- Geopolitical worries boosted market volatility
- Statements from various ECB officials paved the way to monetary normalisation
- We are still neutral on equities overall with a preference for Japan and China
Geopolitical worries boosted market volatility after Washington said there was a bigger chance Russia might invade Ukraine. Moscow had flagged a partial withdrawal of troops after what it called manoeuvres, but tensions remained and visibility was extremely limited.
Meanwhile, the latest FOMC minutes confirmed that the US economy was doing well and labour markets were under pressure. Inflation remained a concern after January producer prices rose 9.7% over 12 months. And after December’s disappointing figures, retail sales rose 3.8% in January, or much more than expected. In the eurozone, statements from various ECB officials paved the way to monetary normalisation. Inflation is still expected to fall back but then remain higher than in the pre-pandemic period.
In the circumstances, earnings reports shifted to the sidelines. But the tally is so far impressive with 75% of US companies beating estimates and overall earnings 6% higher than expected. The picture is similar in Europe. Close to 65% of company earnings beat estimates with quarterly earnings coming in 9% better than expected, up by almost 50% over a year.
Risk assets certainly suffered from poor geopolitical visibility but government bonds offered scant safe-haven status. After moving above 2%, US Treasury yields fell back below that level. 10-year Bund yields traded in similar fashion, bobbing around 0.30%.
We remain cautious on duration but have taken profits on our US bond hedges. We are still neutral on equities overall with a preference for Japan (more cyclical) and China which stands to gain from moves to a more accommodating stance on monetary policy.
EUROPEAN EQUITIES
Developments in Ukraine continued to dictate equity market moves. Trading was highly volatile and indices ended the period slightly in the red. Throughout the week, investors had to contend with contradictory messages as good news was then undermined by doubts. The situation seems to have calmed down and countries are still taking to one another but uncertainty is still high. Meanwhile, companies posted upbeat figures while warning of inflationary pressure. UK inflation hit 5.5% over 12 months, prompting markets to expect the Bank of England to hike rates faster than expected.
In company news, Airbus said its order book was healthy and that it was managing to cope with supplies in spite of difficulties. Air-France KLM, however, was worried that flying was facing a possible structural change with far fewer business trips. Profits at interim group Randstad blew past expectations due to strong demand for labour. The group sees demand outpacing supply for some time because of technological and demographic changes. Luxury group Kering reported sterling full-year results as demand returned to pre-pandemic levels despite successive price rises. Following LVMH's lead, the group wants to increase prices again this year and seems confident demand will keep up. Engie posted upbeat figures thanks to higher prices. Most importantly, gas and renewable energy will provide another growth driver. Neoen’s results also rose again thanks to higher energy prices. Even so, sales missed expectations, chiefly because its wind power division was hit by low wind speed in Europe. Air Liquide reported good full-year results after managing to pass on energy price rises. The group hopes to push up its operating margins by a notch this year.
US EQUITIES
US indices ended the period sharply lower as tensions with Russia resurfaced after a very brief lull. The Dow Jones shed 2.64%, the S&P500 2.75%, and the Nasdaq 3.31%.
The FOMC minutes revealed that the Fed was ready to raise rates and start to shrink its balance sheet soon but investors were reassured that there was no indication it would hike faster than expected. James Bullard, however, reiterated his view that rates should be raised by 100bp by July 1st to rein in high inflation.
January’s PPI came in at 9.7%, or higher than the 9.1% expected. Here are some figures which reflect the current situation: second hand car prices have soared to 40.5% since January 2021, a level not seen since 1980. And petrol prices are up 40.8%.
And yet, retail sales rose 3.8% last month, an indication that US consumption is still robust.
There were mixed reactions to the latest earnings reports. ViacomCBS, soon to be Paramount, tumbled 18% following its analysts’ day. Its streaming division reported excellent figures but the segment will be loss-making until 2024 because of heavy investment. In video games, Roblox plunged 27%, its worst-ever drop, on disappointing results. They revealed none of the market share gains investors were used to seeing in quarterly figures. Nvidia’s figures beat the consensus but clearly the market was expecting even better and the share fell 7.5%.
Airbnb beat both top and bottom-line expectations in the fourth quarter, shrugging off a resurgence in Covid infections and starting the new year in better shape than before the pandemic struck. ISS (Institutional Shareholder Services) asked shareholders not to approve Tim Cook’s $99m remuneration package at the next AGM on March 4. META has lost 38% since January and is no longer in the top ten global market capitalisation bracket.
JAPANESE EQUITIES
The NIKKEI 225 and TOPIX fell 1.67% and 1.60% for the period. After a sharp fall on the heels of a US market sell-off on mounting Ukraine tensions and hawkish comments from Fed officials, indices recovered when Vladimir Putin agreed to continue talks with NATO. They then fell again as doubts emerged over reports Russian had withdrawn some troops.
Cyclical sectors such as Land Transportation, Mining and Marine Transportation rose on economic reopening hopes but sectors like Services and Communication declined.
Despite worries over commodity prices, Asahi Group Holdings jumped 7.19% on a 29.9% jump in operating profits last year and the group’s forecast of a 10.1% rise for this year. On the other hand, Sysmex Corp., fell by another 19%; the stock is seen as a typical high-valuation Covid-19 beneficiary.
