Week Ending 11th February 2018
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Middle East Africa China Latin America Russia & Eastern Europe South Asia
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18
Energy Currencies EUR, USD, GBP 19 AUD, JPY, Other Asian
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Week Ending 11th February 2018
MACRO REVIEW United Kingdom With the Bank of England having released its first Inflation Report of 2018, its monetary policy summary has been a key influencer this week. The Bank’s economic outlook for global growth is positive, although it does pick up on how recent recovery has become increasingly dependent on productivity – something to which the UK is no exception. Given that UK productivity growth has been stagnating since July 2017, this is understandably a pressing concern. Unfortunately it appears that productivity growth is unlikely to surge anytime soon. Not only do many believe that we are close to or at the natural rate of unemployment, but extended Brexit turmoil within our government’s “war cabinet” is putting off businesses and investors from making moves anytime soon. Results from the University of Nottingham’s Decision Maker Panel informed the Bank that expectations of sales in the near-term has led to a decline in nominal investment by 3-4%, with Financial Directors of firms, school and charities across the country ranking Brexit as one of their top three biggest concerns. In its most recent publication, the Bank speculates: “Overall, business investment is projected to grow at a little above past average rates in the near term, supported by global activity and financial conditions.
Investment is likely to remain sensitive to developments in negotiations around the United Kingdom’s future trading arrangements with the European Union.” Many notable economists, including Martin Wolf of The Financial Times, are not optimistic that developments in Brexit negotiations are likely to continue at a steady pace. This means that until the Tories push through substantially, we can expect productivity to continue growing only incrementally. In the background of these large scale macro announcements, another outsourcing giant found itself in trouble this week, with investors rushing to dump shares of Capita after the company released a profit warning on January 31st. With the collapse of Carillion on January 15th causing panic in the outsourcing industry, investors have been doing their best to minimise risk, hence resulting in a 48% fall in Capita’s share value. Lastly the Labour Party has had its attentions turned to Britain’s railways this week, with the impending collapse of Virgin East Coast (VEC) fuelling the Labour campaign to re-nationalise the industry. Passenger numbers and revenues have undershot predictions, meaning VEC could be the next operator to forfeit its contract if revenues continue to fail meeting forecasts. Amelia Hacon 3
NEFS Market Wrap-Up
United States The US stock market suffered significant losses on Monday 5th February (see graph below), as the Dow Jones Index fell down by 1,175 points (4.6%). This is the worst single-day percentage fall in more than 6 years, and the worst single-day points fall in history. Yet the market managed to recover on Tuesday, with a 2.3% and 1.7% increase in the Dow Jones and S&P 500 index respectively. However on Thursday 8th February the Dow Jones fell again by 1,013 points (4.2%) after the market closed. With the Dow Jones seeing 10% of its peak value knocked off in just two weeks, the market has entered a serious correction. Wells Fargo, the second largest US bank, was hammered by a 9% plunge on Monday. This was partly caused by the unprecedented punishment handed out by the Federal Reserve to impose a cap on the bank’s total assets, as the financial institution had been convicted of “widespread consumer abuses” and faking millions of customer accounts. With current inflation in the US standing at 2.1%, analysts say that the pressure of a future interest rate hike to fight inflation is the main reason for this sell-off. The Fed is expected to raise the interest rate from its current 1.25% to more than 2% by the end of this year. The yield for 10-year Treasury Bills has already increased by 75
basis points since September and reached a four-year high, but the fundamentals of the economy remain ‘strong’ and are likely to strengthen further. In more positive news, Trump’s tax reform is anticipated to inject $1tn into the economy mainly through the form of a corporation tax cut, however some fear it could overheat the economy. US wages are also rising at their fastest rate in 8 years, with average year-on-year hourly earnings reported to be up 2.9% in January. A report by the US small business lobby recently said that more firms plan to raise wages than at any time since 1989. Yet some economists report that only a 3.5-4% wage increase signals a healthy economy. Janet Yellen stepped down as the chair of the Fed on Monday after expressing her disappointment that the President did not offer her a second term. She was succeeded by Jerome Powell, a Republican businessman. Powell supports gradual interest rate rises and tougher banking regulations. He has also pledged to support continued growth and price stability, while emphasising a commitment to better communication with the public.
