Equity markets started the week in a particularly positive mood as more economic stimulus plans emerged. The European Commission raised its package from €500bn to 750bn.
However, the trend was mostly driven by hopes for a genuine economic rebound as countries started to exit lockdown and fears of a second wave abated. Europe’s GDP will probably contract by close to 10% this year and company results could only return to 2019 levels in 2022 but the worst hit sectors bounced on a recovery in industrial production and consumer demand after 2 months of lockdown.
Indices pushed higher but the strong rebound in autos, tourism and commodities, partly on sector-specific stimulus plans, was the most remarkable development. This trend justifies our decision two weeks ago to rotate portfolios into better quality cyclicals.
The wave of optimism also benefited convertibles, emerging country debt and high yield corporate bonds, the focus of our fixed income portfolios.
Nevertheless, we think it is still too early to increase equity exposure as it remains unclear how vigorous the economic recovery will be after this bounce. Increasing bankruptcies, production chain disruption, a sharp rise in unemployment and changing consumer trends should all weigh on the situation.
And there are still geopolitical tensions. Fresh pressure at the Chinese Communist Party congress on Hong Kong’s status should only make them worse.
The week saw a significant rotation in favour of cyclicals and value, previously the worst hit sectors. Transport, Leisure, Autos and Banks all gained. Optimism lifted European indices but investors ended up keeping an eye on mounting US–China tensions after Donald Trump criticised the sanitary crisis in China and the situation in Hong Kong deteriorated.
In Europe, lockdown exits measures picked up speed and the European Commission raised its stimulus package to €750bn after last week’s Franco-German initiatives. Two-thirds of the package is in subsidies and the rest loans with Italy and Spain as the biggest beneficiaries. However, the deal still has to be approved by the Netherlands, Denmark, Austria and Sweden who have so far opposed such a measure. Countries will have to draw up national plans detailing their needs and planned reforms. The European Green Deal should play a key role, notably through a focus on renewable energy projects, green transport and infrastructure renovation to achieve more efficiency.
In France, Emmanuel Macron followed suit with an €8bn stimulus plan for the autos sector. In return, Renault unveiled a significant restructuring plan to improve its competitiveness and profitability while Air France, another beneficiary of government aid, had to agree to slash domestic flights for destinations with viable railway alternatives.
The lockdown exit rebound was particularly strong for companies like Cineworld Group but the situation is still very difficult for groups like Rolls Royce Holdings which was downgraded to speculative status by Moody’s.
In a short Memorial Day week, the Dow Jones gained 3.36% and the S&P500 1.96% but the Nasdaq slipped 0.07% (as of Thursday’s close).
The S&P moved above 3,000, a level last seen on October 21 2019 and has now bounced by around 38% from its March low.
The week began with fresh optimism over the coronavirus pandemic, pushing concerns over US-China tensions onto the back burner. Markets were also lifted by bullish statements, especially from Jamie Dimon who is now expecting a V-shaped recovery with a strong rebound in the third quarter. James Bullard, chair of the Saint Louis Fed, said he sees unemployment dropping below 10% by the end of 2020. This is very optimistic considering that new jobless claims increased by 2.1 million in the previous week, taking the overall number of unemployed to 40 million.
The week saw an unprecedented rotation into value with transport and tourism stocks outperforming as economies reopened and travel restrictions were eased.
But markets turned negative on Thursday on news that Donald Trump was to hold a press conference on China amid worsening US-China tensions. Secretary of State Mile Pompeo said Hong Kong was no longer independent of Beijing and therefore not entitled to have privileged trading relations with the US. China’s foreign affair representative in Hong Kong called the US threat was barbarous.
WTI oil prices ended the period at $33.71 on a fall in US inventories.
Twitter and Facebook came under pressure when Donald Trump signed an executive order to limit their protection from libel due to online content. The president’s reaction was triggered by Twitter’s decision to describe two of his tweets as fake news.
Elsewhere, American Airlines is to lay off 30% of its office workers and is also planning redundancies among pilots and flight crews. Boeing said production if its 737 MAX plan had resumed.
The rebound continued, taking the TOPIX and Nikkei 225 6.74% and 7.50% higher. On May 26, the state of emergency was lifted for the five last remaining prefectures including Tokyo. Restrictions are going to be eased step by step for restaurants, bars, cultural centres, and sports facilities, etc.
Expectations of an economic recovery boosted stocks. In another positive move, Shinzo Abe’s Cabinet submitted its second massive supplementary spending plan to the National Diet for approval.
Economy sensitive sectors such as Air Transportation, Iron & steel, Transportation equipment and Banks outperformed. On the other hand, Pulp & Paper underperformed, reversing a previously positive trend.
Fortunes also turned lower for other manufacturing, including Nintendo which only gained 1.05% on expectations that demand for game consoles might have peaked, and a defensive sector like Telecommunications.