In Covid news, Prime Minister Kishida is to ease border restrictions by raising the cap on the number of entries to 5,000 from the current 3,500. Authorities across Japan confirmed more than 95,000 new infections on Thursday, down more than 4,000 from a week ago.
EMERGING MARKET
The MSCI EM Index and most of the major markets ended the week flat as of Thursday’s close, with China and India up 0.2%, while Taiwan and Korea were down 0.6% and 0.2% in USD.
China's producer price index (PPI) moderated for the third month running, up 9.1% YoY in January, down from 10.3% in December. CPI decelerated to 0.9% vs 1.5% previously. Both figures create favorable conditions for further monetary easing. The PBoC added more liquidity to the market via the medium-term lending facility, while keeping its one-year policy loan rate unchanged after reducing it last month. Chinese banks continued to boost lending to the property sector, with about RMB 600bn billion yuan ($94bn) or double the monthly average from the fourth quarter. Banks in several Chinese cities cut mortgage down payments to boost housing demand. The NDRC published 41 policies to help services industry recover, including requiring food delivery platforms to cut fees for restaurants. China approved the use of Pfizer’s Paxlovid as the first oral anti-coronavirus pill to treat the disease. China plans to launch heterologous booster shots to provide better protection against Omicron. With more than 6,000 new daily cases, Hong Kong plans to mass test its 7.5 million residents for COVID starting next month.
In Taiwan, TSMC announced its first share buyback in 13 years.
In India, January CPI rose to 6.01%, or in line with estimates, but breached the RIB’s inflation tolerance band, largely due to an unfavorable base effect. December IIP fell to a 10-month low at 0.4%, or below expectations of 1.6%. The government approved $6bn worth of PLI schemes for the auto sector. Companies approved include Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Ford India and Hyundai. India added 54 more Chinese apps to its blacklist, including Free Fire, on China security concerns. On the corporate side, Axis Bank was reportedly buying Citigroup’s India unit for $2.5bn. Foxconn announced plans for a JV with Indian conglomerate Vedanta to set up a chip plant. Apollo Hospital reported strong quarterly results as the recovery continued. The company announced expansion plans. Apollo 24/7 metrics continued after a tie-up with Amazon India to increase footprint.
In Brazil, WEG reported solid results as expected. ROIC increased to 30%, a 5% YoY increase that swept past market expectations.
CORPORATE DEBT
CREDIT
Inflationary worries and Russo-Ukrainian tensions continued to dictate market trends. Peak uncertainty on monetary policy once again fuelled strong volatility. And reduced risk appetite pushed spreads wider with the Xover adding 5bp and the Xover 1bp. Credit indices, however, remained resilient with euro-denominated investment grade debt returning 0.1% and high yield dipping 0.12%.
There were no high yield issues this week. Instead, attention shifted to company results and news Saipem SpA is mulling a €4bn restructuring which could include asset sales and liquidity injections. The oil services company is having to contend with reduced investment by oil majors and a number of projects that were delayed by the Covid pandemic. Efforts to refocus the group’s portfolio on green energy projects have also been held up.
Air France KLM may have lost €3.3bn in 2021 overall but fourth quarter sales soared 105% over a year to €4.84bn. The company is heavily indebted and says it might have to raise €4bn to reinforce its balance sheet.
In financial debt, DNB’s 1986 legacy T1 bond plunged to 79% of par after the bank said it would not be reimbursing it. The decision weighed heavily on the entire legacy Tier 1 segment. Subordinated bonds held up better with CoCo (contingent convertible bonds) returns flat over the period. Amid today's geopolitical stress with Euro Coco spreads around a lofty 500bp, the new issues market was calm with only a few deals in the senior segment.
In Italy, BPER’s acquisition of 80% in Carige was made official and UniCredit ruled out a tie-up with Banco Popolare de Milano. There were more upbeat earnings from financial groups. Results from UK, Portuguese and Greek banks are expected in the coming weeks.
CONVERTIBLES
New issuance took a breather as markets focused on geopolitical tension and earnings reports. In Europe, the focus was on EDF's results after a series of setbacks in recent months. As expected, sales and profitability were up but the group reduced guidance because of the government’s measures to soften the impact of the energy crisis on consumers. Management also announced a €2.5bn increase of capital to shore up its balance sheet as well as a €3bn asset disposal plan over the next 3 years. Elsewhere, luxury group Kering's results were boosted by Gucci. Underlying operating profits jumped 60% to a record €5.02bn on record sales of €17.64bn.
In the US, Akamai (technology) disappointed markets with sales of $3.5bn, only up 8% over a year. Operating profits rose 19% to $783m. The company also paid $900m for Linode to reinforce its presence in cloud computing. Canada’s Shopify (e-commerce) also disappointed investors. The company said it expected trading to slow in the second quarter of this year. But fourth-quarter revenues increased by a creditable 41% to $1.38bn.
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
18/02/2022
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The figures, comments, opinions and/or analyses contained herein reflect the sentiment of the Edmond de Rothschild Group with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
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The Edmond de Rothschild Group therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of the Edmond de Rothschild Group. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
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