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Businesspeople discussing financial results

Investors had plenty to look forward to this week. Apart from macroeconomic numbers, including inflation, and speeches from US central bank chairmen, the results season is upon us again.

Six days of financial market optimism came to an abrupt end last Tuesday Ben Steinebach Ben Steinebach Head of Investment Strategy

After a quarter marked by financial market turbulence – due in particular to declining growth in the emerging markets – a few nerves are in evidence as we wait to see how badly this has affected the earnings of multinationals. Thirty-six of the companies making up the S&P500 index published their third-quarter figures, including the big US banks and leading businesses like Intel, Johnson & Johnson, Schlumberger and, on Friday, General Electric. Schlumberger’s figures in particular are interesting for what they tell us about the current state of the oil sector. In Europe, the German software developer SAP, luxury goods manufacturer LVMH and food giant Nestlé all published third-quarter figures. ASML and Unilever were in the spotlight in the Netherlands. Investors could also take satisfaction from some big takeovers and IPO announcements.

Increased grounds for concern?

Six days of financial market optimism came to an abrupt end last Tuesday when the prices of risky assets like shares, oil and base metals (copper and zinc, for instance) fell on disappointing import and export figures from China. The following reasons were cited:

  • Declining inflation in China, the United States and Europe;
  • A sharp dip in the confidence of German investors in their economy (ZEW index);
  • Speeches by US central bank chairmen that offer investors little guidance as to precisely when the Fed will decide to raise its key rate; and
  • The continuing slide of emerging market currencies, particularly those of commodity-exporters like Colombia, Russia, Indonesia, Brazil and South Africa.

All this is sparking uncertainty about the state of the world economy. Investors don’t like that, as it leads to volatile markets. We share these concerns in the short run, which is why we think the Fed will not raise its key rate until next year.

Investors shook off such worries on Thursday. More and more economists take the view, as we do, that interest rates are going to stay low for longer. This made for a positive mood, since higher interest rates generally make it less attractive to invest in equities.

Start of a new takeover cycle?

Apart from company results, a whole lot of major new acquisitions caught the attention. The Belgian-American brewer AB InBev – number one in the global beer market – announced a bid for its South African rival and world number two SAB-Miller. The bid is worth over USD 100 billion, with USD 60 billion to be funded through the issue of bonds. The same goes for computer maker Dell’s announced takeover of the cloud services supplier EMC. In this case, USD 45 billion is being borrowed for the acquisition via a bond offering. Low interest rates are making it easier for companies to fund acquisitions like this.

In addition to takeovers, new companies are coming to market. Intertrust, for instance, was launched on Euronext Amsterdam at an issue price of EUR 15.50 per share. Ferrari’s IPO was announced in Italy and the sports car manufacturer is also expected to be granted a listing on the New York Stock Exchange this month.

Corporate results better than expected

American companies lead the way when it comes to the speed with which they publish their quarterly figures. The results of the five biggest US banks were more or less in line with expectations. Wal-Mart shares were Wednesday’s worst performer. The world’s largest supermarket group is predicting a sharp dip in earnings next year due to the increase in the minimum wage from USD 9.00 to USD 10.00 per hour and investment in new online sales channels. The stock price slid almost 10%, knocking just under USD 20 billion off Wal-Mart’s market value. SAP had better news to report: the German software developer expects revenues and profit from its cloud operations to grow further in the years ahead. The darling of the Dutch stock market – chip equipment maker ASML – presented its third-quarter figures on Wednesday. CEO Peter Wennink used the occasion to sound a note of caution about the future. ‘Chip producers are becoming more hesitant with their orders as Chinese economic growth slows down.’

Nestlé, the world’s largest food producer, is taking a more cautious line on sales growth in 2015. During the presentation of the third-quarter figures, CEO Paul Bulcke cited factors including a slower-than-anticipated recovery in Chinese sales. Nestlé was also adversely affected by a prohibition on the sale of Maggi noodles in India. Investors can look forward to more company news next week, particularly from listed US companies. Expectations may not be high, but in a market like this in which there is a considerable amount of uncertainty, both positive and negative surprises can have major repercussions.

Ben Steinebach’s column was written this week by Mark Schneiders.


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