Week Ending 22nd November 2015
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone Japan Australia & New Zealand Canada
Emerging Markets 10 India China Russia and Eastern Europe Latin America Africa South East Asia Middle East
Equities 17 Financials Oil & Gas Retail Technology Pharmaceuticals Industrials & Basic Materials
Commodities 23 Energy Precious Metals Agriculturals
Currencies 26 EUR, USD, GBP AUD, JPY & Other Asian
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Week Ending 22nd November 2015
THE WEEK IN BRIEF
Low inflation continues
Commodities slide further
The majority of the developed world is continuing to experience low, or even negative inflation, with sustained decreases in fuel prices driving down inflation, amid weakening demand in an increasingly fragile global economy. This week we learned that overall prices, according to the Consumer Price Index, fell in the UK last month, with inflation at -0.1% for the second successive month. With the Bank of England stating in its quarterly Inflation Report that inflation could remain below its’ 2% target for another two years, expectations that there might be an increase in interest rates any time in the near future have been dampened. Meanwhile, inflation is still well below target in both the Eurozone and in the US, with the annual inflation rate at 0.1% and 0.2% respectively. Whilst the Fed looks poised to increase interest rates in the US, another round of quantitative easing in the Eurozone seems almost certain, which could force the Euro yet closer to parity with the Dollar. Meanwhile, although the Bank of Japan is maintaining its position on its current monetary policy, many now expect them to follow the ECB to pursue further QE to come before too long as inflation still lags well below the 2% target. However, low inflation may not be such a bad thing at this time; decreased fuel prices are allowing consumers to spend more on other goods, which is hoped to give a much needed boost to demand at this time.
Oil and gas prices have continued to fall this week, with WTI crude oil falling below $40 for the first time in three months, while natural gas prices have fallen 8.5% over the week. Food prices have also maintained their downward trend, and the Food Price Index has now fallen 17.2% since September. There has been a similar story for precious metals - in particular, gold and silver continued to tumble, with many waiting on the Fed to raise interest rates in the US. A recovering US economy amid weak global economic performance means that we could see the current commodity price slump continue for some time. Weak demand from the likes of China, as well as other emerging economies that are experiencing a decreased rate of growth at present, is contributing to global supply gluts of commodities. The low prices have already caused problems for many producers, particularly mining firms, who are facing decreasing revenues and squeezed margins. Given this outlook, then, the future for these firms seems uncertain, with further share price falls likely in the coming months. Jack Millar
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NEFS Market Wrap-Up
MACRO REVIEW
United Kingdom This week’s headline regards the government’s financial position ahead of next week’s Autumn Statement and Spending Review. The Chancellor has promised to eliminate the structural deficit by 2020 and as a result intends a wide range of spending cuts. It has been announced that seven government departments have agreed to cuts, with only the NHS and education not seeing a reduction in their budgets. However, figures released this week on government finances show that it has recorded the worst deficit for any October since 2009, with public sector net borrowing rising by £1.1 billion compared to last year. This is well above forecasts that were predicting a reduction in the amount of borrowing, and undermines the government’s aim to reduce spending. Between April and October alone, the government had to borrow £54.3bn to plug the gap between its spending and income, with its annual target being £60bn. As a result, it is likely that the Chancellor will fail to meet his target this year, with progress being much slower than expected. More importantly this could undermine the government’s target to eliminate the structural deficit in time. In fact, the main contributor to the falling public sector borrowing, illustrated below, is increased tax receipts, rather than reduced spending.
that the lack of inflation will turn into persistent deflation due to strong consumer demand and rising domestic wages. In fact, the slight negative inflation will give a short-term boost to the economy. Services exports are set to overtake the value of exports of manufactured goods in the next three to five years according to the British Chambers of commerce. This is going to be a first for a major economy, where manufactured goods still make up the majority of trade. The UK has benefitted due to the global services trade growing faster than goods trade, which is ideal for the UK as it possesses a comparative advantage in the sector. While the services trade surplus is not yet big enough to offset the deficit from exported goods, considering the recent trend of the UK’s services sector, this is likely to change. Matteo Graziosi
In other news, the inflation rate, as measured by the CPI, remained at -0.1% in October. This marks two consecutive months of falling consumer prices for the first time on record. Inflation has now been stuck in the narrow range of -0.1 to +0.1% since February. However the Bank of England is unconcerned
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Week Ending 22nd November 2015
United States Minutes from the Federal Reserve meeting on 27-28 October, along with consumer price index data from the Bureau of Labor Statistics, were released earlier this week. The right choice of words in the meeting minutes is crucial as they are analysed very critically by the markets. In the last meeting, most members of the Federal Open Market Committee (FOMC), the interest rate-setting body in the US, said that conditions for an interest rate rise “could well be met” by the next meeting in mid-December. This is provided that economic data continues to show improvement and that there are no “unanticipated shocks”. Despite a split in opinions among policymakers, the Federal Reserve will want to keep its options open come December. Some are concerned that the US economy is not adequately prepared, however, the key argument for a rate rise in December is that it will allow the Federal Reserve to follow a “shallow” lift-off trajectory. Janet Yellen stressed that keeping interest rates so low while the economy has recovered could encourage “excessive leverage and other forms of inappropriate risk-taking”. As measured by the consumer price index (CPI), prices for all items in October rose in line
