Share prices at record annual highs

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Financial market sentiment was very upbeat last week, which saw investors moving away from “safe” bond markets to seek out risk in equity markets.

With the publication of results from aluminium manufacturer Alcoa and a number of US banks, the results season is now under way for Q1 2016. Ben Steinebach Ben Steinebach Head of Investment Strategy

Investors were spurred on by favourable macroeconomic data out of China, which quickly dispelled the gloomy outlook for that country espoused by many at the start of the year. Earlier in the week, we had seen favourable Chinese foreign trade figures for March, followed by better-than-expected growth figures for retail sales, industrial production and fixed asset investment at the end of the week. China’s overall economy grew by 6.7% in the first quarter of 2016, which, despite being only very slightly less than the 6.8% growth generated in the previous quarter, should be seen more as a levelling off than a slowdown. On top of that, the rate of money growth proved to be the fastest since 2010, indicating strong lending.

Other concerns felt early in the year are dissipating, too. This week, Brent crude from the North Sea was selling for well above USD 40 a barrel, in sharp contrast to many analysts in January expecting a further drop to USD 20 a barrel with levels remaining low in the long term.

The prices of other commodities have continued to rise over the last few weeks, suggesting a positive development for the world economy which in any event is certainly at odds with all the gloomy predictions of the recent past. Although the IMF has again lowered its forecast for the growth of the world economy in the run-up to its spring meeting this weekend, the adjustments it has made are minimal, with growth still expected in 2016 and 2017. This also applies to the US and the eurozone, which were both the target of considerable pessimism at the beginning of the year.

Concerns about southern Europe and the UK

There are still plenty of concerns, however, particularly about southern Europe. The – primarily political – stumbling blocks in Spain and Portugal involve the formation of new governments in those countries. On Monday, the outcome of a vote by supporters of the Spanish centre–left political party Podemos on whether it should join a leftist coalition will be announced. If the alliance is rejected, Spain will face fresh elections at the end of June, as forming a government will have proved impossible.

The greatest risk in Portugal, however, is a further downgrade of its credit rating, which would effectively exclude it from the European Central Bank’s asset-purchase programme.

Greece, too, is facing problems, which have to do with the reform programmes there and the lack of agreement about these with its creditors. All these problems could rear their heads again in June, the very month in which the UK is scheduled to hold a referendum on whether the country should withdraw from the European Union, or Brexit. Polls suggest that the stayers are still in the majority, but that the leavers are gradually gaining ground. For the time being, the financial markets have ignored these concerns (and risks). Bond yields in the US and German markets, considered safe havens by investors, have risen again and have flowed into equity markets, where prices have soared to record levels this year.

The results season has begun

With the publication of results from aluminium manufacturer Alcoa and a number of US banks, the results season is now under way for Q1 2016. Unilever has only presented its sales figures, but these indicate that it has suffered from the appreciation of the euro. Traditionally the first company to publish its results, Alcoa saw its earnings per share fall by 75% to just USD 0.07. Its revenue fell, too, and the company has lowered its outlook for the remainder of the year, as the aluminium market as a whole is expected to grow less than had been expected up to now.

Of the major US banks, JPMorgan Chase and Bank of America were outperformed by Wells Fargo. The first two carry out significant investment banking activities, which are suffering from higher costs and lower income from trading and M&A advisory services. Necessary provisions are on the rise as well. As a bank targeting the consumer market, Wells Fargo is by comparison much less affected by such problems. Income from the most affluent segment – wealth management – remained strong in particular, and earnings per share actually rose slightly more than expected.

In the Netherlands, Unilever presented its first-quarter sales figures, one of the first companies to do so. These fell 2%, to EUR 12.5 billion, compared to the same quarter in 2015. Exchange rates (the lower dollar) were the main culprit, with a negative impact of over 7%. The company did manage to achieve strong sales growth (8.3%) which it generated primarily in emerging market countries.

Last week, the leading equity indices saw gains worldwide, albeit more in Europe and Asia than in the US, where markets closed nearly 2% higher on Thursday than last Friday. The gains seen in Europe were on average twice that, with peaks of around 5% in Germany, France and Spain. The result, in both Europe and the US, was a number of annual highs. Gaining 3.9%, the Amsterdam Exchange Index (AEX) was in line with the European average, closing at 451.04 points. This morning, the index was fluctuating just under 450 points.

A flood of corporate results and some interesting macro data

In the coming week, attention will be shifting to the results published by primarily US companies. At the macroeconomic level, we’re looking forward to the provisional estimates of sentiment among purchasing managers. The most noteworthy company announcing its results in the coming week is, in my view, General Electric, a conglomerate corporation which is seen by many as the most accurate reflection of the US economy as a whole. We’ll be finding out whether Goldman Sachs and Morgan Stanley are also facing margin problems in their investment banking activities.

Results are also expected from the likes of McDonald’s, Coca-Cola and Pepsi, Starbucks, Microsoft, IBM, Alphabet (formerly Google), Yahoo!, Caterpillar, Schlumberger, General Motors and the pharmaceutical companies Johnson & Johnson and Biogen.

In Europe, too, the results season is gradually picking up, with Daimler, Dassault, Novartis and Danone soon to publish their results. The Dutch companies Akzo Nobel, ASML, ASMI, TomTom, Vopak and Wereldhave will be the first to publish results on the previous quarter.

The most important macro data, provisional figures on sentiment among purchasing managers in many countries, will be published on Friday. Before that, though, we’re expecting new data on consumer confidence in the European Union, Germany, the Netherlands and Belgium, and on retail sales in the UK, Italy and the Netherlands.

There could also be a focus on the business climate with the presentation of the ZEW index in Germany, which gauges investor sentiment with respect to the German, and European, investment climate. New data on actual business confidence in France is also being released. In the US, the first figures on the housing market in March, as expressed in the number of housing starts, will be published. Lastly, various countries – including the US, the UK and the Netherlands – will be releasing labour market data.


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