Ang Gao
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Week Ending 11th February 2018
Europe European stocks have fallen dramatically this week following the collapse of US equities. The catalyst for this downfall was better than expected wage figures in the US, which spooked investors into believing that the Fed would raise rates faster than expected. As global stock markets are currently experiencing bubbles, this fall in confidence and stability triggered a major sell off of equities. The French CAC 40 is down 5.5%, the German DAX is down 5.3%, the FTSE 100 is down 4.2%, and the European STOXX 600 is down 1.45%, as of the time of writing. A return to stability looks unlikely for the forthcoming days despite the large sustained purchasing of S&P futures, which is consistent with previous attempts by the Fed’s ‘Plunge Protection Team’ to rally the market. This has had mixed results, with sellers only reappearing once the Fed’s buying has dried up, thus strongly hinting that there will be continued volatility across the markets. The German coalition saga nears resolution after months of uncertainty, as Merkel’s CDU-CSU provisionally agreed a formal coalition with the SPD on Wednesday 7th February. The SPD have leveraged their position against the weak CDU-CSU, and is likely to cause the coalition to shift away from the current Eurozone policies of the CDU-CSU. It has
also been suggested that the SPD will force a move away from austerity measures in Germany. Whilst the coalition has been formally agreed by the two parties, SPD members have yet to vote in favour for the coalition to advance and this may take up to three weeks. This is potentially problematic for Merkel, as the SPD has seen its membership rise to 450,000 in recent months after opposition groups encouraged individuals to join the SPD to vote against the coalition. On Wednesday 7th February, Peter Moscovici, the European Commissioner for Economic Affairs, released the winter expected growth forecast for the EU. The figures showed a revised expectation, raising forecasts to 2.3% for 2018 and 2% for 2019. However the report warned that large corrections might still occur in the financial markets, especially with the looming Fed interest rate hike that may have damaging consequences for the EU. As such, the forecasts must be used with caution, as the impact of Brexit on the EU is largely unknown and thus any prediction regarding this time period is likely to be wholly inaccurate.
Nicholas Gladwin
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NEFS Market Wrap-Up
Japan & South Korea Fears and concerns about the effects of Brexit on Japanese investment in the UK were expressed during the meeting between 19 Japanese CEOs and Britain’s Prime Minister, Theresa May. Koji Tsuruoka, Japan’s ambassador to Britain, warned against the risks of trade barriers for a profitable and stable trading relationship. He stated: “If there is no profitability of continuing operations in the UK - not Japanese only - then no private company can continue operations”. During his speech, Japanese Prime Minister Shinzo Abe confirmed that bold monetary easing would help to achieve the Bank of Japan's 2% inflation target, hence overcoming deflation after more than two decades (see figure below). Despite the central bank’s actions intended to promote economic growth, the target is still far from being hit and strong monetary easing is still required. SoftBank Group, a Japanese multinational telecommunications corporation, is planning to become one of the world's biggest technology investors by selling shares of the core unit (the domestic telecoms business) in order to boost the overall group growth. The Vision Fund, the biggest private equity fund in the world established by SoftBank’s CEO Masayoshi Son, is set to invest in disruptive tech firms and promote their rapid growth.
South Korea’s central bank has announced that it will keep interest rates accommodative at 1.5%, despite the expected rise in interest rates at the end of 2017. This is due to the anticipated negative effects of record household debt on economic growth, with South Korea’s household debt currently amounting $1.31 trillion (190% of GDP). The Bank of Korea stated: “Consumption recovery may be slower than it was in the past due to the growing debt repayment burden among other reasons”. After a four-day losing streak, South Korea’s KOSPI stock index finally rose on Thursday, with the junior stock market sub-index, KOSDAQ 150, increasing by nearly 6% according to Reuters. Foreign investors raised concerns regarding a tax revision proposal that plans to establish a capital gains tax on investments, and of which could negatively influence the KOSPI composite index. However Seoul’s finance ministry reassured investors about his intention to scrap the tax revision, due to logistical difficulties related to the proposal’s implementation.
