Weekly ECM update

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Weekly ECM update

29 Jul, 2019

Dear Reader,

Global equity markets were largely swayed by US – China trade negotiations and 1H results this week.


There are hopes for progress in US - China relations as Steven Mnuchin and Robert Lighthizer are set to resume talks in Shanghai. This prompted stocks to rebound from the previous week's losses and lifted the S&P 500 and the Nasdaq to record highs, finishing the week up +1.5% and +2.1% respectively.
 
In Europe, the ECB kept rates steady but signalled that it is prepared to cut short-term rates for the first time since early 2016. The call on European governments for fiscal stimulus is getting louder, with Mario Draghi saying that it is "unquestionable" that governments will need to pitch in with fiscal measures if conditions keep deteriorating. The ECB's dovish stance pushed the STOXX 600 up +0.9% for the week. The next policy catalyst is now the Fed policy announcement on Wednesday, where hopes are pinned on at least a 25bps rate cut, despite having an unemployment rate at its lowest point in 50 years and Wall Street at a record high.
 
As for Asia, shares rocketed on China's new Nasdaq-style board – the STAR Market – that debuted last Monday. However, dynamism in the global economy continues to be weighed down by prolonged policy uncertainty as trade tensions remain heightened and the HSI and HSCEI both closed the week down -1.3% and -0.5% respectively.
 
In Europe, 14 out of 20 sectors gained this week with Auto & Parts leading the way (+3.6%) driven by strong earnings from Faurecia and Pirelli. Our read on why warnings/misses have been bought in cyclicals (the likes of Continental, Daimler, Autoliv, Plastic Omnium) points to a reset leading to clearer H2 recovery story. Sentiment is that the sector is at a trough and our Auto team argue that Q2 should have seen the nadir for auto demand and production and that the sector could thus finally re-rate into well expected earnings cuts. On a YTD basis, Food & Beverages has this week re-taken the crown as the top performer (+28.9%), followed closely by Technology (+27.6% ytd, propelled by continuous inflows in European Semis, with ASML one of our top 10 traded stocks for the week with 73% better buyers).
 
The week has seen a slow-down of the long-observed momentum vs value trade, although we do not get the impression that the trade has been reversed and we are not seeing outright buyers of value. In this context, we are seeing distinction between Cyclicals vs Value, with buying focused on Autos and Industrials and away from Banks and Miners. Finally, while LOs have been buying into the market rally in Autos (cautiously and predominately form the US) and Tech – the buying has been more focused in defensive names overall.

CYCLICALS VS DEFENSIVES 


VALUE VS MOMENTUM

Most read research this week:

General Retail: "How do retail CEOs get paid?". What drives general retail CEOs beyond a passion for selling us our next t-shirt or television? We explore the impacts of CEO compensation on shareholder value and corporate strategy, detailing the metrics used and any significant changes to their weighting and target levels. For over half of our stocks, family or founder shareholder involvement means absolute total shareholder return is de facto the main incentive, and this is especially true for the large retailers... ESG plays a big role in corporate and brand communication, but barely features in compensation... Retail CEOs are typically incentivised to 3.5-5.0x their base salary. As well as TSR, sales and profit targets tend to be the main criteria. Profits are usually based on adjusted metrics, encouraging management to report below-the-line items. We believe this merits ongoing investor scrutiny... Only a third of companies directly incentivise capital discipline via ROCE or cashflow targets.
 
Food & HPC: "Reckitt Benckiser. Re: Lax – part II". In our recent report (see Re: Lax) we suggested that Reckitt's next CEO will likely materially rebase Health margins. While we have had no investor pushback on this suggestion, we have had many questions related to timing, what is priced in, substance, quantum, and HyHo margins... While we acknowledge that a Health margin rebasing may be largely priced in, we suspect it will be a debate that will run for some time, for it will likely not be until next year that we have clarity. In addition, beyond rebasing likely lies a long slog to return Health to more respectable growth.

Equity Capital Markets:

Only two ABBs and one CB priced this week for less than €1bn. Worldline (IT services, France)* issued a convertible to fund a recent acquisition - was upsized while pricing at best for the issuer (rare enough these days).

Things to watch out for this week:

    • Central Banks. On Wednesday, the Fed will hold its monetary policy meeting. We expect its Funds rate to be cut by 25bps to 2.0-2.25%. We will also look for changes in the forward guidance as markets are pricing in another rate cut by the end of the year even though the economic data remain quite favourable. The Bank of Japan and Bank of England will hold their policy meetings on Tuesday and Thursday respectively. No changes in key interest rates are expected. 
    • US data. The July Manufacturing ISM and the jobs report will give the first indications on the state of the US economy after Wednesday's FOMC meeting. We expect the change in Non-Farm payrolls to weaken after a very strong reading in June. The unemployment rate should be back down to 3.6% while earning growth could accelerate slightly to 3.2% y/y. The Manufacturing ISM is expected to improve to 52.5 after 51.7 in June, following rebounds in regional business surveys. 
    • European GDPs. French, Italian, Spanish and Eurozone first estimates of Q2 GDP growth will be out through the week. We expect France and Spain to outperform the Eurozone with +0.3% and +0.5% q/q growth in Q2 respectively, while Eurozone GDP growth should print at +0.2% q/q. Italian growth should be slightly negative after a disappointing quarter.
    • Chinese PMIs should remain broadly stable in July, as we forecast Official Manufacturing PMI to print at 49.6 after 49.4 in June, while Non-Manufacturing PMI should remain stable at 54.2. We expect the Caixin Manufacturing PMI, to be released on Thursday, to be stable at 49.4.
    • European Inflation. Inflation should weaken in July on the back of lower oil and energy prices. Softer inflation trends should be seen in Germany, France and Italy with the French CPI forecasted at 1.2% y/y after 1.4% in June or Italian inflation expected at 0.6% in July down from 0.8% for instance.
Have a good week.

****************************************

This week's statistics:

Stoxx 600 trading volume as % of 3-month average: 99%
Stoxx 50 volatility (VStoxx): range 12-14%, finishing on 13%

ECM Volumes 2019YTD:

#EMEA €74.9bn
#US $148.8bn

Index performance:

This week: 

Stoxx 600 (+0.9%)
S&P500 (+1.5%)
Nasdaq (+2.1%)
HSI (-1.3%)
HSCEI (-0.5%)                 

Stoxx 600 sector performance:

This week:

Best: Auto & Parts (+3.6%)
Worst: Insurance (-1.6%)

2019YTD:

Best: Food & Beverages (+28.9%)
Worst: Telecoms (-1.1%)

Country performance:

This week:

Best: Luxemburg (+4.9%)
Worst: Hungary (-1.8%)

2019YTD:

Best: Greece (+45.2%)
Worst: Ukraine (-3.3%)

Deals priced this week (> €100m):

- Worldline, €600m, CB (France – Payments)* 
- Elis, €210m, ABB, (France – Business Services)
- Hugo Boss, €100m, ABB (Germany – Fashion)

*BNPP led

Andreas Bernstorff 
Head of Equity Capital Markets 
BNP Paribas
Extel 2017 & 2018 - Exane BNP Paribas #1 Equity House

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