(Arvind Rajaraman – Head of Investments at UCLIF & Lead Editor)
Welcome to the UCLIF Friday Wrap-Up, our weekly newsletter that brings you the most important market events and information during the past week! So what’s moving markets?
Markets: The S&P500 index notched a record closing high after four straight days of gains this week.
Economy: US unemployment claims fell for the third week running to 779,000, the lowest point in two months…but still very elevated.
COVID-19 update: Johnson & Johnson asked the FDA to approve its single-dose vaccine, meaning we could have a third vaccine at our disposal in just a few weeks. The US administered 1.7 million doses yesterday.
Markets in a Minute
Information Technology (Maria Lomaeva)
As the markets shook off last week’s GameStop frenzy, the tech sector had a positive week with NASDAQ Composite gaining almost 4%.
During the past two weeks, the Big Tech companies reported their earnings results. Apple (AAPL) reported on January 27 a record high quarterly revenue of $111.4bn, 21% higher YoY, with a double-digit growth in sales for every product category, including its services business. Customer demand has been boosted by the pandemic and the 5G rollout. Despite the positive results, Apple shares dropped almost 4% since the announcement, partly due to last week’s selloff.
Microsoft (MSFT) also reported strong earnings last week, beating Wall Street estimations as well. The revenue grew 17% YoY to $43.1bn. The driving force here was the cloud computing services Azure which grew by 50%. Microsoft shares are trading almost 4% higher since the announcement.
Facebook (FB) announced a 33% growth in revenue YoY to $28.1bn, ahead of expectations too. The company said that the shift towards ecommerce during 2020 was beneficial for the advertisement business and warned that Apple’s privacy changes in iOS 14 could be detrimental for it. Facebook shares are trading almost 3% lower since the earnings release.
Another Big Tech company Alphabet (GOOGL) beat analysts’ expectations and delivered $56.9bn, up 23% YoY. An unexpected surge of advertising in the last months of 2020 drew the revenues higher, marking one of the strongest quarters in years for Alphabet. As a result, its shares are trading 8.5% higher since the announcement on February 2.
Finally, Amazon (AMZN) also exceeded analysts’ predictions and delivered a record quarterly revenue of $125.6bn, up more than 40% YoY. Another big announcement came from the company’s CEO Jeff Bezos who has decided to step down from his position, to be replaced by Amazon Web Services CEO Andy Jassy in the third quarter. Amazon shares are trading 0.5% higher since the news broke on February 2.
Next week, gaming company Take-Two (TTWO) and tech conglomerate Cisco (CSCO) will announce their quarterly results.
Healthcare (Christine Chan)
As the COVID-19 pandemic continues to ravage the world, the role of healthcare companies becomes significant as ever. The Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) recently reached new highs throughout the month of January, going above the $115 level consistently with a peak of $118.50. It started off this week at $115.97 but has ended the week with a very slight loss at $115.67.
This week has been a very busy week for healthcare. With lots of positivity surrounding COVID-19 vaccines in the past few months, unfortunately there has also been some less welcoming news. The joint AstraZeneca/Oxford COVID-19 vaccine has come under some fire lately, with a French panel of scientific advisers recommending against administering it to people over the age of 65, and Switzerland’s medical regulator rejecting its use completely. Earlier in the week, Sweden, Poland, and Germany also suggested limiting it to the younger population, with all the aforementioned countries citing a lack of data and evidence supporting its use in over-65s. The share price of AstraZeneca (NASDAQ:AZN) suffered 3% over the past week, reducing to $49.73.
However, the German biopharmaceutical company CureVac (NASDAQ:CVAC) has delivered better news, announcing their plans to collaborate with the UK government to develop vaccine candidates against the new COVID-19 variants. 50 million doses have been ordered by the UK government, which will be manufactured by GSK (NYSE:GSK). CureVac’s share price has consequently shot up 21.34% to $120.43.
On the treatment side of COVID-19, Gilead Sciences’ announced a quarterly revenue increase of 26%, mostly fuelled by its COVID-19 drug remdesivir. The drug contributed $2.8 billion in 2020 and $1.9 billion in Q4’2020 alone, beating analysts’ estimates of $1.34 billion, and also their estimates for 2020 revenue. Furthermore, Gilead Sciences announced a 4.4% increase in their Q1’2021 cash dividend, resulting in a quarterly dividend of $0.71 per share. Gilead’s (NASDAQ:GILD) share price rose a healthy 3.7% to end the week at $68.46.