Giovanni Cafaro
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Week Ending 11th February 2018
Australia & New Zealand Turmoil in the US stock market on Monday, in which the Dow Jones Industrial Average index fell by 4.6%, transmitted its way through to the Australian stock market. It caused the S&P/ASX 200 index to fall 2.7%, its worst fall since June 2017. The Australian dollar also staggered to a two-month low, before recovering slightly. The initial shock to the US stock market was rooted in positive labour market news, leading to fears of the Fed increasing interest rates. However, the fall in the US stock market was followed by falls in the FTSE 100, Nikkei 225 and New Zealand Stock Exchange (NZX), suggesting global anticipation of a significant rise in interest rates that will be intended to combat rising inflation. This suggests the shock is, in part, caused by uncertainty in the global economy. Analysts also suggest that the stock market plunge was to be expected after 15 months of steadily increasing prices. Despite the evidence of investors worldwide expecting rises in interest rates, the Reserve Bank of Australia (RBA) decided to hold the cash rate at its record level low of 1.5% on Tuesday. According to the RBA governor, Philip Lowe, this was due to the slow growth of household income and the rate of inflation lying shy of its 2% target level. The RBA stated that
the decision on the cash rate was necessary in order to attain sustainable growth in the future and to achieve the inflation target. The lack of reaction by the Reserve Bank suggests that it is not immediately concerned about the market plummet, with shadow treasurer Chris Bowen stating that that was just the ‘nature of the stock market’. In other news, the Australian housing market is continuing to show signs of cooling off, after data from property group Corelogic showed that the national median house price index had fallen 0.3% in December. The fall was exacerbated by declining house prices in larger cities such as Sydney, where prices retreated 0.9% over the month of December. With house prices still wary however, it is consequently suggested that this factor also swayed the Reserve Bank in their decision to avoid increasing the cash rate.
Deevya Patel
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NEFS Market Wrap-Up
EMERGING MARKETS
Middle East This week we examine the economic effects of the on-going blockade on Qatar. In June 2017, Saudi Arabia, the UAE, Bahrain and Egypt imposed a land, sea and air blockade on Qatar as punishment for Qatar’s new aggressive foreign policy that they claimed violated a 2014 agreement with the Gulf Cooperation Council. Saudi Arabia maintains that Qatar’s financial support to the Muslim Brotherhood equated to Qatar supporting terrorism. The aim of the blockade by Saudi Arabia and its cohorts was to cripple the Qatari economy and therefore force it to abandon its bold foreign policy. The biggest hits so far have been to its tourism and real estate sectors. Recent economic reports show that by January 2018, visitor arrivals were down 20%. It is further estimated that since the beginning of the blockade to December 2017, tourism receipts have dropped $600 million (compared to the previous year) and real estate prices have fallen 9.9%. Overall, the rating agency Moody's has estimated that Qatar burned through more than $38 billion of its reserves in the two months following the embargo in order to prop up its economy However the rest of the economy seems to be doing well. During the blockade period, Qatar endeavoured to create new economic, commercial and military
agreements that have all contributed to the country recording an impressive 1.9% GDP growth rate in the last quarter of 2017, making it the fastest growing economy in the region. The IMF also expects the country's economy to grow 3.1% this year, up from 2.5% in 2017. The initial food shortages that arose when Saudi Arabia and the UAE stopped exporting food to Qatar have also been resolved, after Iran and Turkey started exporting food instead. Since then, Qatar has expanded its supply chain to include more than 80 countries. Qatari exports of natural gas haven’t been affected by the blockade either, as growth in its nonhydrocarbon sector remained unchanged at 3.2% in 2017 Q3. It seems that Qatar's energy wealth has helped it ride out the economic shock. The foreign liabilities of Qatari banks have also been on the rise since November, which is a sign that domestic banks have secured additional financing from foreign banks. Qatar’s finance minister Ali Sharif Al Emadi maintains that the economy is resilient and open for business
Changu Maundeni
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Week Ending 11th February 2018
Africa This week, data about the performance of the Tunisian economy in January 2018 shows that trade and tourism have both expanded, compared to January 2017. This helped to stabilise the Tunisian dinar on the foreign exchange market. Yet numerous protests have taken place across the country throughout January, due to the increased taxes on staple goods and the cuts to public sector jobs. The austerity measures are the result of conditions imposed by the IMF regarding the country’s budget deficit. In 2015, IMF awarded Tunisia a $2.9 billion loan. Due to sluggish growth and currency devaluation, which hindered national debt reduction, the organisation directed the country to take “urgent action” to reduce its deficit in December 2017. Taking into account issues like youth unemployment (currently at 35%), general unemployment (currently at 15%), and the three-and-a-half-year record breaking inflation rate of 10%, the price increases imply a significant decrease in the living standards of the majority of the population. The January demonstrations have prompted instant action from the Tunisian government, which issued promises of better healthcare access, free medical aid for the unemployed youth and more financial assistance for poor families. Moreover, on Friday 9th February, the Tunisian Prime Minister announced plans to discharge the current central bank governor in an attempt to decrease activity in money laundering. This was as a result of Tunisia being placed 59th in the Basel AML Index 2017 and receiving a higher risk rating, due to money laundering. However the replacement of the central
bank’s governor will hinder development projects and foreign investment in Tunisia. For example, it is anticipated that this will defer a billion-dollar Eurobond sale scheduled for next week. As such, the Tunis-based economist Ezzeddine Saidane fears that this delay “will have serious implications for the foreigncurrency reserves of the country and the ability of Tunisia to pay its debts”. Last week, a member of parliament's Fiscal and Development Committee also acknowledged that a major contributor to the current economic crisis is the existence of “a parallel economic network operating outside the official economy and trading in foreign currency outside the official banking framework”. This parallel economy was found to be contributing 20% of GDP and employing 31% of the work force (as of November 2017). The government therefore faces the challenge of concomitantly meeting the requirements of the IMF, as well as fulfilling domestic demands in an unstable political and social environment. Data released by the Central Bank of Tunisia last week disclosed that the country’s foreign currency reserves have suffered as a result of growing trade. The solutions therefore surround trade policy – particularly, by encouraging exports and controlling imports of goods that can be locally produced. In addition, promoting political stability and a “positive business environment” are essential to encouraging foreign investment and economic development.
