Weekly ECM Update - BNP Paribas - BNP Paribas Corporate & Institutional Banking

Weekly ECM update


Weekly ECM update

11 Dec, 2019

Dear Reader,

Global equities struggled to find a real sense of direction this week, as trade news continued to dominate stock markets. Reports early in the week suggested a turn for the worse and stocks tumbled as a result, but positive comments from President Trump, alongside solid economic data from both the US and China, helped market complete a turnaround by Friday.

US stocks began the week suffering their worst two-day loss in almost two months - largely due to negative trade news. On Monday, President Trump's decision to reinstate steel and aluminium tariffs on Argentina and Brazil weighed down on markets, while on Tuesday stocks were sharply down after President Trump suggested he may prefer to wait until after the 2020 presidential elections to finalize a trade deal with China. Over the week, smaller-cap benchmarks outperformed large-caps for the second consecutive week. Within S&P 500, consumer staples - led by Proctor & Gamble - outperformed, while the industrial and transport sector lagged behind.
Despite sharp drops on Monday and Tuesday, European equities were largely flat for the week, with Stoxx 600 ending the week +0.0% after a strong 1.2% performance on Friday. Eurozone inflation ticked up in November after consecutive months of declines, as the CPI increased 1.0% from a year earlier ahead of the 0.9% consensus. This reading will be welcomed by the ECB, which stated last week that below-target inflation was the main reason for yet another interest rate cut. Retail (+1.9%) was the best performing sector of the Stoxx 600 last week – also reflected in our trading flows where we were overall buyers of consumer stocks. Throughout the week, Germany's export focused DAX index fell 0.5%, while the UK's FTSE 100 dropped by 1.6% due to a strengthening pound from polling data suggesting the Conservative Party remains likely to secure a strong majority.
European equity ETFs saw inflows of $1.6bn last week, with US and Emerging Market exposure most in demand. UK focussed ETFs also saw continued inflows and our Delta 1 desk have seen clients looking to structure "UK domestic" equity baskets over the past couple of weeks. On a style-factor basis, ETFs offering exposure to Value saw the biggest inflows with only Low Volatility seeing outflows. European Utilities, Technology and Healthcare were the stand-out sectors for inflows. On the flip side, Financials saw the biggest outflows. 

In Asia, equities traded in line with the flow of trade news, just like those of Europe and the US. China wants tariffs to be rolled back as part of the phase one trade deal with the U.S, while warning that interfering in China's internal affairs and applying pressure on the country to buy commodities could threaten the deal. Japan's prime minister, Shinzo Abe, unveiled a new stimulus package of $120bn to boost an economy facing declining exports and lower consumption from the recent sales tax increase. The spending program is expected to boost GDP by 1.4% through 2021. The HSI and HSCEI closed the week up by 0.6% and 1.0%, respectively.

Trade tension and uncertainty continues to be a drag on global economic growth and equities. Estimates for 2020 suggest trade uncertainty could slow economic growth by close to 1% vs. the base case scenario, and by more than 0.5% in 2019 and 2021 (figure 1 below). With President Trump's comments this week suggesting a solution to the US/China trade war may not be reached until late in 2020, it may be the case that trade worries will continue to be a drag past current estimates. Unsurprisingly, the trade war is impacting US business investments as managers delay large scale investment to a time where they have a more clear outlook. Exane BNP Paribas estimates that business investment growth could contract by as much as 4% annualized in the second half of 2019, with trade uncertainty forecast to have a significant negative impact into 2021 (figure 2 below).

Figure 1: Impact of trade war on global GDP growth (% deviation from baseline)

Figure 2: US business investment growth (quarterly annualized, %)

Commodities:  OPEC met on Friday to discuss production cuts, with talks still ongoing. Analysts speculated that Saudi Arabia, having produced below its target, would push hard for an extension of output cuts (below, left) through at least the middle of 2020, as experts warn the crude market could be heavily oversupplied next year. Saudi Arabia's target appears to be reassurance of current prices rather than raising the crude price much above current levels. The Stoxx Oil & Gas sector is trading at a 2-year relative low against the market (below, right), which can partially be explained by the oil price in the low 60s also being towards the bottom of the recent range. However, valuations look interesting at only 11.5x 12m forward P/E vs 14.7x for the broader market.