Nissan motors jumped 20.48% after a period of severe underperformance and Daiichi life rose by 17.41% as its investment portfolio increased in value.
The MSCI EM index was up 2.2% this week as at Thursday’s close, boosted by strong rebounds in India and Brazil. Chinese equities, which had held up well year to date, were subject to some profit taking on rising US-China tensions.
In China, The National People Congress (NPC) announced a fiscal stimulus package of over RMB 8.5tn, or 8.2% of GDP (vs 2019: 4.8%). This should also represent close to RMB 3.75tn in fiscal deficit (3.6%), of which Rmb 3.75tn will be financed by special purpose municipal bonds and RMB 1tn by special treasury bonds. Local governments will allocate the proceeds to public health infrastructure and Covid-19-fighting areas (eg. consumption and tax reductions).
Deteriorating US-China relations worsened when the NPC voted to impose national security law on Hong Kong and the US decided to expand its entity list, i.e. the list of companies that are subject to special trade licensing authorizations. The US Senate passed the Holding Foreign Companies Accountable Act, which stipulates that if a listed company has 3 consecutive non-inspection years by the US Public Accounting Oversight Board (PCAOB), it shall be prohibited from being traded on US stock markets. This is likely to increase the number of large ADRs returning to the HK/A share market.
On the macroeconomic front, China’s construction machinery rebounded by over 30% YoY in April. Excavator sales surged 60% YoY and truck cranes 32%.
In Korea, Hyundai Motor and Kia Motors picked LG Chem to supply batteries for pure EV. Production will begin in 2021. Singapore said it would lift lockdown on June 2. According to the Ministry of Trade and Industry, its economy should now contract by 4%-7% this year.
In India, following Facebook’s investment in Reliance Jio, Google was said to be considering taking a 5% stake in telecom operator Vodafone Idea. Axis Bank saw a sharp rebound this week as Carlyle Group was rumoured to be weighing buying an 8% stake for $1bn.
In Brazil, April’s current account balance came in at a higher-than-expected $3.8bn (versus consensus estimates of $3bn), driven by trade results and lower deficits in the payments and service balances. April-15 inflation down 0.59% (versus -0.48%), leaving room for further interest rate cuts. In terms of job losses, there were 1.1m fewer formal jobs in April, driving the unemployment rate to 13.3%.
In results, Magazine Luiza reported strong online sales. The highlight was management guidance for online sales growth of 138% and 203% in April and May, respectively, taking revenues into positive territory (up 7%). Magazine Luiza‘s online business not only offset the brick-and-mortar business revenues, but also gained market share. Rumo reported weak results as expected on low volumes after heavy rains. The company announced the renewal of the Malha Paulista concession contract to 2058. The announcement was much earlier than expected and positive for the business, boosting potential capacity and volumes.
Market rose on increasing signs of an economic recovery and the European Commission’s huge €750bn stimulus plan. The mood was, however, tempered by fresh US-China tensions. The Xover tightened by 68bp and Main by 11bp between Monday and Thursday.
In a busy week for results, Selecta’s EBITDA plunged by a disappointing 58.3% in the first quarter and leverage rose to 8.7 times as of end March. But’s third quarter for FT 2019/20 was reasonably reassuring. It performed well before the lockdown, boasts a solid cash position and said rents for the lockdown period had been cancelled on force majeure grounds and not simply postponed. Loxam also had a reassuring first quarter. The group took several measure to protect margins and liquidity and expects free cash flow to be positive in the current quarter in spite of a steep decline in trading. Cirsa’s first quarter was rather resilient with free cash flow at €33m, down from €40m a year ago. Despite the complicated environment, SPCM’s first quarter sales and EBIDTA rose 7.4% and 35.2%. Lower commodity prices underpinned margins.
Jaguar Land Rover’s bonds performed well over the week. The group is reportedly in talks with the UK government on a loan for more than £1bn. The auto sector also performed well on news of France’s €8bn aid plan for the sector. This includes plans which have already been announced, including the government-backed €5bn loan to Renault. Elsewhere, Intesa Sanpaolo has reportedly given preliminary approval to FCA for a €6.3bn loan guaranteed by the government.
Hertz and its US and Canadian subsidiaries filed for Chapter 11. (Its international subsidiaries are not concerned by the procedure). According to press reports, Hema’s creditors are mulling taking control of the company. In return, they would be prepared to spend €300m on repaying the Dutch chain store’s debts. As part of Casino’s disposal plan, GBH (Groupe Bernard Hayot) in La Réunion has received the competition watchdog’s conditional approval to buy Vindémia.
On a busy new issues market, Ardagh raised $1bn at 5.25% over 7 years. Insurance companies Aviva and Phoenix raised £500m at 4% and $500m at 4.75% with Tier 2 deals. Swiss Re raised €800m with a subordinated bond at 2.714%. Crédit Agricole and Commerzbank raised €750m with Tier 2 bonds at 1.625% and 4%.