Investors continue to avert risk

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Although stock markets, particularly in the US, rebounded on Wednesday and Thursday, investors were risk-averse for most of the week. On Thursday, shares everywhere traded lower than levels seen last Friday. One notable exception was the Shanghai Stock Exchange, which, despite being the epicentre of all the turmoil, saw share prices gain an average of one percentage point.

Oddly enough, investors are suddenly concerned that the weakening dollar (which shed four cents this week) is an indication that the US economy is deteriorating... Ben Steinebach Ben Steinebach Head of Investment Strategy

Oddly enough, investors are suddenly concerned that the weakening dollar (which shed four cents this week) is an indication that the US economy is deteriorating – while the poor figures on the US industrial sector published last week were actually the result of the appreciation of the dollar over the last year and a half. Accordingly, business competitiveness has weakened, particularly in the manufacturing industry. The purchasing managers index for the services sector fell in January to a still very respectable 53.5 points, admittedly down from over 55 points in December. Yet this fall, together with the decline of the dollar, was seized on as an indication that the entire US economy is weakening and perhaps even going into a recession. Low oil prices continue to wreak havoc in the markets. Because they don’t reflect a recession (after all, unemployment is falling everywhere, wages are increasing, albeit slowly, and Western economies are growing), they must be a result of abundant oil supplies, which, in turn, boost purchasing power and, more generally, the world economy as a whole.

Risk-averse investors flee to bonds

Because of the continuing turmoil in the financial markets, investors are again retreating to bond markets, which they see as safe under current conditions. Government bond yields have again fallen to low levels (e.g. to 0.3% in Germany and to 1.9% in the US).

Yields fell in the Netherlands and France, too, but Italy and Spain are apparently not considered to be safe havens, as interest rates there rose slightly. In Spain, the main cause is the current political impasse resulting from the formation of a new government. Owing to the fall in interest rates in the major government bond markets, interest rate differentials with corporate bonds actually increased slightly. In these bond market segments, interest rates hovered at levels previously achieved. Given the current situation, the Federal Reserve could decide to moderate somewhat its plans to raise interest rates (we still expect the next hike to come in June). Conversely, the slightly weakened dollar could mean that the European Central Bank and the Bank of Japan will be more likely to intensify their stimulus measures.

Another week of corporate results

Again last week, many companies presented their fourth-quarter results. These varied in character, with energy companies posting poor results and financial institutions exceeding expectations with surprisingly good figures.

Most US companies have now published their Q4 2015 results. Approximately 78% of all companies in the S&P 500 presented better-than-expected earnings, 46% also recording better-than-expected turnover.

There was also a fair amount of M&A news, in which Chinese firms featured prominently. When the Midea Group doubled its stake in the German robot manufacturer Kuka to 10%, Kuka shares also gained 10%. This is yet another sign that the Chinese are doing all they can to gain a foothold in highly innovative Western companies, of which Kuka is certainly an example. Another is the Swiss biotech seed producer Syngenta, which recently rejected a USD 46.2 billion takeover bid from US-based Monsanto, a move that resulted in its CEO being forced to step down. But Syngenta bit when the Chinese state-owned ChemChina made an offer of USD 43.2 billion (incidentally, the biggest bid ever made by a Chinese company). Syngenta generates a quarter of its turnover in the US, so US regulators may well block the deal. They recently opposed the acquisition of Lumileds (Philips) by the Chinese firm Go Scale Capital for a similar reason.

Last week’s focus in the Netherlands was on results from KPN, Royal Dutch Shell and ING. KPN’s figures were somewhat disappointing – despite a better-than-expected free cash flow (thanks in part to its growing customer base), its fourth-quarter turnover and earnings were both down 8% compared to the year before, mainly as a result of a disadvantageous change to Dutch tax legislation. Hardly surprising given the low oil prices, Royal Dutch Shell also posted poor results. The company does intend to maintain its dividend policy, but that will require an increasing number of divestments (or fewer new investments) and possibly even capital market borrowing. Although the company could conceivably shoulder more debt, such a move, together with a frugal investment policy, will weaken Shell’s future position. ING, for its part, presented good results and strong underlying profit growth (from EUR 548 million to EUR 822 million). Like many other banks having published results in recent days, ING announced that it had been able to reduce its provisions for bad loans as well as its exposure to the oil and gas sector. European stock markets shed around 4% of their value in the four days up to and including Thursday, which is more than double that of the US stock markets. On Thursday, the Amsterdam Exchange Index (AEX) had slipped 3.1%, having fallen to 417.94 points, compared to last Friday. This morning, the index had rebounded slightly to 419.50 points.

Little macro-economic news and unremarkable corporate results

We expect little news in the coming week. It’s unusually quiet on the macroeconomic front, and although a flood of corporate reports is expected, the companies concerned aren’t that noteworthy.

By the time you read this, we will probably know whether US employment grew by about 200,000 jobs, as expected. That will be the most important figure this week. We’ll also be seeing a lot of data on industrial production in Europe in December (specifically, for the EU, the UK, Italy and France). At the end of the week, the various European statistical bureaus will be publishing their initial estimates of economic growth during the fourth quarter of 2015. Next week, January inflation figures for Germany are expected, as are data on US retail sales for the same month. That’s it for macro news – unless Janet Yellen manages to stir things up with her semi-annual monetary policy report to Congress.

Chinese stock markets are closed all next week for the New Year, with Monday ushering in the Year of the Monkey. In terms of corporate results, the main focus will be on international companies like Coca-Cola and Pepsi, Alcatel Lucent, L’OrĂ©al, Disney, Total, Cisco, Renault, Nokia and Commerzbank. In the Netherlands, we’ll also be looking forward to results from AkzoNobel, Heineken, SBM Offshore and TomTom.


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