(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: Global stocks are ticking down after President Trump and first lady Melania Trump tested positive for the new coronavirus. Futures are down. Political uncertainty has jumped to the fore, though the White House physician said Mr. Trump and the first lady are both “well at this time.
Economy: US Jobless claims remained high (837,000 last week) while U.S. household income fell 2.7% in August after stimulus measures dried up. GDP fell at a mind-bending 31.4% annualized rate in Q2, according to the government’s final estimates. But as the country reopened in Q3, the economy likely rebounded in similarly historic fashion—estimates put GDP growth at about 30% last quarter.
Markets in a Minute
Information Technology (Maria Lomaeva)
This week the tech industry moved up somewhat with tech-heavy NASDAQ Composite trading about 2% higher over the past five days. Although, the index declined 2% on Friday amid the news about President Trump contracting Covid-19.
The US-China tech war escalated further within the semiconductor sector with the Trump administration demanding special licencing on exports to China’s largest chipmaker Semiconductor Manufacturing International Corporation (SMIC; 981). If China is unable to receive US equipment, it will very likely damage its semiconductor industry as only 16% of its demand is currently matched by the domestic production. SMIC shares fell almost 8% on Monday but have since recovered most of the losses. This conflict is not only damaging for China: apart from equipment manufacturers losing their Chinese customer, SMIC also makes Qualcomm chips, while NVIDIA needs Beijing’s approval to buy chip designer Arm.
Micron Technology (MU), an American manufacturer of computer memory and computer data storage, also became negatively affected by the US-China tensions. Despite reporting a revenue growth of 24% YoY to $6.06bn as well as almost doubling its net income (non-GAAP) to $1.23bn in the last quarter, its shares fell approximately 7% after the earnings announcement as Micron had to halt shipments to one of its large customers, Huawei, earlier in September. In the past quarter, about 10% of all sales were made to Huawei, and it will take time to shift supply to other customers, Micron’s CEO said. The company’s shares are trading 12% lower since the beginning of the year, underperforming within the industry as iShares PHLX Semiconductor ETF (SOXX) that tracks the benchmark Philadelphia Semiconductor Index is up almost 22% since January. The current outlook does not render Micron attractive to investors, at least in the foreseeable future.
Healthcare (Christine Chan)
This week, there were some slight fluctuations in the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV). It reached a peak of $106.25 mid-week, but ended at $104.14 on Friday, having started the week at $104.10.
Outside of Donald Trump testing positive for coronavirus, it has been a relatively quiet week for healthcare overall. On Thursday 1st October, the German pharmaceutical giant Bayer (ETR: BAYN) issued a warning that their profits have been hit harder than expected by the coronavirus pandemic and will likely have slim profits in the coming year. This resulted in their share price falling nearly 18% to the lowest levels in over 9 years, from €54.39 on Monday 28th September down to €44.83 at market close on Friday. Moreover, its pivot and expansion into the agricultural sector was not as successful as they had hoped, as its $63 billion acquisition of the American seed maker Monsanto back in 2018 is doing the business more harm than good. This is due to the pandemic causing a decreased demand for biofuel, as well as a slump in commodity prices. It has also been affected by negative currency effects, mostly brought on by the weakening of the Brazilian Real. I think it will be interesting to see whether its agricultural business will be able to survive the storm or have to be demolished, as it continues to battle a $11 billion lawsuit that claims its Roundup weedkiller causes cancer. Only time will tell whether their pharmaceuticals business can continue funding their failing crop sciences business to keep it afloat, and whether they choose to let that happen.
In other news, the safety of AstraZeneca’s (LSE:AZN) coronavirus vaccine is being investigated further by the FDA, following on from the unfortunate incident relating to a vaccine trial participant’s possible adverse reaction from previous weeks. Their share price has dropped nearly 3% this week, from £8640 to £8400.
Consumer Staples and Consumer Discretionary (Jun Wei)
S&P futures slumped ~1% in premarket trading on Friday after President Trump, widely criticised for his covid-19 crisis response, announced that he tested positive for covid-19. However, the consumers space has been doing well this week, with the S&P 500 Consumers Discretionary and Consumer Staples Index both up. The Consumers Discretionary Index was up by ~5% while the Consumer Staples Index was up ~3%.
