February 2018 Newsletter

Themes from February

US Federal Reserve chair Jerome Powell said the pace of US interest rate rises would remain “gradual” but acknowledged the US economy had strengthened.

Global equities sold off sharply during the first week of February with the Dow registered two days of declines in excess of 1,000 points. US equities rallied after touching lows on the 8th February 2018.

RBS reported £752m profit missing forecasts but net interest margin fell 5 basis points to 2.13%. RBS shares declined 20p in response.

IAG reported EPS of 95.8 cents up 3% and promised to buyback €500m of its shares during 2018. IAG nevertheless fell 5%.

Comcast gatecrashed the Sky/ Fox/ Disney deal offering 1250p cash for Sky. The Murdoch family has yet to formally respond.

Toys R Us went into administration following a VAT demand for £15m which the company could not meet. The administration will leave the Pension Protection Fund with £37m of new liabilities.

Provident Financial is undertaking a 17 for 24 rights issue at 315p per share to raise £331m. The board agreed a £172.1 provision in respect of the Repayment Option Plan.

Forthcoming UK Events

1 March BoE Consumer Credit/ Nationwide House Prices
2 March Construction PMI
5 March UK new car sales/ CIPS UK Services PMI
6 March UK Treasury 30 YR Gilt Auction
7 March Halifax House Price Index
9 March UK Balance of Trade/ UK Industrial Production/ UK Manufacturing Production
15 March UK Treasury 10 YR Gilt Auction
20 March Retail Prices Index/ PPI Output
21 March Public Sector Net Borrowing/ Average Earnings/ UK Unemployment Rate
22 March BoE Interest Rate Decision/ UK Retail Sales
26 March UK Mortgage Approvals

Performance of World Markets (28/2/2018)

North America Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 25,029.20 -1,120.19 -4.28 18.53
S&P 500 (Close) 2,713.83 -109.9 -3.89 13.27
NASDAQ (Close) 7273.01 -138.47 -1.87 23.19
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 7,231.91 -301.64 -4.00 -2.05
CAC 40 INDEX (Close) 5,320.49 -161.43 -2.94 9.51
EUROSTOXX 50 (Close) 3,440.01 -169.28 -4.69 1.47
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 3,259.41 -153.72 -4.50 0.40
NIKKEI-225 (Close) 22,068.24 -1,030.05 -4.50 -1.00
ASX 200 (Close) 6,016.00 -21.70 -0.40 5.50
HANG SENG (Close) 30,844.72 -2,042.55 -6.20 29.70

United Kingdom

UK blue chips endured a 240 point sell off over February after the exuberance of January 2018 evaporated as global interest rates rose. UK gilt yields rose on the view that base rates will rise in May 2018.

Source: www.fixedincomeinvestor.co.uk

Utilities, transport and property stocks bore the brunt of the sell off with electricity and water sectors, the focus of nationalisation fears and higher interest rates.

The UK government’s struggles with its backbenchers pulling in opposite directions over the EU customs union have yet to be resolved. Politics is a key issue for sterling (which has been sensitive to comments from Michel Barnier) but less so for UK capital markets.

The demise of Toys R’ Us and Maplin on the same day underline the structural problems of high street retailers and online competition.

China

Both Shanghai and Tokyo stockmarkets fell sharply during February despite the lack of any real pressure on bond yields which remained subdued during February, suggesting investors were selling equities and parking the proceeds into bonds.

Source: www.tradingeconomics.com

Hong Kong stocks fell 6.5% in February but staged a rebound towards the end of the month. AIA Group jumped 4.8% after the insurer reported a 48% net profit increase to 30th November 2017. Chinese billionaire Li Shufu, CEO of Geely Holding Co (owner of Volvo Cars) acquired a 9.7% stake in Daimler AG for US$9bn. The move is a first step in Geely’s “go global” strategy, and possibly aimed at securing access to Daimler’s car battery technology.

Europe

According to the Pew Research Centre the EU economy is the world’s second largest economy worth $20.3trn, behind China’s $21.4trn but ahead of the USA at $18.6bn and Japan’s $5.3trn based on 2016 data. According to the European Commission GDP growth was 2.4% in 2017 and is expected at 2.3% in 2018.

Munich Re reported a profit of €392m in 2017 due to Hurricanes Harvey, Irma and Maria but kept its €8.60 dividend unchanged.

The Euro weakened towards the end of February in response to expectations of higher US interest rates (possibly four hikes in 2018) vs Euro rates which are not expected to increase in 2018.

United States

February 2018 saw the first discernable investor re-think on the Trump fiscal plan. As inflation rose and bond yields jumped, investors were finally questioning the desirability of another US government debt splurge. Interest rates will have to rise, firstly to contain inflation but also tackle the risk of overheating.

Unlike previous occasions when the US budget deficit got out of control, the current scenario now envisages more debt at a time when US debt to GDP is already 104%. The funding plan for massive $1trn annual deficits will require higher interest rates. Is GDP growth of 4% sustainable or even desirable?

February 2018 was a much needed correction in US equities. January’s 2018 gain of 5.5% had seemed euphoric. The near 4% drop in the S&P 500 seemed long overdue.

Exxon Mobil reported earnings of $19.7bn in 2017 including $5.9bn of gains from lower US corporate taxes. However investors took a dim view of Q4 oil production of 4m barrels down 3% from 2016.

Walt Disney’s new blockbuster “The Black Panther” recouped its $200m cost over its opening weekend reporting gross revenue of $748m in its first 2 weeks.

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Important Information

Key to Material Interests:

Please be aware that the following disclosures of Material Interests are relevant to this research note:

RBS                                           Relevant disclosures:   <2>

IAG                                            Relevant disclosures:   <2>

Comcast Inc                           Relevant disclosures:   <2>

Provident Financial            Relevant disclosures:   <2>

AIA Group                               Relevant disclosures:   <NA>

Geely Holding                        Relevant disclosures:   <NA>

Munich Re                               Relevant disclosures:   <2>

Exxon Mobil                           Relevant disclosures:   <2>

Walt Disney                            Relevant disclosures:   <2>

  1. The analyst has a personal holding in the securities issued by the company or of derivatives linked to the price of the company’s securities.
  2. Collins Sarri Statham Investments Ltd has clients who hold either shares or CFD positions in this security.

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