Felicia Bogdana Cornelia Ababii
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NEFS Market Wrap-Up
China Figures released on Thursday show a considerable expansion of China’s foreign trade. Total imports and exports grew 16.2% to 2.5 trillion yuan from the year previous to January (as seen in the graph below). This expansion was largely driven by an upsurge in imports of 30.2%. Paired with a 6% increase in exports, China’s trade surplus has consequentially shrunk from 361.98 billion yuan to 135.8 billion yuan (equivalent to a fall of around 59.7%). The overall growth in trade for China means the economic superpower now accounts for 58.6% of total foreign trade, which totals at 1.47 trillion yuan in January 2018. The increase in imports, and so capital inflows, is reflected in the exchange rate. According to the China Foreign Exchange Trade System, the Chinese yuan strengthened to 6.2822 against the US dollar, the highest level in 30 months. The strengthening of the yuan is promising for China, as the preceding growth in capital inflows reflects growing confidence in Chinese markets. This is possibly partly due to stronger regulation to control debt. Overwhelming debt has been an evergrowing issue for China and it seems that strict regulatory controls will continue into 2018, and possibly be extended further. On Wednesday, the State Council announced measures to reduce stateowned enterprise debt. These new measures took many different forms, including relinquishing central government control over SOEs and introducing more efficient policies regarding bankruptcy and the reorganisation of certain businesses.
These measures continue on from reforms in 2017, which saw the debt-to-asset ratio of industrial enterprises fall to around 55.5% (from 56.1% in the previous year) at the end of 2017. There will also be considerable emphasis on improving the quality of debt-to-equity swaps. Bankruptcy will be tackled through spending the losses of loss producing “zombie enterprises” across numerous institutions. On Thursday, China Securities Journal also reported that 2018 would see growth in mixed ownership of SOEs. These reforms will largely focus on enterprises in national defence, for example China North Industries Group Corporation Limited, and in oil and natural gas. Much of this is reportedly intended to tackle managerial inefficiencies and restructure the enterprises in an attempt to boost the outlook for profits. Controlling debt will boost confidence in Chinese markets, help fuel continued investment and maintain Chinese growth momentum. Laura Leng
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Week Ending 11th February 2018
Latin America Political instability underlines the tumultuous atmosphere in Latin America. The principal problem facing Latin America is in its politics. Venezuela, Nicaragua, Honduras and Bolivia have abolished term limits, and their elected presidents now rule as dictators. Unfaltering corruption has once again been seen as the Honduran and Bolivian presidents swayed courts to remove their term limits. Support for democracy is waning – Costa Rica’s support for their political system, as measured by the Latin American Public Opinion Project, has fallen from 64% to 36%. Alongside rectifying political disorder, McKinsey & Co. proposes that Latin America’s growth strategy follow four imperatives. These include the adoption of technology, strengthening of education, employment and narrowing of gender gaps, investments in productivity growth, and the removal of obstacles to competitiveness. In development theory, these principles are strong but not necessarily revolutionary. The obstacle is in their implementation. Strong governance is vital, in addition to a focus on institutional and taxational efficiency. High tax revenues are ideal for the growth of economies with infantile and unstable governments, provided they are used appropriately. For instance, Costa Rica’s tax revenues have remained at around 14% of GDP for years. However that is far too low for the country’s level of development, according to the Economist. Contextually, the OECD average sits at a much higher 34%.