PepsiCo (NASDAQ: PEP) has resumed earnings guidance for the fiscal year of 2020 and expects to meet revenue projections as they announced earnings for Q3 2020. This comes as PepsiCo beat analyst expectations for both revenue ($18.09 billion vs. $17.23 billion expected) and earnings per share ($1.66 vs. $1.49 expected). Its quarterly revenue grew 5.3% compared to the previous quarter, with sales fueled by increased demands for its drinks and snacks, particularly its new product Cheetos macaroni and cheese. PepsiCo believes demand was driven by work-from-home arrangements as people had freedom to snack in the comforts of their own home. Moving forward, PepsiCo’s earnings guidance is sensible, and earnings should not deviate too far from estimates as there is a lack of clear drivers of demand for the rest of the year.
The billionaire Issa brothers and TDR Capital, a private equity firm, have agreed to acquire British supermarket chain Asda for $8.8 billion. The new owners will be looking to drive growth of Asda, which has lagged behind competitors such as Sainsbury’s and Tesco, by expanding into smaller neighbourhood shops as well, similar to the concepts of Sainsbury’s Local and Tesco Express. The new owners will also be looking to investment £1 billion over the next 3 years to keep prices low and strengthen its supply chains, adding competition to an already competitive and saturated supermarket industry in the UK. However, leveraged buyouts of retail businesses have been under the spotlight in this covid-19 pandemic, with many retail businesses struggling under huge debt after private equity acquisitions.
Communication Services (Katarina Lau)
This week Japanese telecoms companies experienced a sector shakeup after new Prime Minister Yoshihide Suga called on wireless carriers to reduce prices sector-wide. This prompted Nippon Telegraph and Telephone Corporation (NTT) to take over its telecommunications unit NTT Docomo in a $40 billion buyout, where NTT will launch Japan’s largest-ever tender offer for 34% of NTT Docomo stock. This would allow the company to take its wireless carrier business private, and achieve the lower prices the government calls for. NTT (9432.T-JP) shares fell 3.61%, while NTT Docomo (9437.T-JP) surged 20.92%. However, shares of NTT Docomo’s closest competitors dipped with SoftBank Group Corp (9984.T-JP) falling 1.13% and KDDI Corp (9433.T-JP) down 0.34%. Overall, Suga’s grand scheme is the hope that the savings generated from lower telco prices will stimulate consumer spending elsewhere in the economy.
Finnish telecom giant Nokia won a deal with BT to phase out Huawei across all UK networks, inclusive of 2G, 4G and 5G. Nokia will become BT’s largest equipment supplier for 5G networks across the country. Previously in July, the UK government banned all the mobile providers from buying Huawei 5G equipment, however older, existing Huawei networks still remained intact. As per the deal, Nokia would provide base stations and network equipment, which BT will leverage to provide fast 5G internet its customers. Though, the transition comes at a hefty price for BT at around £500 million. Nokia shares have lost 21% over the past month after Verizon replaced the company as its US 5G supplier and chose Samsung for supplying most of its radio equipment. However, Nokia appears to have rescued itself with this new deal, attracting the return of hedge fund investment and future price targets all on the upside.
Financial Institutions (Jamie Biswas)
This week saw large gains within financial institutions, with the Vanguard Financials ETF (VFH) rising 4.42%, more than recovering last week’s significant drop. The gains within the sector can be attributed more heavily to banks than to insurance firms, although both had a very strong week. The financial institutions sector easily outperformed the S&P 500 this week, which made gains of around 2%
Goldman Sachs is buying General Motors’ credit card business, marking the investment bank’s second significant credit-card partnership and another step towards balancing its investment banking operations with consumer finance services. Goldman Sachs will pay about $2.5bn for the portfolio, which has approximately that amount in outstanding balances. The previous owner is Capital One. Goldman Sachs had $2.3bn in card loans as of the end of the second quarter. But while that will now more than double, the total will remain small in comparison to the bank’s $1.1 trillion in assets. In credit card co-branding deals, the bank partner owns the assets and liabilities of the portfolio while the corporate partner, in this case General Motors, takes a fixed share of the profits. Assuming the asset has an 8 per cent yield, the deal is likely to be slightly accretive to Goldman’s earnings next year.
Goldman’s core businesses in trading and capital markets has become less profitable and less appealing to investors, due to higher capital requirements and a widespread shareholder aversion to earnings volatility. As a result, Goldman has been trying to diversify, and has done so through the creation of Marcus, a digital bank which currently has $92 billion in deposits. Goldman’s consumer banking arm currently only makes up 13% of the bank’s revenues and David Solomon, Goldman’s CEO, is trying to change this.
Industrials (Ed Collins)
The Industrials sector has been up very slightly this week. The Vanguard Industrial Index (VIS) has risen by 0.67%, whilst the S&P 500 Industrials Sector (SPLRCI) is up by 1.77%, since the start of the trading week.
