countries but worried by Germany's constitutional court querying the ECB’s government bond-buying programme. Wednesday’s disappointing macroeconomic indicators added further pressure. The Xover widened by 9bp and Main by 2bp between Monday and Wednesday.
In the ongoing first quarter results season, Huntsman saw sales down 4.6% and EBIDTA 19% lower but both were better than expected. The group announced various measures to deal with the pandemic including a 30% cut in investments, cost reductions and the suspension of its share buyback programme. Ellkator’s full year figures were rather disappointing. Fourth quarter sales and EBIDTA fell 14.4% and 31.3%. The group’s concessions and environment divisions were particularly badly hit by the crisis. Car hire firms remained in focus with mixed news on Europcar. The group obtained a $220m loan guaranteed by France but revenues in March tumbled 34.6% despite heavy cost cutting. Hertz’s creditors agreed to postpone part of its debt repayments up to May 22 to give the group more time to draw up a restructuring plan and ward off bankruptcy risk.
Coty had reaffirmed its disposal schedule at the end of March but press reports said Henkel and KKR had suspended their plan to acquire its professional care division due to the pandemic’s possible impact on hairdressing salons. Telefonica and Liberty Global are reportedly in talks to merge their UK subsidiaries to create substantial synergies.
BNP Paribas’ net results fell 33%, but better than expected, after provisioning around €500m for any future losses. Intesa Sanpaolo’s net profits rose by a reassuring 10% YoY due to significant trading and treasury gains. Provisioning was increased but should be partly offset by the capital gains from the Nexi deal. The bank has maintained its bid on UBI Banca.
In new issuance, Stada raised $200m over 4 years at 3.5% to go on general corporate purposes. RBS raised £1bn with a Tier 2 bond at 3.622%. The issue was well received.
CONVERTIBLES
Strong issuance in the US took helped raise $1.29bn over the period. The biggest issue was the $750m deal from NCL Corporation, subsidiary of Norwegian Cruise Line Holdings. The bond is due 2024 and has a 6% coupon. The proceeds will go on reinforcing its balance sheet to withstand the tourism lockdown for another 12 months. After Carnival Corp in March, this is the second company in the sector this year to use convertible financing.
Bloomin’ Brands, which owns and runs several restaurant chains in the US, unveiled a $200m convertible at 5%. It will help reinforce group liquidity, running at $270m currently, and reduce the impact of forced restaurant closures.
In Europe, Germany’s HelloFresh (meal deliveries to homes) raised €175m at 0.75% due 2025. The proceeds will go on ensuring the group’s expansion after a first quarter which saw sales jump 68% to €699m.
China’s Weimob (Wechat corporate solutions) raised $150m. The company enjoys the support of Wechat’s developer Tencent.
First quarter results were very mixed. In South America, MercadoLibre (e-commerce and payment solutions giant) saw sales rise 82.2% while net earnings rose 70.5% compared to the same period in 2019. France’s Total reported a 35% drop in net adjusted profits to €1.75bn. The group maintained its dividend and said investments would fall by around 15% this year. In line with OPEC+ quotas, the group expects production to fall 5% in 2020.
Sales at Orpea (clinics and care homes) rose 7.8%. The group said it was financially robust with close to €1bn in funding capacity. Figures from the health care sector were upbeat. Sales at Fresenius and Qiagenr rose 8% and 7%. In North America, Illumina’s sales were up 2% to $859m. At Jazz Pharmaceuticals, they were 5% better at $535m but the company reduced guidance for the full year due to the pandemic.
Splunk announced a partnership with Google Cloud to integrate Splunk Cloud, a date processing decision-making platform, to facilitate interaction between the two apps.