Market Bulletin (03/05/2016)
Dialling down
One of the drawbacks of stock market regulations is the unintended effects they can have on prices, and even on corporate practice. Nowhere is this more pronounced than in the obligation for companies to publish quarterly reports, which provide an impetus for companies to prioritise short-term performance. In order to add a gloss to their results, they often resort to dialling down expectations ahead of earnings season.
Companies have had to do plenty of dialling down in recent weeks. Earnings season is now well underway, and the news is not good. Earnings of S&P 500 companies are thought to be down by around 8% in the first quarter, despite the fact that an unusually high number of S&P 500 companies have been buying back shares in recent months, precisely because it gives their earnings numbers a boost. The numbers are even worse in Europe, where first-quarter profits are expected to fall by 19% compared to a year earlier, according to Thomson Reuters.
One of the headline underperformers in the first quarter was Apple, whose earnings have suffered because iPhone sales have hit a plateau, while more recent inventions have failed to pick up the slack. Shares in the company dropped more than 10% last week. Another weak performer in the tech sector was Twitter.
Yet despite a dipping earnings season in the US, last week the S&P 500 reached a landmark: the second-longest bull-run in its history. In other words, since March 2009 it has not once slipped into bear territory, which is defined as 20% below its previous peak. Over the period, the world’s leading index has more than tripled in value. (Last week, it actually dipped by 0.75%.) There have been dents along the way, not least the sell-off following the Shanghai crash in mid-2015, and some pretty mixed quarterly earnings. But those have not prevented it from delivering sustained growth for long-term investors.
While stocks continued their run, however, the Federal Reserve spoke in muted tones about the outlook for the US economy, using its monthly meeting to report that, due to slower US growth, it would not be raising rates. Last week it emerged that the US economy grew at its slowest rate in two years during the first quarter, as corporate investment and export levels fell. On the other hand, Janet Yellen said that the bank’s former concerns about global headwinds and financial hazards had dissipated somewhat. The broad assessment was subdued, leading markets to postpone expectations of the next rate rise to December.
Yet if the growth slowdown was reflected in the meagre profits many companies recorded in the first quarter, some of the largest showed themselves to be thriving – tech companies among them. Facebook’s net income tripled in the first quarter of 2016 (although a plan to issue non-voting stock may yet temper the market enthusiasm that followed the earnings announcement); profits at Amazon rose 28%.
For other companies, sliding profits added impetus to the desire to change existing business models, not least in the banking sector. Goldman Sachs announced a profits fall of 56% in the first quarter, but last week the old aristocrat of investment banking announced the launch of GS Bank, an online retail bank, with a minimum deposit of just $1. In the UK, Barclays announced a profits drop of 25% in the first quarter (annualised), but investment banking returns showed positive. Jes Staley, still warming his seat as chief executive, hopes the results will give him latitude to press ahead with the restructuring he has planned, which includes selling off $365 billion of assets. Barclays announced a 50% cut to its dividend in March.
The FTSE 100 dipped 1.1% last week on a mix of global concerns that ranged from corporate earnings (RBS’s poor results were notable) to the oil-price outlook. First-quarter results at BP showed a £532 million profit (a loss had been expected) and a successful cut in investment by $15–17 billion. Brent crude continued its rise, finishing above $46 a barrel on Friday. Last week also saw the announcement that British Home Stores, founded in Brixton in 1928, was going into administration.
The UK’s own quarterly earnings figures came in last week; growth slowed to just 0.4% in the first three months of the year, down from 0.6% in the previous quarter. While services continued to grow, output in both production and construction fell – some construction analysts have reported that investment will be subdued until after the referendum vote in June. Reports by Mark Carney and the OECD last week highlighted the risks posed to growth, wages and prices by a UK exit. Meanwhile, eurozone growth exceeded that in both the EU and UK for the first time since 2011.
Steely stuff
The European Central Bank is planning to extend its asset-buying programme to corporate bonds in July, a move that may well encourage an increase in euro-denominated corporate bond issuance – the euro-denominated corporate bond market in 2015 was only one third the size of dollar-denominated issuance. It may need to, given the eurozone’s latest corporate earnings. Deutsche Bank, Germany’s biggest bank, reported annualised revenues had dropped by a fifth, while pre-tax profits were down 60% – restructuring and litigation costs are expected to make 2016 a tough year. The FTSEurofirst 300 fell 2.1% over the five-day period.
Just as markets in Europe look to Mario Draghi to offer a perennial boost to asset prices, so in Japan Haruhiko Kuroda has become known for unconventional measures to boost growth. Last week, however, the surprise came in the form of inaction. Kuroda said the Bank of Japan was still waiting to see the effects of recent negative interest rate and quantitative easing measures – and that it would take more than a month for these to come through. The yen has climbed dramatically this year already and last week it jumped still further, while the Nikkei 225 dropped 5.4%. Kuroda clearly has strong nerves.
Commodity traders in China have likewise left their nerves at home in recent months. Speculation is rife, the steel price is up 50%, and the authorities have imposed new fees and trading volume caps in response. Excessive debt – especially in manufacturing – is a particular worry, and not just in China. A report published by Fitch Ratings last week said that private debt in emerging markets reached new highs in 2015.
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