Cyclicals with exposure to international tourism underperformed
The eurozone rebound is still in place
We are still neutral on risk assets
Risk assets saw strong returns in the first half with US and European equities posting gains of more than 15% (in their respective currencies).
Over the last few days, however, Covid developments began to loom large on markets as investors hesitated between the ongoing reopening of economies/vaccination progress and the spread of the Delta variant across the globe. Returns in Asia faltered due to fresh local restrictions and weaker-than-expected economic data. In Europe, where vaccination rates are high, the UK’s experience is reassuring. Infections there have accelerated but for the moment there has not been a sharp rise in admissions to intensive care units or deaths. Even so, cyclicals with exposure to international tourism underperformed. At the same time, consumer confidence and investor sentiment surveys confirmed that the eurozone rebound was still in place. Only US stocks held up and that was thanks to the Conference Board’s consumer confidence index for June coming in at 127.3, or higher than the 119 expected. Future jobs data will be crucial in assessing when the Fed might tighten and by how much. As a result, the dollar strengthened although doubts over the pandemic's trajectory kept rates low. The increase in risk aversion over the week was reflected in the almost 10bp drop in 10-year US and German government bond yields.
In our view, the scenario of an economic recovery amid the easing of sanitary restrictions is still valid. We are consequently still neutral on risk assets but with a preference for European and Chinese equities. In fixed income, we remain cautious on government bonds and prefer corporate debt.
EUROPEAN EQUITIES
Markets were caught between the spread of the Delta variant and another batch of reassuring economic data. Manufacturing PMI in the eurozone hit an all-time high of 63.4 in June, up from 63.1 in the previous month. European equity indices also closed out the first half with strong returns. The CAC 40, in particular, rose 17%, its best first half showing since 1998.
The week also saw guidance upgrades from companies riding on reopening economies and accelerating structural trends. Sodexo, for example, now expects sales this year to rise 15%, up from 10/15% previously. Momentum is strong in the US, which accounts for 40% of sales, as schools reopen. Rexel (distribution of electrical, heating, lighting, and plumbing equipment) raised its sales guidance for 2021 from +5/7% to +12/15%. The company continues to benefit from the economic recovery, its digital transformation, and higher prices.
Results at Trigano (camping cars) beat expectations and management is to increase prices for its vehicle range by 5/10% in 2022. The company expects to capitalize on buoyant demand in Europe (30% market share), a 15-20% increase in capacity and more acquisitions.
The dynamic IPO market welcomed Acciona Energias, a Acciona subsidiary, a global leader in renewables. Daimler’s finance director, meanwhile, said the spin-off and listing of its truck division was proceeding well and expected to occur before the end of 2021.
Ahead of its half-year results, EssilorLuxottica said its acquisition of GrandVision had been completed. The deal will rebalance the group’s geographical focus towards Europe. It also promises several synergies, notably by enhancing Essilor and Luxottica’s products in GrandVision's outlets.
In M&A, Faurecia and Plastic Omnium expressed an interest in Germany’s automotive parts supplier Hella. Insurance group Covea, meanwhile, is reportedly interested in the reassurance business that AXA received when it bought the US group XL.
In the utilities and energy sectors, Engie launched the sale of its multi technical services division -now known as Equals- and the Suez board approved the tie-up with Veolia.
US EQUITIES
Indices had a good week with the Dow up 1.28%, the S&P 1.25% better and the Nasdaq rising 1.06% even as concerns mounted over the rapid spread of the Delta variant. Transport and hotel stocks were hit by new restrictions in Asia, rising Covid cases in Russia, Brazil and South Africa and restrictions on people travelling from the UK. However, markets benefited from upbeat macro indicators reflecting a vigorous recovery in the US economy. Consumer confidence for June hit 127.3, a high not seen since the pandemic began. US house prices rose 14.9% YoY, their biggest annualized increase since December 2005 and job creations came in at 692,000, or higher than the 600,000 estimated.
Meanwhile, Philly Fed chair Patrick Harker said a $10bn reduction in monthly asset purchases would only be reasonable and should start this year. The IMF, however, said the Fed could taper from the first half of 2022 and probably raise rates later in the year or at the beginning of 2023.
Following the convincing results of the Fed’s bank resilience test, several banks said they would be giving more back to shareholders. Morgan Stanley doubled its dividend and announced a $12bn share buyback. Wells Fargo also doubled its payout and unveiled a $18bn share buyback. Bank of America upped its dividend by 17%.
Against all expectations, Brent crude rose above $75, its highest level since October 2018, ahead of the OPEC summit.
Nike hit an all-time higher as consumers spent more than expected amid a decline in the pandemic in most parts of the globe.
Amazon and Google are both being investigated in the UK for allegedly failing to protect consumers against an avalanche of bogus recommendations.
Virgin Galactic soared 38.8% after getting the green light from the Federal Aviation Administration to send clients into space.
Online brokerage Robinhood, which made commission-free trading popular and was massively used by individual investors punting on GameStop and AMC Entertainment, filed for an IPO with the SEC. The company has 18 million clients and sales rocketed 245% last year to $958m.
JAPANESE EQUITIES
Investors remained in risk-off mode and the NIKKEI 225 and TOPIX ended the period 0.58% and 0.41% lower. The market continued to hope for economic recovery as vaccinations progressed, but sentiment was affected by spreading variants. At the same time, uncertainty over the real state of China’s economy dragged down export companies.
Iron & Steel (1.95%), Retail Trade (0.98%) and Insurance (0.66%) rose from relatively cheap valuations. On the other hand, cyclical sectors including Mining (-3.34%), Marine Transportation (-2.93%) and Real Estate (-2.38%) all declined.