Rolls-Royce plc (RR) is looking to bolster its balance sheet. The jet maker announced this week that it plans to raise £2bn in a rescue rights issue, as well as drawing in up to £3bn in government support from a new debt package. The company is also planning to raise an additional £1bn from the bond market and two new loans
Warren East, the CEO, said that the funds would help the manufacturer navigate the “current uncertain operating environment”.
The cash call is vital to restore the balance sheet. Rolls-Royce will see a roughly £4bn cash outflow this year. Their net debt has soared, and is expected to rise from £993m last year to a forecast £3.5bn by the end of 2020. Approximately £3.2bn of the company’s debt falls due next year, putting it under pressure to refinance those borrowings.
Rolls-Royce’s share price has fallen 26.4% this week and is down 83.3% since the start of the year. After the company announced the plans on Thursday, shares slid throughout the day to close in London down 10.3%.
Utilities (Katarina Lau)
Tesla delivered a record number of 139,300 cars worldwide in Q3, beating analysts’ estimates and cementing its dominance in electric-vehicle (EV) sales. The company’s outperformance surpassed its prior all-time high of 112,000 in Q4 2019. The bulk of Tesla’s deliveries include its mass-market Model 3 and most recent Model Y crossover. Tesla (NASDAQ: TSLA) shares which have rallied more than 5x YTD, however fell 7.4% as part of a risk-off selloff at the news U.S. President Trump tested positive for COVID-19.
Tesla’s strong results suggest that even in pandemic-stricken times, worldwide EV demand remains solid as increasing amounts begin to recognize the promising future of sustainable vehicles. While this industry shift is good for the world, this nonetheless will threaten Tesla’s current 16% market share, with startups and established automakers alike already set to launch several competing EV in the next few years. Moreover, the U.S. and China have long been Tesla’s strongest markets, along with its Shanghai plant being responsible for significant amounts of manufacturing, so with an escalating US-China trade war on the horizon, could Tesla ever be caught in crossfire like TikTok, Huawei or WeChat? Unlikely as of now, but certainly not off the table.
NextEra Energy, the world’s largest solar and wind power generator has surpassed oil major ExxonMobil in market cap. The Florida-based utilities company reached a market cap of $138.6 billion, inching past ExxonMobil’s $137.9 billion. This was no small feat given the latter was once the world’s biggest public company worth $500 billion at its peak 2007.
Clearly, NextEra’s ascent and ExxonMobil’s decline reflects investors’ bets on a changing energy system with the rise of renewable resources and an uncertain outlook for oil demand. The future continues to shine bright for green startup NextEra having most recently been in M&A talks with Duke Energy, a North Carolina-based utility company worth $66 billion.
Materials (Ed Collins)
The Materials sector has not improved this week. The Vanguard Materials Index (VAW) is down very slightly, by 0.31%, whilst the S&P 500 Materials Sector exchange (SPLRCM) is also down, by 0.56%.
Lots happening in the Materials sector this week. Firstly, Royal Dutch Shell (RDSA) announced this week that it plans to cut 9000 jobs, which is almost 10% of its total workforce. This is as part of its restructuring process, whereby the oil major is attempting to shift to being cleaner and greener.
Ben van Beurden, Shell’s chief executive, said on Wednesday that the job cuts were expected to reduce annual costs by as much as $2.5bn by 2022. 7000 to 9000 jobs will be cut at Shell by the end of 2022. The aim is to make the FTSE-100 company more financially resilient and set it up for a shift towards lower-carbon energy businesses. The restructuring comes as the pandemic has depressed oil prices.
On Thursday, Shell’s share price dropped to its lowest point in 25 years, one day after announcing the company overhaul. Shell’s B shares closed at 907.3 pence on Thursday, the lowest level since November 1995. Shell’s share price is down 8.08% this week, and has fallen 58.8% YTD.
In other big Materials news, Devon Energy Corp (DVN) is to buy its shale rival WPX Energy (WPX) for $2.56bn. WPX investors will receive 0.5165 Devon shares for each WPX share they own. The deal, including the debts of both companies, is valued at $12bn. Devon shareholders will own approximately 57% of the new company, which will be called Devon Energy. This is a big deal for the sector because besides from Chevron’s agreement to buy Noble Energy, there has been a lack of M&A activity. This new deal may be a sign of a thaw. Devon claims that the deal’s synergies would yield $575m in annual cash flow improvements by 2021, and that it would be “immediately accretive” in earnings, free cash flow, and invested capital.