with forecasts by a seasonally adjusted 0.2% from September. This was the first positive reading in three months as the consumer price index was up 0.2% on a year-on-year basis. The index is a measure of the average change in prices over time of goods and services purchased by households. In calculating the index, price changes for the various items are averaged together with weights. Excluding food and energy, due to their high price volatility, the core consumer price index rose 0.2% from September and is up by 1.9% from this time last year. As shown in the graph below, the relationship between the price of Brent crude oil and the US headline inflation rate appears to be quite highly correlated. While lower energy prices have had a downward drag effect on inflation, lower fuel costs, boosts in employment and high wage growth should boost consumer spending. Speeches from policymakers and releases of economic data over the next month will be of utmost interest as the Federal Reserve assesses the viability of increasing interest rates for the first time since 2006. The fragility of the US economy should become more apparent once the first move is made. Sai Ming Liew
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NEFS Market Wrap-Up
Eurozone The president of the European Central Bank (ECB), Mario Draghi, announced this week that the ECB must act to ensure that inflation increases swiftly in order to ensure positive inflation is achieved within the euro area. In October 2015, inflation was at 0.1% in the euro area, exceeding some estimates and beating the previous month’s figure of -0.1%, well below the ECB’s target of 2%, which has not been reached for quite some time. In fact, the inflation rate in the Eurozone as measured by the Harmonised Index of Consumer Price (HCIP) hasn’t been close to 2% since 2013. Many economists believe that this is a sign that the ECB will introduce new measures to combat deflation within the Eurozone as soon as December 2015 at the next ECB meeting. Mr Draghi stated that "If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible”. This could indicate that more stimulus may soon be used to increase inflation. The ECB has already implemented a €1.1trillion bond in an attempt to lift consumer prices and promote in the 19 countries of the Eurozone. This was part of a quantitative easing programme used by the
ECB, which involved purchasing sovereign bonds at the cost of €60bn a month until September 2016. Following the speech given by Mr Draghi, the Euro began to fall with respect to the US dollar as the expectation of the markets is that more stimulus will be used by December 2015. One of the reasons that the ECB are keen for inflation to turn positive in the Euro Area and reach their target for inflation of 2% is that falling consumer prices can reduce demand; consumers may delay the purchasing of some goods and services in the hope that prices may fall further in the future, which can in turn reduce demand and result in fewer jobs. Moreover, if consumers delay buying goods and consumer demand falls firms in the Eurozone, countries may then postpone any investments they were going to make. While the Eurozone is still far from this level of deflation at present, persistent negative inflation is worrying for GDP growth prospects in the Euro area, amid the drawn out recovery that the Eurozone is experiencing. Indeed, in his speech Mr Draghi stated that the Euro Area recovery is the weakest since 1998.
Kelly Wiles
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Week Ending 22nd November 2015
Japan As predicted by many analysts, preliminary data released this week shows that Japan will enter a technical recession for the third quarter of this year. This would mark the second recession since the election of Prime Minister Shinzo Abe and the inception of his Abenomics programme. Data shows GDP will contract by 0.8%, which is greater than the anticipated 0.2% contraction. The main drivers of this have been weak exports in the backdrop of declining emerging markets. As Japan’s main trading partner the slowdown in China has also been particularly detrimental, accounting for roughly 20% of its exports. Despite the economic risk from overseas, the economic and fiscal policy minister Akira Amari has expressed confidence in Japan’s recovery trend. Likewise, the Bank of Japan (BoJ) continues to have faith as the size of quantitative easing as bond purchases are kept constant at ¥80tn per year. This approach has been very different to previous year’s recession when the bank eased monetary policy in order to boost inflation expectations, whereas now the BoJ will keep policy unchanged as long as it considers the economy to be on course to reach the 2% inflation target. However, the general consensus amongst analysts remains the same, anticipating further QE in the coming months but no imminent changes to policy.
Marcel Thieliant of Capital Economics expects further BoJ action in January. While Japan will enter a recession by technical definitions, it is not what is conventionally considered to be a recession. Critics may claim Abenomics is flagging but reality is that the Japanese government has delivered the outcomes expected from stabilising macroeconomic policy – full employment and increased labour force participation. For Japan there is a more fundamental problem which makes it susceptible to falling growth – population growth. The population began to decline in 2005, as shown on the graph below, and as a result the working-age population is estimated to be shrinking by 1.5% each year. So far the government has tried to mitigate this demographic challenge by increasing the labour force participation of women despite the falling labour force. Female employment has reached a high of 65% following legislation introduced to promote women in managerial positions. However, “womenomics” as it has been called, will not be enough to prevent the long-term issues; sooner or later Japan will need to re-assess its position on immigration, thus far avoided due to its political sensitivity. Loy Chen
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NEFS Market Wrap-Up
Australia & New Zealand Australia’s Wage Price Index (WPI) was released on Tuesday, meeting the 0.6% forecast, whilst matching the previous month. This seasonally adjusted indicator measures the change in the price that firms and the government pay their labour, excluding any bonuses. The Australian Bureau of Statistics claimed that over the last year the WPI rose 2.3%, keeping in line with previous quarters, as shown by the graph below. But this quarter experienced the slowest growth rates in private sector wages, only 0.5% and 2.1% over the past year. But public sector wages grew marginally faster by 0.7% and 2.7% over the whole year. The cause of this is believed to be “the end of the mining boom” as stated by AMP’s Capital strategist Shane Oliver. Following significant jobs losses, wages only grew by 0.1%, a significant depreciation since the 1% days of the “resources-boom era”. Workers have less bargaining power and therefore forced to accept lower wages, creating “weak demand in the economy leading to weak wage growth”. It may help to protect employment as wages are low and therefore costs are lower for firms - a potential explanation for why jobs growth have been above expectations recently.