Moving beyond COVID-19, Jazz Pharmaceuticals (NASDAQ:JAZZ) has agreed to acquire GW Pharmaceuticals (NASDAQ:GWPH), a British pioneer in cannabis-based therapies for $7.2 billion in cash and stock. This equates to $220 per GW share, representing a 50% price premium, but giving Jazz access to GW’s childhood-onset epilepsy drug Epidiolex, the first cannabis-derived medicine to be approved by the FDA and become available on the NHS. GW shares rose nearly 47% in pre-market trading as a result of the announcement, and the cannabis-based therapeutics space will certainly be an interesting one to watch in the coming years.Changes to senior management has also been a theme this week, with the global pharmaceutical company Merck’s CEO Kenneth Frazier announcing his retirement from the firm in July 2021, and Sir Andrew Witty becoming the CEO of UnitedHealth Group, the largest American healthcare insurance company, after the surprising retirement of the previous CEO David Wichmann. The market didn’t take the news too well, with the share prices of Merck (NYSE:MRK) and UnitedHealth (NYSE:UNH) falling 2.87% and 3.14% over the week respectively; these are great examples demonstrating the significance of senior management in a company’s share price.
Consumer Staples and Consumer Discretionary (Jun Wei)
For the past 2 weeks, headlines have been dominated by the incredible price volatility of Gamestop. In response, equity markets responded negatively to the news but seem to have recovered this week. The S&P 500 Consumer Discretionary Index was up while the Consumer Staples Index clawed back to trade flat for the week after losses midweek. As earnings season continues, we look at the earnings of McDonald’s and Ford.
McDonald’s (NYSE: MCD) failed to beat earnings estimates for Q4 2020. It reported revenue of $5.31 billion vs. analyst expectations of $5.37 billion, and EPS of $1.70 vs. expected EPS of $1.78. Despite missing earnings, the share price of McDonald’s went up slightly (~1%) immediately following the earnings announcement and has been trading sideways since then. Sales in the U.S. jumped 5.5%, but sales in Europe fell due to new lockdowns in Germany and France. Moving forward, McDonald’s continues to face cost pressures with the expected minimum wage increase to $15 in the U.S., which is a key policy initiative by the Biden administration. However, McDonald’s has recovered strongly from the impact of covid-19 compared to its rivals, and management is confident that labour costs remain manageable in the long term.
Ford (NYSE: F) reported mixed Q4 earnings, beating on EPS (EPS of $0.34 vs. expected EPS of -$0.07) but missing estimates on revenue ($33.2 billion vs. expected $33.89 billion). However, shares in Ford jumped by 4% immediately following earnings, possibly due to optimism surrounding their new investments into electric and autonomous vehicles. Ford announced that the company planned to invest $29 billion in electric and autonomous vehicles through to 2025, as it aims to ramp up production of electric vehicles. EV stocks were extremely popular in 2020, with Tesla’s share price exploding and its Chinese rival Nio seeing its share price increasing nearly 30 times. As the regulatory tide seems to be turning in favour of electric vehicles moving forward, Ford is finally focusing its efforts on EVs along with its long-time rival GM. With its existing production capabilities, Ford may be an interesting value play moving forward if it is able to pivot towards EVs quickly and efficiently.
Communication Services (Katarina Lau)
The Communication Services Select Sector SPDR (XLC) saw an noteworthy 1.3% increase week over week with an approximate $156.7 million dollar inflow.
Network parent WarnerMedia announced that CNN President Jeff Zucker will depart the cable news channel by the end of 2021, upon his contract expiring, ending months of uncertainty about the network’s leadership.
A new diplomatic war between the UK and China was triggered, when UK regulators pulled the broadcasting license for China’s state-owned China Global Television Network (CGTN). Media regulator Ofcom claimed the channel didn’t have “editorial responsibility” for the channel’s output, for example, claiming the channel failed to explore the views of protesters during the Hong Kong protests. China immediately responded by slamming the decision, stating such move was purely political. Chinese Ministry of Foreign Affairs spokesperson Wang Wenbin called the UK’s actions “a blatant double standard”, as the UK “advocates freedom of the press”, yet revoked CGTN’s license.