Credit (Alexander Kaiser)
While the pandemic has resulted in new records being set in terms of issued debt, this week has shown that larger companies may no longer issue it from the same place anymore. Following a significant influx of investment from the middle east, direct lenders now can now compete for some of the largest deals. These new platforms include partnerships such as the one between Credit Suisse and the Qatar Investment Authority and traditionally more private investment firms, i.e. divisions within larger private equity firms such as Apollo, Ares and HPS investments. Following the increase in their capital, these groups are now able to write over $1bn checks, something that used to be solely reserved for banks. Historically, these divisions have always become more active during periods of major restructuring and economic upheaval, something which is expected to persist for the foreseeable future. While large loans from these sources are not completely new, they have dramatically accelerated during the pandemic and are expected to continue rising in popularity with more challenging credit environments emerging following the US presidential election. The complex deals direct lenders are able to produce are much better suited for companies during such times, however, I do worry that this will shrink the number of new listings for more traditional investors since PE firms prioritise their investors. Many companies have already locked in long-term debt at low rates and with future need being lower in scale but higher in complexity, it seems there will be less and less room for smaller institutions and individuals.
Meanwhile, pension funds and smaller asset managers who have begun looking elsewhere for safe returns following the degradation of yield in the west found the 2nd largest market in china to be too risky and illiquid. Domestic commercial bonds tend to hold bonds to maturity due to regulation, basically eliminating reselling of debt, which will make the Chinese market a minefield of regulations and other legal restrictions for western investors according to the IMF. Calls for reform still face stiff opposition from domestic lenders as it would force them to increase capital as a buffer against bad loans. It seems to me that Chinese markets will still increase in importance in the next few years and managers and investment directors with the experience and skill set to navigate the Chinese landscape will increase in importance.
Real Estate Investment Trusts (REIT’s) (Claire Willemse)
New figures have been released on the percentage of rent paid by tenants for the last quarter of 2020. Re-Leased, a commercial property management platform, claims retail tenants have paid a mere 13% of their rent due, a further fall from last quarter as uncertainty climbs over the re-tightening of lockdown restrictions. With many retail tenants dependent on the holiday season for sales, such measures by the government would certainly impact their ability and willingness to pay even further. Office tenants and industrial tenants did slightly better with 32% and 18% respectively, themselves subject to the same uncertainty and the prospect of prolonged working from home schemes. Furthermore, with the furlough scheme soon coming to a close and the worry of more job losses as a result, as the new scheme fails to adequately subsidise struggling employers, the economic climate is likely to further worsen. This will continue to therefore, create issues for landlords, assuming no further government aid is announced.
Brookfield Asset Management (NYSE:BAM) , a Canadian alternative asset management company, has filed the draft prospectus for a new REIT in India. This will be the third REIT offering in India, as part of the growing sophistication of India’s Real Estate sector. This comes after Blackstone-backed Embassy Office Parks REIT and Mindspace REIT. The listing is aimed for mid-December to early January and should raise $600mn. 11 merchant banks, including Morgan Stanley and HSBC, are working on the issue which involves 14mn square feet of assets. Considering the size of Brookfield Asset Management though (over $500bn in AUM), this had little impact on their share price, with an increase of only 1.4% this week.
Oil & Precious Metals (Oliviero Sacchet)
This week the oil industry registered: WTI(-7,03%) BRNT (-5,07%)
Today oil prices fell under $40 a barrel, the lowest level since June. In the past four months Opec has managed to stabilized brent prices thanks to supply cut. However, with coronavirus cases rising, the demand is suffering so returning to the pre-covid level of 60$ will take longer than expected.
The Dubai-Iraq’s $8 billion deal with US energy companies is facing important troubles because Washington may close its Baghdad embassy. After the assassination of the Iranian commander, Qassem Soleimani, the green zone in Baghdad was targeted with multiple rocket attacks. This closure will be suffered from Iraq, that saw the deal as the key to Iraq’s energy future. However, it is not clear how this will impact to US companies, but Raad Alkadiri, the BCG senior director of the Center for Energy Impact, said that this could lead to domestic opposition to commercial deals with US companies.
The strike in Norway could cause a reduction in the domestic oil production. Norway is Europe’s largest oil producer with an output of 2 million barrel per day. However, this strike could reduce the oil production by 8 %, or 330,000 barrel per day.
The building of the Nord Stream 2 pipeline has resumed in Denmark. On October 1 the Danish Energy Agency has permitted to operate in its water. Gazprom applied for the permit on November 2019 and actually Denmark seems to have passed the poisoning of Alexei Navalny. However, Germany still hasn’t taken a final decision.