Robust US figures outweighed by Chinese cooling

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The global financial markets were back in risk-averse mode in the past week. The Ukraine-Crimea-Russia stand-off definitely had something to do with it, but a cooling Chinese economy would appear to be just as important.

A series of poor data on the Chinese economy in the past week explain why Asian stock markets were hit so much harder. Ben Steinebach Ben Steinebach Head of Investment Strategy

Risk aversion was visible in both the equity and bond markets: share prices came down 2-3% on average in the United States and Europe, and in Germany even by over 3.5%. The Crimea situation hasn’t changed all that much: the past week only saw verbal posturing, with Europe and the United States denouncing the referendum as illegal and unconstitutional. So it’s a matter of wait and see whether the Crimea’s citizens will come out and vote, while armed conflict would seem unlikely.

In fact, I would offer another factor as more instrumental to the negative mood in the markets: the release of a series of poor data on the Chinese economy in the past week. That would also explain why Asian stock markets were hit so much harder: Japan’s Nikkei 225 by over 6% and the Hang Seng Index by 5%. Chinese exports for February dropped 18% on the comparable period and industrial product growth for the same month declined to a little over 8.5% compared to January. No cause for alarm, we’d say: these developments reflect trends in Chinese policy to emphasise private consumption and de-emphasise investment and exports, and we think it highly unlikely that China’s economic growth will dip very far below the government’s 7.5% target.

Dutch companies hit acquisition trail
In the Netherlands, the corporate news centred on acquisitions, with a few stragglers reporting their fourth-quarter 2013 results. The AEX languished below 400, closing as low as 386 on Thursday. A number of names were on the acquisition trail this past week. Anglo-Dutch player Unilever bought a majority stake in China’s water purification company Qinyuan for an undisclosed amount, the company’s biggest acquisition in China in a decade. Qinyuan’s sales of €140 million may be a mere 0.3% of Unilever’s, but this strategic buy is an excellent fit for its Dutch subsidiary Pureit, which is active in the same sector – a market that has grown by an annual 20% in the last three years.

Aalberts made a similar strategic move: it took over US company Nexus Valve, a market leader in flow control for the HVAC industry, generating annual revenues of about $20m with 60 employees. Ahold bought 50 Czech Spar stores for a consideration of €190m, increasing its Czech store numbers to 334. Boskalis, Twentse Kabel Holding (TKH) and Fugro all posted their fourth-quarter 2013 results. Fugro’s figures were very lacklustre indeed, with its Geoscience division detracting the most from corporate performance. Turnover at Geotechnical disappointed, but profits remained solid, while the reverse was true for the Survey division. TKH released results that were rather more in line with expectations, while Boskalis’s figures beat expectations. That said, the work in progress portfolio was disappointingly subdued.

Brisk issuance in bond markets
Bond markets reflected the subdued mood. Prices were up as a result, with robust issuance also contributing. Positive economic data from the United States, where winter finally seems to be drawing to an end, would, in the normal course of events, put upward pressure on yields. Instead, global markets witnessed downward pressure, for three reasons: central banks have made it very plain that they’re aiming for low interest rates for the time being; risk aversion caused investors to seek refuge in traditional safe-haven German bunds and US Treasuries; and many issuers made the best of low interest rates by issuing new loans in response to high demand. Ireland, for one, issued a €1bn 10-year loan at 2.97%, the United States issued 3-year and 10-year paper to the tune of $30bn and $21bn and at 0.8% and 2.73% respectively, while Italy and the United Kingdom also successfully tapped the markets at rates below those recently demanded. And new issuance wasn’t restricted to government loans either: companies also successfully issued new paper, although supply wasn’t abundant enough to meet all the demand.

Out with corporate results, in with macroeconomic data
The results season is drawing to a close and investor focus will now shift to macroeconomic indicators, while the Crimean stand-off is bound to keep making headlines even after Sunday’s referendum. Two companies left to go in the results season, with Imtech due to release its numbers in the Netherlands and Nike claiming our interest in the United States. A key gauge in the macroeconomic data slated for release will be the February inflation figures for the Eurozone, as a further decline might prompt the European Central Bank to bump up monetary stimulus.

Inflation figures are also due out in the United States, while the release schedule includes consumer confidence figures in the European Union and the Netherlands – indicating how willing consumers are to loosen their purse strings. Germany will post the latest ZEW indicator, which captures investor willingness to invest in Germany – and the eurozone. The United States will see industrial production data in February and the first March readings on the Philly Fed Index, while of course we’re also awaiting the outcome of the Crimean referendum – although it would come as a surprise if the population rejected incorporation into Russia.


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