Latin America’s international political stance could be more promising, however. Growing relations with China could be a key element in encouraging economic growth. Xi Jinping, president of China, hailed Latin America as a “vibrant and promising region” in 2012, that was “embracing a golden period of development” with the help of China. China is now the largest trading partner of Argentina, Brazil, Chile and Peru. Meanwhile, American diplomatic efforts at instilling political stability in the Latin American region may well have a detrimental economic effect. In a recent visit to the region, American Secretary of State Rex Tillerson suggested sanctions targeting Venezuela’s exports, such as an oil embargo, in a supposed effort to damage the autocratic leader, Nicolas Maduro. Financial sanctions however are likely not best for Venezuela’s already-crumbling economy. Helima Croft, of RBC Capital Markets, emphasises this, suggesting it could induce a “situation in which Venezuela gets worse”. Columbia’s Finance Minister, Mauricio Cardenas, said that the international community urgently needed a “day after” plan for Venezuela. While the course of politics in the region of Latin America is uncertain, the general sentiment, pessimistic as it may be, is that Venezuela’s economy is headed for disaster – if it is not there already. Fallout should be minimised.
Matthew Chapman
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NEFS Market Wrap-Up
Russia & Eastern Europe Following the Economic Crisis of 2008, many former communist countries in Eastern Europe are facing severe labour shortages due to the weakening of controls on labour market movements. This reduction in labour market regulation has led to many young, skilled labourers moving to find work in richer parts of Western Europe. Before 2008, sourcing capital and finding a cheap supply of labour were two very large problems in Eastern Europe. However, several years after the crisis, this problem seems to have reversed, with capital being much more readily available. Yet labour is still scarce, even with the high wages that were intended to convince skilled workers to remain. The country that is facing the biggest labour shortage is Hungary, which has the worst labour shortage on record. In 2017 Q2, Hungary was reported to have over 48,000 vacant positions, with the most affected sectors being tourism, IT and public transport. Other badly affected countries include the Czech Republic, Slovakia and Poland. This problem has forced many firms in Eastern Europe to change the way their businesses are run and to automate many processes. The International Federation of Robotics has estimated that 9,900 robots were installed during 2017. This is a huge 28% increase on the levels in 2016.
However the automation that is occurring provides manufactures from all across Europe with the opportunity to reduce production costs Whilst firms might previously have looked to Western Europe for countries like France or Germany, they can now expand into Poland, Hungary and other Eastern European countries where production costs are much cheaper. This shift could hopefully encourage the relocation of European Industry to Eastern Europe, where many countries are now in the European Union, have stable governments and flourishing economies. Furthermore, taxes in many Eastern European countries provide incentives for foreign investment. Higher spending on automation and robots also means increased productivity. Productivity gains have been seen in Poland, Hungary and the Czech Republic in recent years, with Poland’s Capital Intensity Relative to Hours Worked measure rising by 2.9%. In comparison the same measure in Germany and France was 0.7% and 0.3% respectively. Despite the labour shortages, automation can prove beneficial for Eastern European firms. They can simultaneously boost capacity whilst saving money on wages and attracting foreign investment. The future for Eastern European manufacturing and industry looks bright.
Abigail Grierson
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Week Ending 11th February 2018
South Asia Despite the arrival of a new year, 2018 was still welcomed in Mumbai, India, by protests targeted at the caste system, a system of discrimination so well known in India. The city was partially paralysed by members of the Dalit community, which are located at the bottom of the Hindu caste system, protesting against the new government’s expected U-turn regarding the promises they made to promote development and reform. Reporters in India stated that the anger in India’s financial centre was merely an advance warning for a much bigger wave of rage that should be anticipated. Dalit groups from across the UK also marched in London at Parliament Square, Westminster, whilst chanting slogans against the atrocities currently being committed in India. Dalits continue to face widespread discrimination across the country, despite the laws to protect them. They remain markedly poorer, worse educated and less healthy than average (see chart below). They are also 30% more likely than other Indians to end up in prison. Whilst some Dalits have broken professional barriers, many are still in jobs that no one else will take, such as disposing of dead animals
and cleaning sewers. Furthermore, crimes against Dalits are not decreasing. According to the National Crime Records Bureau, there were 40,300 cases of crimes against Dalits in 2014, however by 2016, this figure had risen to 40,743. Yet the outlook for Dalits is improving. Whilst Dalits once feared crossing streets, they now have their own millionaire-filled chamber of commerce and scores of energetic NGOs to promote their rights. Progress is also being made in politics, with some 84 of the 545 MPs in the Lok Sabha (the lower house of parliament) being of the Dalit community. Ram Nath Kovind, who was elected India’s President in July, was also born into a Dalit family, making him the second Dalit to serve as Head of State. Cultural views are also shifting. Devesh Kapur, an economist at the University of Pennsylvania, recalled a visit he made to a rural area in India in the 1970s, stating: “The kind of language that was used and the whole emphasis on purity and pollution was just nothing like as relaxed as we see now”.