Stocks related to individual consumption gained for the week. Shiseido rose 3.98% on the completion of the transfer of its personal care division to CVC Capital Partners. Seven & I gained 3.29% on expectations of upbeat earnings. In sharp contrast, Eisai plunged 11.14% on profit-taking.
Covid-19 infections increased again after the lifting of the state of emergency. The country will soon be hosting athletes for the Tokyo Olympic games but events could be held without spectators if preventive measures are extended after July 12th.
EMERGING MARKET
The MSCI Emerging Market index was down 0.75% as of Thursday’s close. China outperformed other regions, retreating by 0.56%, followed by India (-1.43%) and Brazil (-2.77%).
In China, industrial profits rose 36% YoY in May with growth slowing due to base effects and rising costs. June Manufacturing PMI edged lower to 50.9 from 51 in May, vs. 50.8 expected, while non-manufacturing PMI dropped to 53.5 due to a resurgence in Covid cases. Municipal bond issuance picked up with the recovery in corporate bonds: new lending for the first 25 days in June was already running at 112% of the full month of June last year. The US Congress approved $52bn to boost US research and development in domestic semiconductor manufacturing. This is in response to China’s challenge to US economic supremacy. Hong Kong and Macau are rumored to be mulling resumption of limited travel as soon as mid-July. Li Ning made a positive profit alert after more than 30% YoY revenue growth in the first half. CATL extended the Tesla Lithium-Ion battery supply agreement by 3 years to 2025. AIA agreed to buy a 24.99% China Post Life stake for $1.9bn. Chinese cities rolled out affordable public summer courses for 1st to 5th grade students to address concerns of AST over competition among parents. Didi, China's largest ride-hailing platform, raised $4.4bn in its IPO. It was valued at $68bn after its first day of trading in the US, making it the biggest IPO haul for a Chinese company since Alibaba Group listed in 2014. In Korea, June exports rose +39% YoY, vs +33.8% expected and +45.6% in May. May Industrial Production fell 0.7% MoM, the third down month in a row, as chip shortages led to automakers adjusting production. SK Innovation is considering a spin off and IPO of its battery business to meet rising EV demand.
In India, June Manufacturing PMI moved below 50 to 48.1 for the first time in 11 months due to the second Covid wave. The finance minister announced a Rs75bn credit guarantee to facilitate loans through micro-finance institutions and covering 75% of default amounts up to 3 years. India moved 50,000 additional troops to its Chinese border, taking the total to 200,000, up from 100,000 last year. The government granted emergency approval for Moderna's Covid-19 vaccine. Cipla has been allowed to import the vaccine. Reliance signed an agreement with Abu Dhabi National Oil Company to set up a petrochemical factory in Abu Dhabi.
In Brazil, bank loans continued to accelerate in May to 16% YoY, vs 15% in April. Retail loans rose, indicating NIM expansion in the second quarter. Led by services, 280,000 jobs were created in May, or better than the 150,000 expected. The second part of the tax reform was presented to Congress. It includes taxes on dividends, corporate tax reductions and the end of the interest on capital tax shield. The market reacted negatively as expectations were for a higher corporation tax rate reduction to fully offset the new tax on dividends and the IOC tax shield. The bill is still in negotiation. If the bill is approved as proposed, Itau will be net negatively affected as it benefits from the IOC tax shield.
The MSCI reclassified Argentina as a Standalone Market.
CORPORATE DEBT
CREDIT
Markets turned nervous again as the Delta variant spread. Equity markets fell and credit spreads rose with the Main and Xover up 0.5bp and 4bp. However, yields fell, offering some relief for credit markets. Despite spreads widening by 1bp and 9bp, IG and HY bonds returned 0.21% and 0%.
In company news, Picard posted excellent fourth quarter results for its FY 2020/21. Sales rose 10.3% to €431m; in the fourth quarter of the previous financial year, they were up more than 15% due to households stockpiling at the start of the pandemic. For the full year, sales rose 17.7% to €1.77bn and EBITDA was up 26.9% to €327.7m.
United Airlines is betting on a strong recovery in air travel in the US. The group made its biggest order ever, including 70 Airbus A321neo for a catalogue price of €35bn.
S&P raised the outlook on IGT (BB) from negative to positive, citing improved performance in its lottery business thanks to higher revenues and lower costs.
On a relatively dynamic new issues market, Picard raised €1.71bn with three tranches of Sustainability Linked Bonds (SLB): €1.4bn in secured debt over 5 years including €750m at 3.875% and €650m at Euribor 3 months +400bp, as well as €310m in non-secured bonds at 5.375% over 6 years. Elior (contract catering) raised €550m with a senior bond at 3.75% due 2026. UniCredit sold a CoCo at 4.45%.
CONVERTIBLES
New issuance remained as active as in previous weeks with a total of $1.2bn raised. Japan’s Mercari Inc (e-commerce) raised $450m in two tranches, 2026 and 2028. The company offers a flea market application which has proved highly successful in Japan. Management is now trying to speed up expansion in the US. In Taiwan, United Microelectronics raised $400 with a July 2026 maturity. The proceeds will go on buying production equipment to meet accelerating demand for semiconductors.
German tour operator TUI announced an up to €190m tap on its €400m issue last April. The proceeds will help the company refinance, notably by repaying loans made by Germany’s development bank KfW. Meyer Burger Technology AG raised €125Mn at 2.75% with a green convertible due 2027. The company has been active for 20 years in the photovoltaic industry and markets a solar module product range.
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