Figure 3: Crude Oil Production OPEC vs Russia y/y %

Figure 4: EU Oil Sector Relative Market

On strategy - Global equities have experienced a rally YTD: is there anything left in the tank? - Yes, but it will likely have to come via earnings

Following the rally, global stock valuations are no longer at a discount. Below we highlight the Trailing PE multiple, which is now in-line with historical norms. Barring a further re-rating in multiples, earnings will have to do the heavy lifting when it comes to 2020 returns. On this front, if the consensus of sell-side bottom up analysts is to be believed, global earnings growth is forecast to accelerate to c. 10% in 2020. Without any changes in PE multiples, this would suggest 10% price returns in 2020. However, barring 2017 and 2018, the consensus has usually been over-optimistic. With this is mind, how should we frame the earnings outlook for 2020?

Figure 5: Valuations in Line With History

Figure 6: Consensus Forecast 10% EPS Growth in 2020 .... we've shown this chart before but it's worth looking at: read the lines from left (2012) to right (2020), consensus market EPS forecast over 12 months of each year. In every year except 2017 & 2018, forecast EPS growth was materially lower in December than January....and always start January at about 10% EPS growth...

Ultimately, the call on global earnings comes down to two factors: Global Manufacturing PMIs and the US Dollar. Global EPS growth has followed global manufacturing PMIs with a lag of 6 months. And adding the dollar significantly improves forecasting ability. Our model in Figure 8 highlights this. Since the turn of the century, a combination of PMIs and the dollar has helped explain Earnings Growth. That is, to forecast 2020 earnings growth we need to estimate the levels of (i) Global Manufacturing PMIs in June 2020 (because of the 6m lead) and (ii) the dollar in December 2020. Therefore,  if Global manufacturing PMIs recover to 51 from 49.8 today, and the dollar remains flat, global EPS growth should recover to 7%.

Figure 7: Global EPS Growth Follows Manufacturing PMIs with a 6m lag

Figure 8: Our Global Earnings Model Suggests 7% EPS Growth

Most read research this week:

Video games: So many ways to play
- What do you do with a market that doubles in seven years? If it's video games, we'd advise playing it...  And it's not just because the sector's in full flight. A series of macro and technological trends are opening out new angles to differentiate the top players. We pick out ten key dynamics, analyse their wider impact and show who's well placed to ride the wave. We also show who can best monetise their assets, whose pipelines are strongest and, with our 15-indicator scorecard, who's in good shape across the board. We launch on the three leading US names. We are Outperform on Activision-Blizzard and Electronic Arts. We recognise Take Two's quality, but do not believe its 40% premium relative to peers is sustainable: we are Underperform. We reiterate Outperform on Ubisoft.
Paper & Packaging: Thinking outside the box
Last Christmas we gave you Europe; this year we're bringing you the US. Yes, Paper & Packaging is a sector that keeps on giving. Not that it looks like that now, after a tough 2019 and sustained price pressure likely to keep a lid on earnings in 2020. But there's still enough for investors to stay in the game. We forecast appealing FCF and dividend yields for next year. Beyond, we see patience being rewarded as a pickup in demand in 2020 finally feeds through to revenues. We provide detailed analysis of the market and key trends, including the impact of China's National Sword policy and how the players are positioned to harness the plastics-to-paper transition. We initiate on both WestRock and International Paper with Outperform and Packaging Corp of America with a Neutral. 

Equity Capital Markets: 

Setting Saudi Aramco aside, we observed a healthy volume in EMEA ECM this week with just over EUR 3bn in activity driven mostly by a number of ABBs and a large convertible bond. When including the Saudi Aramco IPO of up to €23,170m (including greenshoe), EMEA ECM volumes surpass €26bn, which is the highest weekly volume ever seen in EMEA.