Hayati Sharir
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NEFS Market Wrap-Up
EQUITY AND DEALS
Financials After last week’s article explaining the delicate situation regarding the FTSE 100 stock, the beginning of this week saw one of the FTSE 100’s biggest falls since Brexit, plummeting by as much as 193 points, or 2.6% (see graph below). This wiped out an estimated £50billion off the index. This correction, however, was not isolated to the FTSE 100 index. Many other Indexes around the world fell by alarming amounts this week to correct for the over optimism seen recently in the stock market, among which were the S&P 500, Eurofirst 300, Hang Seng, and Topix.
The S&P 500 Index and the Dow Jones Industrial Average fell to around 2,575 points during the week, but did manage to rebound to around 2,600 on Friday. This was a good sign for traders who managed to make accurate investments in US futures. All-in-all there is little need for alarm, as the fall this week was nothing more than a correction by the market. It was however greatly exacerbated by algorithmic trading, where trading bots decide where to buy/sell from using algorithms created by investors.
The Eurofirst 300 (the index of the top 300 companies with the largest market capitalisation in developed Europe) fell by 0.7% throughout the week, to end up with a fall of 1.7% on Friday. A possible reason why the Eurofirst 300 has failed to bounce back as much as US indexes may be due to the uncertainties still surrounding Brexit. This week has been worse yet for Hong Kong and Tokyo, finishing off as one of the worst weeks in the recent history of Asian markets. Hang Seng closed with a 9.5% drop this week and Topix closed with a 7% decline, its biggest fall in two years. Both did manage to rebound by small amounts, but less so for Hang Seng than for Topix.
Mario Pucinelli Filho
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Week Ending 11th February 2018
Technology & Health This week Twitter shares soared, following results that showed it had achieved a net profit for the first time. In the health industry, GlaxoSmithKline (GSK), the world’s sixth largest pharmaceutical company, has released full-year revenue results and news that has greatly pleased investors. Twitter’s Q4 results showed the company’s return to revenue growth and their first ever net profit. Over the past year, Twitter has been making numerous changes that are believed to have helped the social network company compete with other platforms. These changes include improvements to its app and added video content. According to CFO Ned Segal the company will be investing in new products this year, which will cause expenses to “more closely align with revenues”. The news had a huge influence on the company’s share price, which increased by 30% to $35, as shown in the diagram below. The stock increase is its highest since its market debut in 2013. GlaxoSmithKline (GSK) indicated it will maintain a generous dividend policy after reporting its full-year revenue of £30.2bn for 2017. The higher-than-expected revenue is an 8% increase on the previous year.
GSK’s share price has been suffering over the past year as investors worried that the company would cut dividends in order to fund acquisitions. It is therefore no surprise that the news pleased investors and saw shares jumping as much as 2.2%. Emma Walmsley, CEO of GSK, stated that she was “increasingly confident” that new products will help GSK achieve single digit growth in the five years to 2020. However, the company has suggested earnings per share could be down 3% in 2018. The largest threat to the company is the expectation that generic versions of GSK’s Advair, the company’s blockbuster lung inhaler, could reach US markets this year. The company has indicated that earnings would grow between 4% and 7% this year if no competitor emerges. GSK is also facing increased competition from Gilead Sciences’ new HIV drug and could compete with Reckitt over the acquisition of Pfizer’s consumer healthcare business, a deal worth $20bn. It will be interesting to see how GSK deal with these risks this year.