The main industries enjoying an increase during the quarter were Accommodation and Food services, rising by 1.6%, whereas Finance and Insurance services experienced the smallest rise (0.2%). New Zealand’s inflation expectations were released on Monday, measuring the percentage business managers expect prices to change annually over the next 2 years. The Reserve Bank uses this as an indicator when assessing inflation pressures. According to them, business managers expect inflation to be 1.85% in the next two years, a change from the 1.94% expectation last period. When looking at the year to December 2016, expectations came in at 1.51%, a slight rise from the 1.46% expected 3 months ago. Banks, such as Westpac, were surprised at how stable expectations were, meeting the RBNZ’s 1-3% inflation target, especially considering inflation has remained below 1% for some time. In terms of New Zealand’s official cash rate, such figures are unlikely to put pressure on the central bank to cut the rate further in the hope of boosting growth. However some analysts do expect a cut to 2.5% next month, as inflation expectations are still below the 2% mid-point. Meera Jadeja
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Week Ending 22nd November 2015
Canada Following the Finance department’s update of economic and fiscal projections, which was published on Friday, the general consensus is that it will take time alongside effective policy implementation for Canada to return to normal economic conditions. The CPI inflation rate has remained at 1% for the second month in a row, which is on the lower boundary of the Bank of Canada’s inflation target, which is 2% (plus or minus 1%). The low rate is largely due to the collapse in oil prices that started at the end of 2014. Nonetheless, it is expected that inflation will start to rise. David Madani, Canada economist at Capital Economics, said “we expect that gasoline inflation will be back to zero in December. That change will add a full percentage point to headline inflation, which could rise above the 2% mark by early next year”. However, this may need to be taken with a pinch of salt; the increase in inflation is due to what might be described as a statistical loophole. The CPI rate is calculated on a yearly basis, so the change in December 2015 inflation would be calculated by comparing to CPI performance in December 2014. The largest falls in gasoline prices, as shown on the
below chart, occurred between November 2014 and January 2015, when prices fell by roughly 27%. Therefore comparing a low value now against a low value a year ago would make it seem like inflation is rising towards the 2% target. Yet this week, crude oil fell close to US $40 per barrel. Although low gasoline prices have overall had a negative impact on Canada’s economy, some areas have benefitted from this, primarily the retail sector. Lower gasoline prices have meant that consumers have had more to spend on retail – however even this advantage have been short-lived. Following four months of positive growth in the sector, it has been revealed that retail sales fell by 0.5% from August to September. Alongside this, the fiscal outlook also remains gloomy, with the Finance Department’s report predicting a $3 billion deficit in 2015-2016; a stark contrast to the forecast of a $2 billion surplus made earlier this year. There are plans to invest into infrastructure in order to revive the economy, which will require a deficit, particularly as subdued growth has meant tax revenues have been low. Shamima Manzoor
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NEFS Market Wrap-Up
EMERGING MARKETS China In 2009, shortly after the Global Financial Crisis, China’s central bank governor, Zhou Xiaochuan, called for a new international currency system with the IMF as its core. The huge amount of US Dollar reserves China piled in the last decades, as shown in the graph below, makes China vulnerable to the Federal Reserve’s monetary policies. Accordingly, now the world’s second-largest economy, China asked in 2014 for the yuan to be added to the IMF’s basket of Special Drawing Rights currencies, but until recently the RMB was considered to be managed too much to be a fitting candidate. It now looks likely the RMB be formally included in the SDR’s currency basket at the end of this month. Earlier this week the IMF’s Christine Lagarde said that the fund now deemed that the RMB “meets the requirements to be a ‘freely usable’ currency”, which is one of the most important hurdles to join the Yen, Dollar, Pound and Euro as a leading unit in international trade. China thinks that the inclusion of the RMB into the SDR basket will strengthen the representativeness and the attraction of the SDR. “It will improve the existing international monetary system.” the People’s Bank of China (PBoC) added.
This week, the Bank of China International Holding limited has launched Europe’s first RMB-denominated share exchange-traded fund (ETF) at the same time as the inauguration of the China Europe international Exchange (CEINEX). According to the PBoC, the launch of the ETF will help broaden the spectrum of Europe’s RMB equity fund market and create a conduit for European investors to access China’s stock market. The Co-CEO of CEINEX, Han Chen states that “as the gateway between Europe and China, CEINEX will focus on ETFs, bonds and other cash products at its early stage of development. It will gradually broaden its RMB financial derivatives offerings to meet the demand of overseas investors and further promote RMB internationalisation.” Alexander Baxmann China's Currency Reserves
The Shanghai-Hong Kong Stock Connect, which was installed one year ago, was not considered such a big deal by many, as the numbers involved are relatively small. Nonetheless, its real significance does not lie in its size but in the fact that it was the first scheme under which China had let foreign investors in without requiring approval of each investor.
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Week Ending 22nd November 2015
India Contracting for the eleventh month in a row, India’s exports declined 17.35% to $21.35bn, highlighting the fact that the country’s current trade strategy is clearly not working and must be addressed. Fortunately its trade balance was buoyed by a sharper fall in imports, which, as shown by the graph below, now stands at its lowest level since February. Meanwhile, wholesale prices have dropped again, mainly on account of rising food prices. Sluggish global demand, an overvalued rupee and falling global commodity prices are usually attributed to weak trade performance, but India’s merchandise exports have been hovering at around $300 billion for over four years. Interestingly, in Modi’s eighteen month tenure as Prime Minister, the country has seen a 44.89% drop in exports. Slowing global trade cannot fully account for the slide, given India’s modest export share of 1.7%. The same can be said for currency value as India’s top competitor in its key exports such as steel, chemicals and textiles is China, and the yuan has fallen just 3% against the dollar, while the rupee has fallen 10%, since July 1, 2014. Instead, India’s limited export base must be addressed with further product diversification, alongside modifying trade agreements which
are shallow in terms of product coverage. An example is the India-Mercosur trade agreement with countries in Latin America, which doesn’t spare textile and apparel items from import duties as high as 35%. In light of the data, which was released on Monday, the government approved a scheme to provide a 3% interest subsidy for exporters for the next 3 years. In other news, inflation in terms of the wholesale price index (WPI) rose slightly from -4.54% recorded in September to -3.81% in October. The WPI has lingered in negative territory for a year now but the trend has been welcomed by the Confederation of Indian Industry, whose direct general Chandrajit Banerjee, said "WPI inflation has continued to remain negative for a full year, indicating downward pressure on the price of a range of commodities”. Whilst inflation is stable and not a cause for concern, India must tackle the worrying trend of falling export levels. Despite attempts to incentivise exporters, they are not long term solutions and perhaps India should look at making extensive changes to its current trade strategy instead. Homairah Ginwalla