In the US market, the top 3 telecoms groups have each gone through their respective ups and downs and they recently released their 2020 performance report. T-Mobile US Inc (TMUS) just announced a profit for the fourth quarter that dropped from the same period last year. The company’s profit came in at $750 million, or $0.60 per share slightly lower when compared with $751 million, or $0.87 per share, in last year’s fourth quarter. The company’s revenue for the quarter rose 71.2% to $20.34 billion from $11.88 billion in 2020. With T-Mobile’s recent consolidation of Sprint and its promising proprietary 5G networks, prospect of growth is positive. For AT&T (T), the US’s second largest telecoms group and owner of Warner Bros and HBO posted a $13.9 billion loss in the fourth quarter due to covid-19’s impact on businesses and the uprising trend of consumers fleeing towards online streaming services like Netflix. However, AT&T’s core wireless business kept the company resilient, reporting an adjusted earnings of 75 cents per share on revenue of $45.7bn. In terms of Verizon Communications Inc (VZ), the company recently reported its 2020 performance, stating that its wireless service revenue has increased by a 2.2% year over year growth rate, amounting to $16.7 billion. Verizon also ended 2020 with strong earnings and has a full year 2020 free cash flow of $23.6 billion.
Financial Institutions (Jamie Biswas)
This week saw massive gains within financial institutions, with the Vanguard Financials ETF (VFH) increasing 7.11%, rebounding strongly after last week’s drop. The gains within the sector can be attributed evenly between insurance firms and banks. The financial institutions sector outperformed the S&P 500 this week, which increased 4.70%.
The financial institutions earnings season continued this week with Deutsche Bank and Santander announcing their Q4/annual results.
Deutsche Bank made headlines this week by announcing their first profits since 2014. The boost to their bottom line came in the form of increased trading revenues, especially within fixed-income. A net profit of €113 million was generated by the bank in 2020. This was higher than predicted by analysts, but small in comparison to the €5.7 billion of losses amounted in 2019. In fact, since 2015, the bank has seen cumulative losses of €14.6 billion. A 28% year-on-year rise in revenues within bond and rates trading helped the bank regain profitability. The investment banking arm of the bank was to thank for the profits, being the only part of the bank, which saw increasing revenues in 2020. Deutsche bank realises its reliance on its investment bank and has been focusing on improving its retail and commercial banking activities. The bank is also trying to produce more stable revenues within its asset management division. Deutsche bank’s shares fell around 2% after the results were announced.
Whereas Deutsche bank announced its return to profitability this week, Santander reported its first ever annual loss. The Eurozone’s largest retail bank reported an annual loss of €8.8 billion, with large loan loss provisions combined with restructuring charges contributing to the poor results. The bank set aside €2.6 billion for potential future defaults in the fourth quarter. Revenues in Q4 were better than expected, rising 1% year-on-year after excluding the impact of currency movements. Santander’s Spanish and UK operations fared the worst, whilst the bank’s Latin American and North American businesses showed the strongest performance. Santander also announced a dividend of 2.75 cents per share, the maximum permitted by the ECB, which changed its policy in December 2020.
Industrials (Ed Collins)
The Industrials sector is up this week, with the Vanguard Industrial Index (VIS) having finished the week with up 4.76%.
You may remember that two weeks ago, I wrote about the agreement that Signature Aviation (SIG) had reached on a £3.4bn bid from Global Infrastructure Partners, despite potential competition from rival private equity firm Blackstone.
Well, now Blackstone and GIP have ended their takeover battle for the UK-listed private jet services company, instead agreeing to join forces with a new £3.5bn bid for Signature. Together with Cascade Investment, Bill Gates’ investment vehicle, the firms have made a £4.11 per share offer for the business.
At the beginning of January, Cascade and Blackstone made a tentative £3bn offer for Signature, which was trumped by GIP the very next week with their £3.4bn bid.
Signature’s shares fell 2.92% to £4.12 on the day on Friday, closer to the level of the fresh offer. The share price has risen more than 60% since news of the first takeover interest in the middle of December.
Signature, a FTSE 250-listed company, does not own any aircraft of its own, but instead offers ground handling, refuelling and other logistical support through a sprawling network of bases scattered across the US.
Private jet operators have largely been able to withstand the impact of the pandemic better than their commercial airlines. In November, Signature said flight activity had stabilised to about 80% of the previous year’s levels.
The private equity group Carlyle had also considered a move for Signature, but the higher offer and Cascade’s existing 19% stake in the business would make it difficult for it, or another rival, to disrupt the deal.