Jessica Murray
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NEFS Market Wrap-Up
Oil, Gas & Industry This week will be focusing on the price of Brent crude oil, the performance of European oil companies and Rio Tinto. Data on Wednesday showed that US production exceeded all-time records, with the largest pipeline in the North Sea restarting after an outage. Brent crude is down to $64.38 a barrel, which is the lowest level for nearly two months. US production of oil now exceeds Saudi Arabia at 10.25 million barrels a day. Concerns have therefore mounted that this increase in production will offset the cuts made by other prominent producers, including Russia and OPEC. The higher oil prices have improved the profits of the European companies, with Total SA (a French oil company) reporting that their 2017 Q4 net earnings jumped up by 19% to $2.9bn. Their adjusted net profits over the full year were up by 28%, at $10.8bn. With such good news, the company plans to increase dividends by 10% over the next 3 years and buy back up to $5bn of shares. Royal Dutch Shell and BP have also experienced an improvement in profitability, which has been put down predominantly to lower costs. BP’s 2017 Q4 earnings more than quadrupled, with the company stating that the average unit production cost had been reduced by 46% since 2013. The positive results even
prevailed over the $1.7bn of additional costs associated with the 2010 Deepwater Horizon oil spill. However major US oil companies, ExxonMobil and Chevron, reported disappointing 2017 Q4 earnings due to weak performances in refining operations. This occurred despite gaining billions from the recent corporate tax cuts made by the Trump administration, with the main rate of corporation tax falling from 35% to 21%. Rio Tinto, one of the world’s largest metal and mining firms, recently reported a net profit of $8.67bn over 2017. This was driven by higher commodity prices, along with a growth in earnings from the iron ore and aluminium business. The company had rewarded shareholders with the biggest dividend in the firm’s 145-year history, with a $5.2bn payment declared on Wednesday. Mining firms have been under pressure to boost cash returns, following poor spending on acquisitions and over-ambitious projects during the commodities boom in the 2000s.
Abdul Akhtar
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Week Ending 11th February 2018
Deals On Wednesday Theresa May, the UK Prime Minister, was pressed on Melrose’s hostile pursuit of engineering company GKN, which is valued at £7 billion. Jack Dromey, the Shadow Minister for Work and Pensions, described Melrose’s cashand-shares offer to take over GKN as “unwanted”. May replied: “I can assure him that I, and the government as a whole, will always act in the UK national interest”. GKN offered no response to the Prime Minister’s remarks, however a Melrose spokesman said: “We welcome any and all opportunities to explain to government why we believe a merger with GKN will create an industrial powerhouse of which the UK can be rightly proud.” U.S. semiconductor company Qualcomm on Thursday rejected Broadcom’s revised $121 billion takeover offer. Broadcom described the offer of $82 dollars per share (comprising $60 per share in cash and $22 per share in stock) as: “highly favourable to Qualcomm and its stockholders.” The offer follows Broadcom’s first takeover attempt of Qualcomm in November last year. However the revised offer still “materially undervalues” the company, according to Qualcomm’s board. Trinity Mirror, the publisher of the Daily and Sunday Mirror, has agreed to pay £126.7 million for the Daily Express, OK! Magazine and other titles from Richard Desmond’s Northern & Shell. Mr
Desmond had owned the Express titles for 17 years and will still hold a 10% stake in the combined company. One of the most significant mergers of British newspapers in decades, the deal is expected to bring substantial cost savings by pooling resources. Simon Fox, chief executive of Trinity Mirror, said: "For example, [instead of] sending two reporters to a football game, we can send one." The company’s share price surged by close to 15% in early trading, with investors lifted by the financial benefits and cost saving opportunities. Another significant deal in the media industry was the $500 million cash deal agreement for Tronc to sell the Los Angeles Times to the billionaire Patrick Soon-Shiong’s investment firm, Nant Capital. This deal will also include the San Diego Union-Tribune, Spanish-language Hoy Los Angeles and community newspapers. Meanwhile, SoftBank Group Corp, Yahoo Japan Corp and Aeon Co Ltd together plan to launch an online retail business. The business would sell food, clothes and everyday goods. The link would combine SoftBank and Yahoo Japan’s customer base, whilst taking full advantage of Aeon’s wide product range and distribution network.
Edward Turner
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NEFS Market Wrap-Up
COMMODITIES
Energy French oil and gas giant, Total, announced that they will increase shareholder returns over the next 3 years, following an increase in their earnings during 2017 Q4 of 19%. Adjusted net profits stood at $2.9bn for Total’s fourth quarter, up from $2.4bn dollars the year before (see graph below). The improved earnings have been credited to lower expenditures, increased oil prices and boosted production. Many other oil and gas firms announced an increase in profitability, thanks to a revival of crude prices. Total also improved their full year dividend by 1.2%, up to €2.48. Total stated: “After a period of heavy investment, the group’s cash flow generation is growing strongly, driven by an increase in production that is at the best level among the oil majors”. The Indian state of Tamil Nadu anticipates becoming the world’s cleanest energy provider in wind power. With the state already generating an impressive 7.85 gigawatts (GW) of wind power, it is estimated to double over the next ten years. However Tamil Nadu need to overcome their coal usage as they have 22.5GW of coal power plants in the pipeline. In addition to this, wind power can only be generated over half the year and, even in this period, production cannot
reach its full potential as Tamil Nadu does not have a large enough grid to convey the energy to other states. For the state to therefore bring about a sustainable future, they need to do more than just switch from coal to wind power. With the fall in the auction prices for backup electricity in the UK, concerns are being raised by those within the industry and government whom feel that large gasfired plants are essential to replace the UK’s remaining coal plants. Nevertheless many industry executives and analysts believe that the drop in auction prices will result in Britain using less electricity than expected from coal plants, with gas and nuclear power stations being significant winners in the auction. This is part of the UK government’s strategy of using more low-carbon renewables.
