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MARKET ANALYSIS 01/03/21


  • Investors began to fear a strong economic rebound might fuel inflation

  • The Fed and ECB tried to reassure markets

  • A significant sector rotation, mainly out of growth stocks

Tension on bond yields mounted over the week as investors began to fear a strong economic rebound might fuel inflation. The $1.9 trillion stimulus plan in the US could cause some sectors, like commodities, to overheat. The Fed and ECB tried to reassure markets by indicating that liquidity would be maintained, and any inflationary push would only be temporary but worries persisted. As a result, we chose to increase our underweight position in government bonds and investment grade credit. Faced with significant sector rotation, mainly out of growth stocks, we have stuck with our well-balanced approach to investment styles. We hope to avoid strong performance deviation between sectors. Volatility has risen on fixed income and equity markets, but we remain generally well-exposed to equities. Markets are still on an upward trend based on earnings capacity, good visibility on global liquidity in 2021 and an unprecedented economic boom to come. As for investment themes, we continue to like stocks geared to economic digitalization, healthcare, and ecological transition.


EUROPEAN EQUITIES 10-year government bond yields continued to rise while investors focused on expectations that the post-crisis period would see a significant bounce in growth. Central banks, however, stuck with their accommodating stance. Traders are looking beyond short-term risks. The Covid-19 situation in Europe is a mixed picture but vaccine developments are encouraging. Markets are also keeping a close eye on plans to approve the new US stimulus package. No change in sector bias: cyclicals, and especially tourism/leisure and basic resources, remained in favor amid hopes for an economic recovery. Oil companies were also heavily traded as oil prices rose further while financials gained on higher interest rates. Axa’s results and its 2023 objectives sent the share higher. The group intends to pay a dividend and expects to see premiums rise in coming quarters. Defensives like utilities and telecoms with structurally higher dividend yields lagged. Tech also came under attack. Results continued to beat expectations in the main. This was especially true for EPS and sales in cyclical sectors. Cost control measures at companies like Bureau Veritas helped underpin margins. Heidelberg Cement sounded a relatively optimistic note for 2021. The group said construction had picked up in recent months and it expects stimulus plans to act as leverage. Despite a fall in sales over a year, EBITDA rose thanks to strong cost-cutting efforts. Nevertheless, some companies like AB InBev cautioned on pressure on margins from higher commodity prices. Accor said it wanted to continue cutting fixed costs despite an improvement in trading.
US EQUITIES Markets ended the period lower with the Dow Jones down 0.29% and the S&P500 2.16% lower. The Nasdaq tumbled 5.38%, its biggest weekly drop in four months. Reassuring words from the Fed chairman, Jerome Powell, and the likely United States approval of the new Covid-19 vaccine from Johnson & Johnson failed to reassure markets on inflationary risk. Jerome Powell said rates would remain low until inflation moved above 2% and stayed there and until full employment was on the horizon. He said reaching the Fed’s inflation target could take 3 years, but investors remained nervous. 10-year Treasury yields rose above 1.4%. Growth stocks, which had taken off during lockdown periods, weighed on Wall Street. Financials and cyclicals remained in favor but defensives like utilities and food retail were lackluster. On Thursday, Johnson & Johnson's single-dose vaccine was approved by the FDA panel and full approval should be a matter of days. There are already 3 million doses ready to be distributed. Elsewhere, GameStop saw a speculative surge after its finance director resigned, a move which clears the way for the company to adopt a digital/e-commerce model. Tesla continued to lose ground partly due to investing at least $1.5bn in bitcoin. The cryptocurrency has lost 12%. Airbnb gained 1% in after-hours trading after a strong result beat. Falling hotel reservations have led to increased demand for holiday lets. AT&T sold 30% of its pay channel, DirecTV, to private equity fund TPG based on an estimated value of $16bn. AT&T acquired DirecTV for $48bn in 2015.