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NEFS Market Wrap-Up
Russia and Eastern Europe The Russian Prime Minister, Dimitry Medvedev, announced this week his acknowledgement of the tough economic situation his country faces, as figures released show that Russia’s GDP would be 1.5% higher had it not been for the Western sanctions; despite this he remained optimistic. Medvedev went on to say that the sanctions have had no positive effects on any industry and that they have “considerably complicated the situation.” Either this, or the results are in embryo state. Fortifying the latter proposal is import substitution, a phenomenon that has occurred in the military sector, reducing reliance on foreign imports and, subsequently, strengthening domestic production. This is a good step for Russia in the long-term has they reduce their dependency on other countries and focus on independent growth. While the PM said that the current situation is worse than the 2008-09 recession - due falling real incomes (factors which were unchanged some 7 years ago) - he stressed that the economy was stable and attractive to investors. In fact, the economy’s stability is rather unbelievable when we consider not only the economic, but political, pressure Russia is under. This resilience can be attributed to the devaluing ruble, which, while initially thought of as a negative indicator, actually allows foreign investors to buy Russian assets at lower prices
– something that may be hugely beneficial in the long run for Russia’s international relationships. On top of this, FDI from the Asia Pacific region into the Soviet State is estimated at $20 billion and, from there, can only increase. China and India, in particular, have already proved they are actively looking to increase their investment flows through establishing various funds. It can only be good news, then, that Russia and the Philippines signed an economic cooperation agreement this week in at the APEC summit in Manila. Sberbank boss, German Gref, announced his prediction that “financial recovery will take another several years due to tightened requirements to capital.” While this looks to be true, a lot depends on oil prices and how they fluctuate next year. Gref sees oil prices increasing above the current $50/barrel level and minimal growth of 0.5-0.6% - a very negative outlook. For the first time of late, however, the price of oil and the strength of ruble started to decouple, with Russia’a currency rising 2% against the dollar as oil continued to sink (graph shown below). All in all, the current outlook is still mixed – for me, there is a lot more hope in Russia than one might think. Tom Dooner
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Week Ending 22nd November 2015
Latin America A major story this week is that China will finance and build two nuclear power plants in Argentina in a deal worth up to $15bn, underlining Beijing’s continued presence in Latin America despite its slowing economy. When finished, the projects will roughly double Argentina’s nuclear power capacity, currently provided by its existing three nuclear plants. Although China has already made enormous investments throughout Latin America, including in ports, dams, railways and energy projects in Argentina. This comes at a time when China has started to scale back its exposure to more risky Latin American borrowers, such as Venezuela. However, China did agree to an $11bn currency swap arrangement last year to bolster Argentina’s weak reserves. The deal comes amid a push to export China’s home-grown atomic technology, often by offering cheap technology and generous financing. It follows China’s move last month to take a one-third stake in a French-led project to build the first in a new generation of UK nuclear plants at Hinkley Point. The agreement, signed in Turkey during the G20 meetings, will see China provide most of the financing for the two new plants at a time when Buenos Aires is locked out of global credit markets. Chinese banks and companies will
provide loans and investment to cover 85% of the projects’ costs, with the loans to be paid back over 18 years with an annual interest rate below 6.5%. Some Argentineans have raised concerns about the country’s growing reliance on China, and Buenos Aires’ decision to sign the deals just before a presidential electoral runoff, after which Ms Fernández will step down at the end of her second term. Mr Macri has promised to review all agreements signed between the current government and Beijing if he wins on the November 22nd. Indeed, the 22nd November election run-off will see Argentina’s presidential elections come to a climax as the first voting session saw no clear winner. The mood seems to be swinging towards the challenger Mauricio Macri; polls show him with a nine point advantage, while third-placed Sergio Massa has refused to place his support behind either hopeful. Furthermore, Brazilian inflation has reached its highest level in 12 years, adding to the government’s challenges as it struggles to steer the country through an economic and political crisis. Inflation in the year to November was 10.28% according to the IBGE, Brazil’s statistics office. Yet, despite rapidly rising prices, the economy is set to contract 3 per cent this year. Max Brewer
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NEFS Market Wrap-Up
Africa In just a week since being declared Ebola-free, Sierra Leone is on the brink of economic crisis. The 2016 spending budget has been set at just under four trillion Leones (91 million USD), however so far this year the National Revenue Authority has only managed to raise two trillion Leones. Unfortunately Sierra Leone has faced a very financially difficult year, with 2015 GDP having fallen by 25%. The primary cause is the Ebola crisis, which has cost the country $200 million USD. Lost workers have slowed down production, causing businesses closures and the costly need to retrain new employees, with lower production consequently reducing export revenues. The resulting business and industry failures have led to reduced tax receipts reducing government income. Furthermore, restrictions on migration have increased unemployment, as workers have not been allowed to move around the country in search of available jobs. A second factor has been the collapse of iron-ore prices, which has caused some of Sierra Leone’s main mining companies to close down. This has greatly increased unemployment, whilst further reducing GDP and significantly decreasing exports, thereby putting deflationary pressures on the currency. To recover, the IMF is performing a review of Sierra Leone’s economy and may put forward
some financial support. Until then, budget cuts are essential if the inevitable budget deficit is to be minimalized, yet this will be difficult in a time when social spending is much needed following the Ebola crisis. Elsewhere, South Africa is following in the footsteps of Zimbabwe by increasing interest rates amid the US Dollar’s continued appreciation. However whilst the Zimbabwean Dollar faced globally uncompetitive trade, the South African Rand fears a capital flight of assets, as it depreciates in value. Consequently, by increasing interest rates, it is hoped investment will remain in South Africa. Unfortunately, over the past two years, the Rand has lost more than a third of its value against the Dollar, as seen in the graph below. The looming depreciation of the Rand also threatens to increase the inflation rate, as exports increase. Whilst some economists see this inflation as beneficial for the currently struggling South African economy, others argue it could be detrimental. As savings and wages erode away as prices rise, consumer spending, investment rates and livings standards will deteriorate. Charlotte Alder
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Week Ending 22nd November 2015