Sarren Sidhu
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Week Ending 11th February 2018
CURRENCIES
Major Currencies The Japanese yen has risen 3.4% against the dollar since the start of the year, with the dollar falling below ¥109 last week. A weaker yen, which dropped in value after Mr Trump took the US presidency, has fuelled the export sector and helped Japan's stubborn inflation rate increase to 1% year-on-year in 2017, as measured by the consumer price index. The Bank of Japan claimed on the 26th of January that the economy was nearing its 2% inflation target. Coupled with the prospect of the US seeking to weaken the dollar and current global stock market volatility, investors have fled to the yen, which is seen as a haven currency. In the past, the Japanese Ministry of Finance issued statements when the yen was strengthening. However, with the North Korea crisis intensifying and the US president taking a firm stance against currency manipulation, Japanese officials have been silent to avoid provoking their ally. The pound was also boosted by inflationary signals. The Bank of England was more hawkish than expected in its monetary policy statement last Thursday, which surprised investors. The expectation of an increase in the bank rate in May consequently rose after the statement. The bank cited robust growth in investment as driving stronger overall growth than the economy could sustain without inflation. It also claimed that the
recent instability in the financial markets would not significantly affect economic growth. During a rush to buy government bonds, sterling rose 1% against both the euro and the dollar on Thursday. The gains were pared on Friday when Michel Barnier, the Brexit negotiator for the EU, called into doubt the UK government’s promise of a “soft Brexit.” He said that if the two parties cannot find agreement on core issues, a transition period “is not a given,” meaning that Britain could fall out of the single market in 2019. As the prospect of the Brexit process becoming yet more chaotic was priced into the pound, sterling fell 1% against the dollar during Friday trading. The dollar made modest gains last week. The dollar index rose 0.1% over the week against a backdrop of instability in the financial markets. Yields on US treasuries fell throughout the week as markets became more volatile and investors picked up safer assets. The 2-year yield touched below 2.02% on Friday, after inflation expectations had boosted bond yields in the prior week.
Daniel Blaugher
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NEFS Market Wrap-Up
Minor Currencies Global stocks ended this week as their worst since September 2011. Minor currencies were not spared from the bloodbath either as markets pulled back from the substantial gains made in 2017 and early 2018. This week’s market selloff is also thought to be fueled by expectations of higher US interest rates. Fears of rising US interest rates and a stronger US dollar in 2018 quickly evaporated the bullish sentiment minor currencies had in late 2017. AUD/USD extended its losses from the previous week to 5% in a fortnight, after falling from its 2018 high of $0.8136 to its current low of $0.7780. NZD/USD was also on the defensive, as it has already shaved some 2.5% off its 2018 high of $0.7436. The Canadian Dollar (CAD) mirrored losses in West Texas Intermediate (WTI), which broke below $60 per barrel for the first time in 2018 as USD/CAD rallied some 3% off its 2018 low of $1.2250. Being positively correlated to commodity prices means that minor currencies, namely the AUD, NZD and CAD, will likely remain under pressure in the coming weeks as the Bloomberg Commodity Index (BCI) corrects further after topping out at 90.80 in January 2018 (see Figure
Figure 1
1). The BCI previously provided a boost for AUD, NZD and CAD when it bottomed out at 79.35 and rallied 14% in 2H 2017 (see Figure 2). Despite the current market rout across different asset classes, Goldman Sachs Group Inc (Goldman) is standing by its very bullish call on commodities. Goldman highlighted that commodities have historically performed very well in rate– hiking cycles. In fact, the US investment bank threw its weight behind commodities in February this year, saying that it is more bullish on commodities than any time since the end of commodities supercycle in 2008. The bank also said that reforms in China to remove excess capacity would help to boost commodity prices. During this sell-off, other analysts have reaffirmed their positive outlooks on commodities, with Citigroup backing metals over bonds in the months ahead. In conclusion, investors should treat this recent market correction as an opportunity to invest in higher-yielding currencies such as the AUD and NZD.
Mingli Yong
Figure 2
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Week Ending 11th February 2018
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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