Utilities (Katarina Lau)
The Utilities sector fell by 0.4% this week, where the biggest losses came from CenterPoint Energy, Inc (CNP) and DTE Energy Co (DTE) declining 1.7% and 1.5%, respectively. Both stocks make up 4% of the Utilities Select Sector SPDR ETF (XLU), which was also down 0.3%, but up 0.08% YTD.
Meanwhile, President Biden’s administration has started discussions with the utility and automobile sectors about reducing greenhouse gas emissions , with the goal of decarbonizing the U.S. power sector by 2035 and the whole economy by 2050. Oil and gas companies will finally face new proposed limits on methane emissions later in the year. Vehicle companies will also head towards an EV future, as the industry prepares to revise vehicle emission standards through 2026 onwards. For instance, General Motors has already set the aim of selling only electric cars by 2035.
Last week, US’s largest electric utility and energy company, NextEra Energy(NEE) took a $1.2billion after-tax impairment charge to account for the delays and increased cost of the Mountain Valley pipeline due to legal and regulatory challenges. As NextEra holds a 31% stake in the shale gas pipeline project, the announcement of the impairment charge caused its shares to fall 2.1% to $85.23 last Tuesday. However, with president Joe Biden taking office and pledging to drive down carbon emissions, it will only further encourage utility and energy companies to try to shift towards cleaner energy projects as well as reducing pipeline constructions. This made the outlook for all pipeline projects a lot cloudier. Although the Mountain Valley project is vital to NextEra and will definitely affect its adjusted earnings report, the company’s strategy to focus heavily on clean energy initiatives makes it a highly anticipated stock. The company forecast building an average of 4GW of new wind capacity and 5.2GW of solar capacity for third-party customers in 2021 & 2022 which accounts for 15% of the nation’s new utility scale solar capacity and 33% of new wind capacity. It will be interesting to see how utility companies pivot into the clean energy space in the coming years.
Materials (Ed Collins)
The Materials sector is up this week: the Vanguard Materials Index (VAW) has risen by 1.16% since the start of the trading week.
It was oil week this week: a large number of the supermajors released their earnings reports for Q4, and it was not all good news.
ExxonMobil (XOM), once the world’s largest company and the US’s biggest oil producer, racked up an annual loss of $20bn in 2020. This is the first annual loss in the company’s history, down from profits of $14bn in 2019. It capped a year of crisis for the company: it was also stripped of its place in the DJIA and shed more than 40% of its market value.
Meanwhile, across the pond, BP (BP) recorded its first annual loss since the Deepwater Horizon disaster over a decade ago. BP’s fourth quarter profits dropped 96%.
Furthermore, Royal Dutch Shell (RDSA) raised its dividend despite its annual earnings falling to their lowest in at least 15 years: Shell’s adjusted net income fell 71% to $4.8bn, from $16.5bn in 2019.
On top of the devastation to oil company revenue caused by the pandemic and last year’s price crash, investors and environmental activists have also assailed the sector with demands that it step up efforts to reduce carbon emissions.Oil companies are keeping their dividends in order to keep investors happy and interested: despite the financial blow, Exxon maintained its quarterly dividend of $0.87 per share, and Royal Dutch Shell raised its payout to 16.65 cents, and has said it will again raise the dividend by 4% to 17.35 cents a share in the first quarter of 2021.
Oil & Precious Metals (Oliviero Sacchet)
This week the oil industry registered: BRNT (+4.55%) WTI (+5.6%).
North Stream 2 is facing more problems due to European concerns on Russian political situation. After the spread of several protests in the country regarding the arrest of Navalny, a French government official said that the pipeline construction should be halted. In addition to French concerns also the German government – and more specifically the Chancellor Angela Merkel- underlined that there are multiple reasons to be against the Russian project. However, Merkel said that she will discuss with the administration of new US President Joe Biden. Instead, on the Russian side, Moscow is considering a legal action if required to help get Nord Stream 2 over the finishing line. A little more than 150 km of Nord Stream 2 have to be laid in Danish and German waters, but the threat of US sanctions against companies involved in laying the pipeline has led to long delays in its completion.
US coal industry is also facing some problems. Weekly US production was estimated to be over 11.1 million st for this week, down 3.5% from the previous week and down 10.8% from the same week in the past year. Weekly output was down 22.5% compared to the five past years average of 14.4 million st for the most recent week production was down 12.9% to 54.3 million st compared with the year ago period.