South East Asia Vietnam, the country proving to be one of the world’s best performing FDI locations recently, is hoping for double boosts from the TransPacific Partnership, which will provide greater access to US markets, as well as stricter reforms and regulations to battle the corruption that has riddled Vietnam for many years. Multinational companies have been enticed by Vietnam’s exceptional low labour costs as compared to China, who are still adapting to the rapidly rising middle class and hopes that the young population can be the driving force behind this growth. Facing rapid wage rises in China and the transition from a manufacturing sector to a services sector has had huge implications on Vietnam as it is quickly becoming the world’s main manufacturing hub, attracting a staggering 241 FDI projects so far this year. Arguably Southeast Asia’s fastest growing economy, Vietnam continues to attract a range of manufactures ranging from technological firms such as Samsung to big retail brands such as Nike. Annual GDP growth is currently 6.8% with the potential to exceed 7.5% in 2016, as shown in the graph below. Therefore, both the TPP and the recently announced trade agreement with the EU, which will be based on lower tariffs and greater integration, will give Vietnam a greater competitive advantage as
multinationals will seek to relocate from China, leading to greater rate of job creation. This will have additional benefits as more jobs will lead to greater consumer spending. Countries that are not in the TPP, such as Thailand are set to lose out; they specialise particularly in car parts, however the markets that have been opened from being a member of two huge trade pacts will mean Vietnam will be able to make in-roads on them in the future. Additionally, Singapore which is another competing country is focusing on another trade bloc in which the Prime Minister Lee Hsien Loong has recently urged countries in the AsiaPacific Economic Cooperation (APEC) to open up their service industry to further integrate their economies. Singapore are currently suffering from all-time productivity lows, and so the future of Vietnam’s manufacturing sector seems secure, although the new regulations on environmental standards and treatment of employees may have a negative impact in the future. Alex Lam
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Middle East Jordan this week released a draft budget for 2016. Despite regional economic and geopolitical headwinds, the budget projects near a 10% increase in spending from revised 2015 figures, fuelled by a projected 11% rise in revenues. Capital spending is set for a 20% hike while current expenditure will rise by 8%. The budget projects growth of 3.7% and inflation at 3.1% for 2016. Jordan’s chronic budget deficit is partly due to the expense of hosting the Syrian refugees, a cost which is not fully covered by international aid. Meanwhile, the central bank governor of Iran stated that Iran's economy has the potential to grow by around 8% a year in the coming future once sanctions are lifted and the country repairs its relationship with the international community. He believes that 3% growth is well below the economy's potential and that the economy has capability to achieve an 8% growth rate over the course of the five year development plan. With a view of promoting growth and tackling high inflation, the government has taken necessary steps and committed itself to disciplined and transparent fiscal and monetary policy programmes. The economy of the United Arab Emirates is expected to grow 3% in 2015, as projected by
its central bank governor. The government is expected to still continue with its spending, while rationalising any unnecessary investments. Further supporting the projection, the UAE’s central bank's foreign assets rose 3.9% from a year earlier in October. Dubai has showed a dip in inflation by 0.3% between September and October this year, as per the report of the Dubai Statistics Centre. Transport cost inflation also slowed, owing to the lowering of gasoline prices in October. Bahrain's minister for industry and commerce informed the public about the plan of increasing subsidy cuts and its intention to impose charges for government services in the forthcoming year to boost revenues hit by slumping oil prices. This drastic change in spending after many years of subsidising goods and services in an effort to maintain social peace by keeping prices low, is being effected following plunging oil income over the past year that has widened the budget deficit of the government. Governments around the Gulf have begun restraining expenditure and cutting subsidies, but most do not face as much pressure as Bahrain, which lacks the huge financial reserves of its neighbours. Sreya Ram
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Week Ending 22nd November 2015
EQUITIES Financials As usual there has been some regulatory news in the financial world this week. Barclays [BARC: LON] has been fined a further $150m for fixing rates in the foreign exchange market, while the head of electronic fixed income will be “terminated”. This comes after many years of investigation into rate fixing in the banking industry, most notably the LIBOR scandal. As expected, the market reacted badly, with the company’s share price falling 2% on Friday. On top of this, the FCA announced that it would be investigating whether clients of asset managers are getting enough value for their money. This is bad news for asset managers, who often run high profit margins of around 35-45%, as they may be forced to change their business models. This was a double blow for BlackRock [BLK: NYSE], who announced on Wednesday it had closed its $1bn macro hedge fund due to continued low returns. The UK’s biggest building society, Nationwide [CCDS: LON], announced on Friday that profits for the company had increased 34% in the last six months. This was mainly due to a 14% increase in mortgage lending in the last year, which increased their share by 1%, solidifying their position as the UK’s second largest mortgage lender. The company pointed to increased employment and increasing house
prices for the improvement in lending. However, whether this will be sustainable is debatable, particularly as many are saying that the UK housing market is extremely overvalued and with the Bank of England considering an interest rate hike in the New Year. Furthermore, Nationwide’s CEO, Graham Beale, pointed out that the new 8% sub charge tax implemented on lenders as of next year will also eat at profits. The South African and British based bank and asset manager, Investec [INVP: LON] beat analyst’s expectations by increasing profits by 16.5% in the last six months. The company said this figure could have been 22% were it not for a fall in the South African Rand of 8.2% in the last three weeks. The most profitable sector was banking, with profits up 29.1%. However, the company is targeting an expansion in the wealth management division, which saw a fall in profits of 0.5%. On the morning of the announcement earnings per share rose 13% to 25.5 pence. This is a reasonable figure as it indicates the firm is not overvalued by the market whilst it also does not imply the firm is undervalued, so I would suggest holding shares in the company, rather than purchasing, at this time. Sam Ewing
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NEFS Market Wrap-Up
Oil and Gas This week I am switching the focus on the gas industry as I, for those of you who have kept up to date, have covered oil companies quite extensively in the previous weeks. On Tuesday, the French industrial gas group Air Liquide (AI: PAR) said it had agreed to buy US-based Airgas (ARG: NYQ) in an all-cash deal for $13.4bn. This is set to make Air Liquide the world’s largest supplier of industrial gasses, including oxygen, nitrogen, hydrogen, carbon dioxide and helium which are used in a variety of industries such as manufacturing, construction and healthcare. Five years ago, Airgas had also been approached by US rival Air Products for an opportunity to sell itself in a hostile bid of $70 per share that was ultimately rejected. The $143 a share offered by Air Liquide is more than double what Air Products offered to pay, and represents a near 51% premium to Airgas’s one month average share price. Airgas shares, which have declined 1% so far this year, jumped 30% to $137.35 on the news. The reaction from the stock market, though, did not extend to Air Liquide, as the response of investors was largely unenthusiastic, leading to shares falling 7% on Wednesday. Both can be seen in the graphs below.