JAPANESE EQUITIES In a volatile week, stocks lost ground last Wednesday following a decline in US tech and semiconductor stocks as well as a rise in long-term interest rates. However, the market rebounded on Thursday supported by positive factors such as the first Covid-19 vaccinations in Japan and an earnings recovery. Sentiment was also boosted by the Fed’s suggestion it would maintain its accommodating stance. Over the five trading sessions to Thursday evening, the NIKKEI 225 advanced 0.50% while the TOPIX edged 0.14% lower. The TOPIX Value index rose 1.47% but the Growth index dropped 1.71%. Value rose on expectations for an economic recovery while growth stocks, which tend to borrow more, were hit by rising US bond yields. Cyclical sectors like Air Transportation (+8.99%), Marine Transportation (+6.76%), Mining (+4.41%), Property (+4.56%), and Materials were in vogue. Stocks, which had suffered from the effects of the pandemic, enjoyed vigorous rebounds. West Japan Railway climbed 8.34% and ANA Holdings 7.54%. General trading company MITSUI & CO hit a 13-year high as investors bought cyclical stocks dealing in commodities. As for the Covid-19 situation, the government will lift its state of emergency by March 7. Vaccinations for the elderly will start on April 12 after medical personnel have been treated. 36 million vaccines will be delivered to municipalities by the end of June.
EMERGING MARKET The MSCI Emerging Market index was down 3.23% as of Thursday’s close. Taiwan and India outperformed other regions, closing in positive territory, while the MSCI China was down 6.73% on profit taking amid a growth-to-value rotation. Brazil was also down 7.54% as investors factored in a significant increase in political risk, mainly due to government interference in state-owned companies following the removal of the Petrobras CEO. China will allow more outbound investment by appropriately raising the quota on its QDII scheme in 2021, an indication that policymakers are willing to see more active two-way capital flows. Macau gaming stocks rallied on an easing in travel restrictions. In company news, Midia announced a RMB 14bn share buy-back, the largest in A-share history. Gree also started a share buyback over the week. Bilibili announced strong fourth quarter earnings and its guidance for the current quarter also beat estimates with an MAU (monthly active users) target raised to 400 million by 2023. Li Auto reported solid fourth-quarter results. Management said 200 stores would be opened by end-2021, a significant upgrade from its previous guidance of 120 stores, to prepare for product launches. NetEase missed analyst forecasts on earnings while revenue topped expectations. The company approved a new share repurchase program of up to $2bn. The Hong Kong Exchange posted record earnings for 2020, the latest sign of the city's resilience. However, the share price fell on concerns that turnover and valuations might be hit by higher dealing costs due to a rise in stamp duty. The city government announced a $15.5bn stimulus program that will be partly financed by an increase in stamp duty from 0.1% to 0.13%, the first rise since 1993. Taiwan’s entry ban on foreigners without a residence permit is expected to be lifted on March 1 amid an improvement in the Covid-19 situation. In South Korea, SK Hynix signed a five-year $4.3bn deal with ASML to secure EUV scanners. Hyundai Motor is recalling 82,000 electric vehicles equipped with LG Energy Solution battery cells due to a possible fire risk. Japan is planning to lift the state of emergency outside the Tokyo area a week earlier than scheduled as falling cases ease the strain on hospitals. India’s government lifted the embargo on private banks conducting government-related banking transactions. Reliance announced the reorganization of its oil-to-chemicals business, paving the way for a stake to be sold to strategic investors. Amazon said it was joining ICICI Bank and Axis Bank in applying for a payment service license. Axis Bank received regulatory approval to acquire a 12% stake in Max Life Insurance. In Brazil, the government presented the constitutional amendment draft (PAC) to allow further emergency aid to individuals. President Bolsonaro announced the replacement of Petrobras CEO by an army general who had been running the Itaipu dam. The government is to cut its stake in Eletrobras to 45% from 61% as part of a privatization move. Retailers Lojas Americanas and B2W rose on merger rumors. Weg announced another batch of strong quarterly results, boosted mainly by favorable domestic short cycle performance. Gerdau (steel company) reported robust fourth-quarter results with revenue up 42.9% YoY. South Africa’s 2021 budget plans for a reduced fiscal deficit. The corporate tax rate is to be cut from 28% to 27%.
