Investor sentiment keeps proving resilient as major indices closed in green despite the soft start of the week.
The S&P 500 and Dow Jones closed up 0.8% and 0.3% respectively, after reaching peaks on Thursday. In Europe stocks brushed off trade tensions and Brexit as the Stoxx 600 rose 1.7%. With investors in risk-on mode and US 10y breaking the 3% mark on Wednesday, the week has seen signs of rotation out of yielding names into cyclicals and sectors which have seen the largest decrease in exposure over the past few months – namely Autos and Banks.
The trade spat continued as America declared a 10% tariff on $200bn of Chinese goods – to reach 25% by end of the year – and the Chinese retaliating with tariff hikes of 5-10% on $60bn of American goods. However, it only weighed lightly on investor sentiment as the low levels of the tariffs were deemed by some as ‘a sign of willingness to negotiate’. Furthermore, sentiment received a boost as the US weekly jobless claims fell to 201k, the lowest level in 50 years. As of writing however, the Chinese have just broken off talks – and tariffs imposed by the US actually go into force tomorrow.
In the Eurozone, the Manufacturing PMI disappointed dropping to 53.3 (from 54.4) whilst the Services increased slightly, overall bringing the Composite PMI to 54.2 (from 54.2). Our CIO Ian Richards highlighted at the beginning of the week that investors will be sensitive to the PMIs as the market has started to downplay Italian budget risk. Brexit negotiations hit an ‘impasse’ in the EU summit in Salzburg as EU leaders rejected Mrs May Chequers plan and gave her four weeks to propose an amended solution. On a more positive note, UK inflation rose to 2.7%, topping expectations with retail sales sliding by less than expected.
In his latest strategy piece, Dennis Jose and team discussed the potential ‘dramatic’ rotation back into Value stocks from Quality stocks. The discount on Value relative to Quality is now at levels seen during periods of crisis in the past – which has come about without any discernible change to earnings estimates. So what are investors pricing in? Dennis suggests c.2% collapse in Global GDP growth and a decline in the US 10y yield to 1.6%, which is at odds with their view of a prolonged cycle.
Most read research this week:
1. STRATEGY: Rotation, Rotation, Rotation
After underperforming until recently, our pro-cyclical/pro-value sector recommendations have finally broken through to positive territory. High Quality, Low Risk stocks dramatically outperformed, with the discount on Value relative to Quality is at similar levels to the periods of crisis. This de-rating of Value has come about without any discernible change to earnings estimates, clearly investors doubt the veracity of these. If a crisis does materialise, our recommendations are likely to underperform materially via cuts to EPS estimates. However if we are right, a dramatic rotation back in to Value appears likely.
2. MEDICAL IMAGING: Picture of health
Medical Imaging is a key driver for new medtech giants Siemens Healthineers (#1) and Philips (#3). We discuss how the market’s underlying dynamics – replacement rates, under-served markets, ageing populations – are opening out prospects for both shortand long-term growth. Meanwhile, our sector expert, Dr Julian Itzcovitz, gives his read on how the various players compare on price, quality and technological innovation.
Trading volumes were 30% above average and flows were unsurprisingly skewed towards buyers of cyclicals, albeit Long-Only investors were large net buyers and Hedge Funds were small net sellers overall.
Things to watch out for this week:
- FOMC meeting. The Fed is widely expected to raise policy rates by 25bps on Wednesday. Fed Chair Powell will hold a press conference, and new projections for the economy and monetary policy will be released. Separately, New York Fed President Williams will give a speech on Friday.
- Italian budget will remain in headlines in the coming week, as the Economic and Financial Document should be submitted to Parliament by next Thursday.
- Eurozone inflation for September will be released on Friday, and is expected to be unchanged at 2%. Inflation for Germany, France, Spain and Italy will also be published. ECB central bankers (Draghi, Praet and Coeuré) will give several speeches throughout next week.
- Business surveys for September. The German IFO on Monday should improve slightly. The French business confidence index on Tuesday should be stable. China Caixin Manufacturing PMI on Friday should edge down. The US Chicago PMI on the same day is expected to soften.
Busy ECM week with three notable ‘Intentions to Float’: Cepsa* (Spain, oil & gas) one of Mubadala (Abu Dhabi SWF) biggest equity market transactions; Shurgard Self Storage Europe* (Belgium, real estate), #1 European self-storage operator, parent is Public Storage, biggest US self-storage operator; and Sonae MC* (Portugal, food retail) a subsidiary IPO from listed Sonae SGPS (Portugal, investment group).
IPOs for SIG Combibloc (Switz, packaging), Aston Martin (UK, fast cars) and Funding Circle (UK, peer-to-peer lending) are said to be covered throughout their price ranges which bodes well for the current crop of IPOs.
Farfetch (UK, online luxury) priced its NYSE IPO above a raised range and closed up over 40% (BNPP co-manager). Also in the UK, Glencore* (UK/ Switz, basic resources) tapped its outstanding USD500m non-dilutive CB due 2025 issued in March 2018.
*BNP Paribas led
Have a good week.
This week’s statistics:
Stoxx 600 trading volume as % of 3-month average: 130%
Stoxx 50 volatility (VStoxx): range 13-15%, finishing on 13%
ECM Volumes 2018YTD:
Stoxx 600 (+1.7%)
Stoxx 600 sector performance:
Best: Basic Resources (+7.9%)
Worst: Real Estate (-1.0%)
Best: Oil & Gas (+11.3%)
Worst: Telecoms (-13.4%)
Best: Turkey (+3.4%)
Worst: Cyprus (-2.4%)
Best: Ukraine (+71.0%)
Worst: Turkey (-15.0%)
Deal priced this week (> €100m):
– Farfetch, $885m, IPO (US, Online Retail)
– Sulzer, CHF560m, ABB (Switzerland, Engineering)
– Glencore*, $125m, TAP on outstanding $500m CB (UK, Commodities)
Deals ongoing (> €100m):
– SIG Combibloc, CHF1.5bn, IPO (Switzerland, Packaging)
– Aston Martin, €1.3bn, IPO (UK, Automotive)
– Funding Circle, GBP300m, IPO (UK, Online Lending / Financials)
– Fundsmith, GBP250m, IPO (UK, Fund)
– Mobius Investment Trust, GBP200m, IPO (UK, Fund)
– Multifamily Housing REIT, GBP175m, IPO (UK, REIT)
– Swiss Prime Site, CHF330m, Rights Issue (Switzerland, Real Estate)
– Elementis, GBP176m, Rights Issue (UK, Chemicals)
– EnQuest, GBP107m, Rights Issue (UK, O&G)
*BNP Paribas led
Head of Equity Capital Markets
Artículo original de la página del Grupo BNP Paribas Focus Magazine.