It is, unarguably, a seemingly enormous price that Air Liquide is paying to get access to the US economy, where most of Airgas’s operations lie, and with the unimpressive growth that US manufacturing has shown so far this year, investors remain concerned. But Benoit Potier, chief executive of Air Liquide, believes that the adverse reaction of investors will prove to be short-lived. The US is expected to be the best market for industrial gases in the developed world over the next half-decade, and Air Liquide expects it to grow by about 4.4% every year from 2014 to 2020 - much faster than the expected annual growth of Europe and Japan (2-2.5% and 1-1.5% respectively). In other energy news, the boutique energy bank Simmons & Co has been bought by Piper Jaffray (PJC: NYQ), a midsized US investment bank and asset manager preparing for more oil and gas deal making during the prolonged price slump. Shares in the company fell 4% after the deal was announced, valuing the bank at about $539m and taking the slide to a decrease of 32.37% in the share price this year. Andrea Di Francia
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Week Ending 22nd November 2015
Retail In much the same oft-repeated vein, retail equities remain relatively stagnant when viewed as a whole, with only a few sectors exhibiting any significant changes in their values or forecasts. Instead, it is certain companies and areas within the expansive category of retail equities which give us exciting changes and points of analysis. As briefly touched upon in last week’s report, two of the world’s largest beer producers, SABMiller and Anheuser Busch, finalised the terms of a behemoth merger, which is to create by far the world’s largest company of its kind, even having to offload certain divisions in order to not violate American anti-trust laws, which were implemented in the early 20th century. The merger is both interesting and pertinent to the retail sector not for its size and scope, but rather for its knock-on effects both for consumers and large retail corporations which stock and sell the beer produced by the new company. Analysis of these effects and impacts is difficult, however, for it is difficult to foresee whether the oligopolistic market structure now in place for the beer industry will offset the cost reductions
forecast as a result of the merger. Whilst one school of thought is that cost-savings can, and will, be passed onto consumers as a result of a strong degree of competition still existing within the marketplace. It could also be argued that, given the size of the new company (accounting for around 25% of the global beer market according to Lazard analysts), power will be in the hands of SABMiller and Anheuser-Busch to set and dictate prices, causing an increase in prices for consumers, assuming retailers do not decrease their own margins to compensate for any supply-cost increase. Elsewhere in the retail sector, Deutsche Bank analysts have posted improved forecasts for holiday season retail sales growth, ameliorating a key metric for retail firms which has previously been a cause of concern for analysts, suggesting possible growth for not only direct retailers, but the abundance of consumer stocks which are contingent upon holiday spending for a great deal of their EBITDA and EPS forecasts. Jack Blake
Down Jones Consumer Goods Index - stagnant after strong October growth.
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NEFS Market Wrap-Up
Technology With a strong focus on the biggest firms within the tech industry, tech companies possessing a relatively smaller market capitalisation are excelling in their own rights. Excellent performance from Infineon Technologies sparked a rise in their share prices to €11.95 – an 8.2% increase. Whilst Xerox Corporations boosted share prices by 6.1% to $10.60 this week, making up for what’s been a poor yearly performance. Moving on from last week’s news regarding competition surrounding mobile payments system between some of the largest tech firms, it seems appropriate to evaluate the top-tech companies competitive performance in a much larger market; Social Media, with recent news revealing a revamp in Googles social network, Google Plus. This service launched in June 2011 – the fourth array of Google’s social networks – a result of poor performance in previous types, such as Google Buzz and Google Friend Connect. The company’s outlook on social networking has now been completely reimagined, with a solid focus on “communities”, where users can access and join groups based on their individual interests, and the addition of “collections”, a feature involving the sharing of pictures and videos, enabling users to post on the same topic. This new image has seen a
profoundly improving reputation of Google Plus, with the service contributing to a rise in Google’s share prices of 5.6% this week, from a low of $736.88 to a high of $779.32. The revamp arises due to fierce performance from main competitors such as Facebook and Twitter. The new Google Plus, coming into operation this upcoming Wednesday, brings a fresh approach, being tailored towards shared interest among users, as opposed to the previous service that was centred on personal profiles and friendships. At the time of Google Plus’s creation, Facebook had 500 million users. Four years later and Facebook now successfully reports monthly users totalling 1.5 billion, whilst Twitter records 500 million tweets daily, with such high numbers being a clear indicator of popularity, expectedly resulting in share prices rising. This is certainly the case with Facebook, who are experiencing exceptional annual growth, being at a yearly high of $109.87 just a week ago – a 51.5% rise since a yearly low of $72.51 in January. Yet Twitter suffered a loss of 38.6% since January where shares were priced at $40.55, with shares now being valued at $24.90, almost matching this year’s low of $21.01 in August. Daniel Land
Facebook vs Google vs Twitter – Annual Share Prices
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Week Ending 22nd November 2015
Pharmaceuticals Pharmaceutical equities have rebounded this week after the recent short term headwind of company-specific issues that have affected the whole sector has seemed to have blown over; the NASDAQ Biotechnology Index and FTSE 350 Pharmaceuticals & Biotechnology Index both rose by 3.6% and 6.2% respectively. Yet, as the $330bn deal between Pfizer and Allergan is expected to be announced sometime next week, the US Treasury implemented new rules attempting to block the tax-inversions. Although both companies are confident that they can work around any Treasury crackdowns, especially since Pfizer is paying a premium, its falling share price (which can be seen in the graph below) translates that investors are becoming increasingly sceptical. One key threat making investors cautious about this sector, which hasn’t yet been mentioned, comes from the Trans-Pacific Partnership (TPP). Although key to facilitating trade between countries in the Americas and AsiaPacific regions, the agreement which was reached early last month after 7 years of negotiations is actually a cause for concern to US Pharma. Despite member states being forced to increase regulation and trial scrutiny to similar levels that are currently present in the
US, it limits drug protection rights or market exclusivity to five years, which is considerably less than the 12 years that US Pharma companies wanted. However, the agreement will impose a framework similar to that created under the US Hatch-Waxman Act which protects the original clinical trial for an additional 3 years after patents expire, leading to prolonged data protection. Even though this weak intellectual property stance may discourage innovation, the increased competition created within the trading bloc may foster greater threats through weaker exports. Regardless, the rife disagreements about the bill will make it hard to pass as its other wider implications are possibly too far reaching. Overall, this sector has been troubled by recent increasing scrutiny from the USFDA and previous high valuations which are now believed to have been corrected somewhat, making this an interesting medium to long term prospect. Even before the apparent correction in September analysts were optimistic about the prospect of companies in this sector so although other short term knocks may unfold in the short term. Sam Hillman
Pfizer Inc. Share Price
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NEFS Market Wrap-Up
Industrials & Basic Materials Schlumberger Limited and Cameron International Corporation jointly announced today that the US Department of Justice has cleared their proposed merger without any conditions. Under the terms of the deal, Cameron shareholders will get 0.716 shares of Schlumberger stock and $14.44 in cash for every share of Cameron stock.
call. “The combination of all these factors is why we’re very excited about the transaction.”