CORPORATE DEBT CREDIT As in previous weeks, markets were preoccupied by the ongoing rise in US long-bond yields. The trend persisted even though Jerome Powell said reaching the Fed’s inflation target could take more than 3 years. US and German 10-year yields rose by 17bp and 7bp and the tension started to weigh on risk assets and credit. The Main and Xover indices widened by 2.5bp and 14bp, respectively. Cash bonds followed suit with Investment Grade and High Yield widening by 1bp and 2bp. Combined with higher rates, this led to returns falling by 0.4% and 0.13%. Interestingly, poorly rated companies gained, returning +0.08% and +0.35% for the simple B and CCC grades. In results news, revenues at Faurecia were down 17.5% to €14.6bn but were well above the €8.5bn guidance issued last October. The group beat all its second-half targets last year due to new orders hitting record levels. Despite non-essential stores being closed last November in France, fourth quarter sales at Moblux (But) rose by an impressive 11.9% to €528m, mainly thanks to online sales and click and collect. Verisure also performed well: fourth quarter sales rose 18.2% to €582m, or better than the €577m expected, and EBITDA jumped 41% over 12 months to €226.8m, also above the €215.8m expected. Although the pandemic ate into LKQ’s sales, S&P upgraded the group by one notch to BB+, citing 2020 cash flow of above $1bn and a reduction in leverage to $1.4bn. SoftBank Group launched a €2.25bn cash offer on its US dollar and euro-denominated bonds. It will be a Dutch auction and is set to expire on March 5 2021. Fourth quarter net results at Allianz fell 2.2% to €1.84bn, or marginally better than expected. Over a year, they fell 14% to €6.8bn. The group’s solvency margin increased sharply from 192% at end September to 197% by the end of the year. Due to the crisis, Allianz is not planning to increase its dividend or launch a share buyback program. On the new issues market, Equinix raised a total of €1.1bn with two green bonds, one for €500m at 0.25% due 2027 and the other for €600m at 1% due 2033. EasyJet raised €1.2bn over 7 years; the yield was revised down from an initial indication of 2.125% to 2%. Victoria PLC sold a 2026 maturity at 3.625%, raising €500m after strong demand led it to raise the amount from the initial target of €350m. CONVERTIBLES Several jumbo deals for a total of $9.16bn galvanized the new issues market. Mexico’s telecom operator, America Movil, raised €2.2bn with an exchangeable into KNP shares, the biggest telecoms group in the Netherlands. Following a failed bid attempt in 2013, America Movil currently owns 20.2% of KNP. Swedish streaming platform Spotify (345 million subscribers) raised $1.3bn to fund its plan to expand in 80 countries, mainly in Africa and Asia. Australia’s Afterpay (fintech) raised $1.17bn due March 2026. The company offers e-commerce customers a “buy now, pay later” scheme. Sales surged in 2020 due to increased use of online shopping. The company plans to use the proceeds from the issue to increase its stake in its US affiliate from 80% to 93%. In the United States, biotech Halozyme Therapeutics (oncology treatments) raised $700m at 0.25% due March 2027. Dropbox (file storage and sharing) raised a total of $1.31bn with two bonds, due 2026 and 2028. Enphase Energy raised $1.15bn also with two bonds due 2026 and 2028. The company is active in-home energy solutions like solar generation and home energy storage. In results news, tech stocks shone. China’s Kingsoft (software) saw sales jump 43% last year due to strong cloud and video game momentum. Palo Alto Network beat fourth-quarter expectations with $1bn in sales. Net earnings came in at $154m or 8% better than the consensus. The group also acquired BridgeCrew for $160m to reinforce its cloud security capacity. Fintech Square saw a sharp increase in sales and profitability in 2020 thanks to its Cash App and its bitcoin investments. The company plans to increase investments in the cryptocurrency. Results among highly cyclical companies were more mixed. Safran (aerospace systems) reported full-year profits of €352m despite a 33% drop in sales, all thanks to taking radical measures early in the Covid-19 crisis. The outlook, however, is still poor due to the sharp drop in air traffic. In contrast, although Royal Caribbean (cruises) reported a record $5.8bn loss for 2020, it was expected, and heavy bookings now suggest the group could recover more quickly than expected.

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