Saudi Aramco priced its shares at the top of the range (SAR 30 –32) at 32 riyals, valuing the company at $1.7tn and making it the largest ever IPO, ahead of Alibaba. The offer is 100% secondary shares offered by the Government of the Kingdom of Saudi Arabia principally to domestic investors.

Elsewhere, Ocado issued a £600m (€696m) guaranteed senior unsecured CB due 2025, upsized from an initial £500m due to strong demand. Coupon will be 0.875% (range of 0.75%-1.25%) with conversion premium 45% (range of 40%-45%). The issue follows Ocado's deal with Aeon of Japan and proceeds will be used to fund capital expenditure in relation to Ocado Solutions' commitments and general corporate purposes.
*BNPP led

Things to watch out for this week:

    • Central banks: Busy week for central banks. The Fed will announce its rate decision on Wednesday and no policy change is expected. The ECB will also announce its rate decision on Thursday. The "Wait and see" stance and dovish tone from the new ECB president should prevail. However, behind this, we expect the ECB to stop cutting its growth or inflation forecasts. We even see the possibility of an upward revision to the inflation forecasts. This should help to strengthen our case for higher, not lower, inflation next year. 
    • Politics: UK general election on Thursday and EU leaders meeting in Brussels are expected on Thursday.
    • US data: Are expected to print on the positive side.  Inflation for November will come out Wednesday, with headline expected to accelerate to 2% y/y while core inflation should remain stable. On Friday, retail sales data will be released and we expect a moderate increase. 
    • Eurozone data: It could be a mixed bag with, on one side, the German ZEW survey on Tuesday to move further up. On the other side, Eurozone industrial production on Thursday should drop despite an expected rise in France. France business sentiment on Monday should soften.
    • China data: November Trade data out on Sunday are expected to edge up thanks to a recovery in exports. We expect inflation (on Tuesday) to remain stable. Credit growth data will also be released next week (on Tuesday), and should edge up.
Have a good week.


This week's statistics:

Stoxx 600 trading volume as % of 3-month average: 94%
Stoxx 50 volatility (VStoxx): range 13.1-17.9%, finishing on 14.1%

ECM Volumes 2019YTD:

#EMEA €145.1bn
#US $251.6bn 

Index performance: 

This week: 
Stoxx 600 (+0.0%)
S&P500 (+0.2%)
Nasdaq (-0.1%)
HSI (+0.6%)
HSCEI (+1.0%)          

Stoxx 600 sector performance:

This week:
Best: Retail (+1.9%)
Worst: Telecoms (-2.4%)

Best: Construction & Materials (+35.7%)
Worst: Telecoms (2.6%)

Country performance:

This week:
Best: Turkey (+1.8%)
Worst: Poland (-4.0%)

Best: Greece (+42.4%)
Worst: Poland & Ukraine (-8.9%)

Deals priced the last week (> €100m):

- Saudi Aramco, €23,170m, IPO (Saudi Arabia, Oil & Gas)*
- Sanlorenzo, €176m, IPO (Italy, Luxury Yacths)
- Sophos, €366m, ABB (UK, Software)
- Entra, €335m, ABB (Norway, Real Estate)
- Zurich Airport, £262m, ABB (Switzerland, Infrastructure)
- BAWAG, €250m, ABB (Austria, Banks)
- Cancom, €174m, ABB (Germany, IT Services)
- Boohoo, €165m, ABB (UK, E-commerce)
- Frey, €162m, Rights Issue (France, REIT)
- Tinc €113m, Rights Issue (Belgium, Infrastructure)
- Ocado, €696m, EQL (UK, Retail)

Deals ongoing (> €100m):

- Juventus, €300m, Rights Issue (Italy, Football Club)*
- Selectirente, €190m, Rights Issue (France, REIT)
- SBB, €140m, Rights Issue (Sweden, Real Estate)

*BNPP led

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

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