Schlumberger is the world's leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide, while Cameron is a leading provider of flow equipment products, systems and services to worldwide oil and gas industries.
However, the Cameron purchase is really diversification into oilfield equipment supply rather than a consolidation of a rival service company. Both companies had also been in a joint venture since 2012 called OneSubsea, which is a long-term bid to lower the overall cost and improve performance in deep water development. Schlumberger will be able to work that plan more effectively by actually taking charge from its joint venture partner.
This deal is valued at $14.8 billion and it allows the world's largest oilfield contractor to bundle gear, services and synergise the business more effectively into one package. Schlumberger is looking to further improve efficiency with drilling and production by creating a single operating system that marries its engineering and digital mapping of oil pockets with Cameron’s critical gear. “Cameron is a great hardware company, and we have all these digital capabilities and the leading downhole portfolio,” Schlumberger Chief Executive Officer Paal Kibsgaard told analysts and investors today on a conference
This deal follows the proposed merger between the world’s second and third largest oilfield services providers Halliburton Co and Baker Hughes Inc in a deal valued at about $35 billion when it was announced in November 2014.
This deal does not come as a surprise for the markets as Schlumberger has a history of buying partners, such as its 2010 deal for Smith International. It is really up to Schlumberger to unlock the full potential of Cameron to go one step further in the business. Schlumberger share price opened higher at $77.84 pre-market whereas Cameron’s was flat at $67.15. Erwin Low
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Week Ending 22nd November 2015
COMMODITIES Energy Energy prices remain weak after the Energy Information Administration (EIA) reported on Thursday that inventories of oil had risen by 252,000 barrels last week to 487.3m barrels, edging them closer towards the record level of 490.9m hit in April. Reflected in the market by a weekly price drop of -0.9%, WTI oil fell below the $40 threshold for the first time since August. Brent Crude oil, while rising on Friday, has also continued it poor form with prices averaging below $44.50 per barrel. The increase came even as imports dropped and refineries increased runs, which typically draws down stockpiles. This result has clearly portrayed the tenacity of US output, even as the price collapse has forced drillers to leave some rigs idle. Crude markets are increasingly straining under the weight of global oversupply, which has mounted since last November when OPEC decided to open the taps to try and squeeze higher-cost producers like US shale. The other main story of the week came with the dramatic fall of natural gas prices, which have plummeted 8.5% over the week. Having previously predicted that “in the future, the extent of oversupply must surely result in price falls”, the combination of weak demand and rising inventories led to “a massive sell-off among bearish natural gas traders”.
Along with oil inventories, the EIA released its Weekly Natural Gas Inventory Report this Thursday, highlighting that natural gas inventories rose to 4 trillion cubic feet for the week ending November 13, 2015. This is the highest record for natural gas inventories. Moreover, the weak demand in the market has resulted primarily from mild weather. Recent weather data reported that eastern and midwestern parts of the US have experienced warmer than normal winter weather. These are usually the high natural gas consuming regions during the winter, with 49% of households using natural gas for heating purposes. The warm winter weather curbs natural gas demand and negatively influences natural gas prices. For the future, one view is that gas prices may remain volatile as sudden cold winter weather in large gas-consuming nations will boost demand, positively influencing the price. However, with record levels of inventories, gas prices may also remain low as firms reduce futures contracts. In my opinion the former holds more merit, since historically, demand volatility due to the weather has been a driving factor of gas prices over the winter period. Harry Butterworth
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NEFS Market Wrap-Up
Precious Metals This week we have seen the precious metals sector prices continue to decline as platinum hit its lowest level since 2008 and gold has approached a five-year low after minutes from the Federal Reserve’s last meeting bolstered the possibility that the Fed could raise the interest rates next month. The gold prices this week have been pushed yet further downwards from 1083.37 USD/oz. to a low of 1064.56 USD/oz. (see chart below) and have observed a slightly different pattern this week as gold prices fluctuated around the 1080 USD/oz. mark. Minutes from the Oct 27-28 meeting showed an emphasis that it may be the right time to increase rates in December and this has caused gold prices to decline almost 10% this year. The strengthening outlook of the US economy has kept investors on their toes as expectations of interest rate hike in December have been kept high. Gold is consistently viewed as insurance, but the shiny metal still does not match up to other assets that yield interests. There have been arguments that the increase in wealth in China and India would translate to a higher demand for gold as the middle and upper classes would seek more jewellery, rings and pendants. Although China and India make
up the largest producers and consumers of gold, it is unlikely that this boost in demand would offset the financial issues and the strengthening US dollar. Silver has also continued to slide as it fell to a 2 month low in London, the longest decline since 1950. Often being seen as parallel to gold or as an industrial metal, Silver’s outlook has not being looking good on both fronts. Besides the likelihood of a higher US interest rate, there is a decreased demand for Silver as an industrial metal due to a slowing rate of growth in China. In other news, platinum have fallen from 878.4 USD to 843.4 USD, a 3.9% drop, while palladium has also fallen from 579.2 USD to 544.7 USD, a 5.9% decline. This has been in line with the precious metals sector as the demand for industrial applications of these metals, also affected by slow growth in China. With the increased possibility of an interest rate hike during December, the outlook of the overall precious metals sector prices looks grim. Investors should continue to monitor the decisions of the Fed and exercise caution in these period of uncertainty. Samuel Tan
Gold Price Trend
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Week Ending 22nd November 2015
Agriculturals So far, 2015 year has not been a profitable one for agricultural sectors. As a trend of declining commodity prices persists across the board, this time our focus tends towards initiatives taken in the prevention of further profit losses and support for farmers to remain in the industry. While a few agricultural commodities, including rubber and rough rice, experienced positive jumps in prices, particularly in June and October respectively, the majority are falling behind the relative targets set, in comparison to previous years. In fact, just from July to September 2015 the Food Price Index (FAO) fell by 5.2%. Unfavourable weather in areas of concentrated growth provided a degree of restriction on price declines (expected to be even higher) throughout the entire October and most of November. For example, just over the last weekend, the dry weather in wheat-producing regions of Australia and US resulted in a delay of production and immediately picked up the relative unit prices, increasing by 13.8% from the 16th to 17th November. Unfavourable weather in areas of concentrated growth provided a degree of restriction on price declines throughout the entire October and most of November. For example, just over the last weekend, the dry weather in wheatproducing regions of Australia and US resulted in a delay of production and immediately picked
up the relative unit prices by 13.8% from 16th to 17th November. Initiatives to stabilise production in 2016 are also already being discussed. According to a study conducted by ISMA – a body responsible for sugar industry – it is expected to observe a number of farmers turning away from cane production and choosing an alternative crop. The study suggests a 5% decline in cane sugar to be supplied next year, one million tonnes less compared to 2015. As evident in the graph, this change is already reflected in the 17.2% rise in the Food Price Index (FAO) for sugar since September 2015. The main underlying factor behind the disruption includes steadily rising arrears for growers. On the brighter side, on 18th November Narendra Modi, India’s Prime Minister, has decided to introduce a directly payable subsidy to farmers. The initiative was agreed under World Trade Organisation norms for a fairer treatment of workers in the industry. From a historical perspective, in the last year sugar prices peaked at 18.85 cents/lb in July 2014 and sank to 10.50 cents/lb by mid-August due to increased supply of the good. At the moment we can observe early signs of predicted increasing price but will only be able to analyse the long-term effect once the subsidy initiative is fully implemented. Goda Paulauskaite
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NEFS Market Wrap-Up
CURRENCIES Major Currencies Despite inflation edging upwards at 0.1%, it remained far too weak to deter investors from betting that stimulus measures will be ramped up. These bets came into fruition on Monday as yet another ECB official strongly hinted that the bank will take further action to boost growth and inflation across the Eurozone. This news sent the euro spiralling to new lows against the dollar, where the pair settled at 1.0635. It was that at this level where many long USD positions began to be closed out, which gave the euro some respite for the first time in weeks. As long US investors cashed in to take profit, the pair began to recover its losses for the week and even surged above 1.075, however they could not beat Friday’s close. This respite was short-lived however, as speculation over the tone and outcome of ECB President Mario Draghi’s speech on Friday morning sparked another sell off of the Euro. As expected, Draghi identified a number of issues present within the Eurozone, with the currency bloc’s low inflation rate being chief among them. He pledged to ‘do what we must to raise inflation as quickly as possible’. This was the clearest indication yet that the bank will approve further easing measures next month, likely by moving its deposit rate deeper into negative
territory (it is currently set at a record low of 0.20%) and by revamping its QE programme. On the back of this, the pair finished the week at 1.0648, slightly above the week low. The US and Eurozone policy divergence trend has been apparent for some time now, with the EU desperately trying to boost growth in the region, and the US looking for the necessary confidence to hike rates. We are yet to actually see official divergence; but I will believe we are nearing the point where the ECB and the FOMC will be running opposing policies. With market estimates giving a 66% probability of a December lift off, and the ECB almost certain to roll out further stimulus measures at the same time, I believe the market has not accurately priced in open divergence. The pair is going to continue to be pushed towards parity, with 1.05 the next immediate support level to be tested. Assuming policy divergence does occur in December as the US becomes active in the matter, then looking ahead to the New-year the pair could even fall below parity, as Eurozone problems will be compounded by US growth. Adam Nelson
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Week Ending 22nd November 2015
Minor Currencies The 1.336 USD/CAD price had only been broken through once this year during late September. The break lasted a mere 2 days, as dovish statements from the Fed and strong Canadian growth figures caused the beginning of a strong trend for Canadian dollar that lasted until mid-October. The psychological barrier around the 1.336 price was again to prove itself this week as being fairly robust. The 1.336 level was briefly broken on Monday when Canadian manufacturing sales fell 1.5% from the previous month when they were forecast to fall 0.5%. The breakout lasted for less than an hour but CAD regained ground to come back to a similar price against the dollar prior to the manufacturing report. The Canadian dollar then made some minor gains during Tuesday because of an unexciting US inflation report CPI was announced as forecast at 0.2%, but the USD/CAD pair failed to break through the 1.330 support price. CAD was able to strengthen notably on Wednesday against USD, first bouncing off the 1.336 resistance level, before breaking through the 1.330 support price after the Fed released some fairly dovish minutes from their monetary policy meeting. The pair then had a fairly
choppy time with no one seemingly knowing which direction it should be heading in. However, on Friday Canada released its retail sales and CPI report. CPI unexpectedly slowed to an annualised rate of 1.0% from 1.3% and retail sales fell 0.5% from the previous month. Stunted price growth coupled with poor retail sales will cause the Bank of Canada to be wary with its outlook and may even cause some to call for additional monetary support. The continuing signs of weakness from Canada again highlight the fact that long term we should expect a weakening trend for CAD versus its US equivalent. And so expectations over the coming weeks should be for USD/CAD to break through the sturdy resistance price of 1.336. Meanwhile, the Swiss Franc (CHF) lost ground to all major currencies this week, falling against the Dollar, Euro and Sterling by 1.3%, 0.55% and 1.1% respectively. This was despite a relatively strong trade balance report with net export value exceeding expectations by more than 1bn. Overall, generally good data out from the EU and UK plus some generally bullish market sentiment around USD at the moment, meant CHF performed below par. Will Norcliffe-Brown
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NEFS Market Wrap-Up
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