Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Does Trump's hubris mark the turning point?
Peter Garnry
Chief Investment Strategist
Summary: The US President yesterday took credit for the 50% stock market rally in the NASDAQ Composite Index since his election. This is a stunning act of hubris given that almost everything is out of his hands and that it is squarely the Fed’s U-turn on January 4 that has sparked the current sentiment rally.
Key equity indices are rolling over today and the price action of German and South Korean equities confirms for the second straight day that the price rises in China should heavily be discounted as a credible signal that things are turning around for the better. Timely indicators such as the Chemical Activity Barometer showed an unabated slowdown in January underscoring that this recent rally is all based on hope and not underlying macro fundamentals. We remain cautious here and recommend investors to reduce equity exposure and take their gains from early January. The risk-reward ratio is not in favour of taking risk at these levels.
S&P 500 continuous future (five year weekly prices):
BASF tries its best to bolster confidence
The Q4 result was better than expected on operating income while revenue at €15.6bn also surprised against estimates of €14.6bn. As a result investors are responding positively this morning. However, the key takeaway is a muted outlook with slight sales growth expected in FY19 from higher sales volumes and portfolio effects. In addition the company guides ROCE (return on capital employed) slightly higher than cost of capital. Being generally critical of management expectations our take on the outlook is that the company sees a lot of uncertainty and there is risk to the downside to this revenue growth expectations. The historical evidence shows that companies are often very bad forecasters in the late stage of the business cycle, so at this point investors should discount companies current outlooks.
Housing market outlook in HK and China
Tomorrow one of the largest residential property developers, Sun Hung Kai Properties, is reporting 1H results with analysts expecting EPS to decline 16% y/y and revenue declining 13% y/y. This should not be a surprise given the housing weakness in China and Hong Kong. But more importantly the outlook and any clues about the sentiment and especially credit conditions among buyers is very important to watch.
The Q4 result was better than expected on operating income while revenue at €15.6bn also surprised against estimates of €14.6bn. As a result investors are responding positively this morning. However, the key takeaway is a muted outlook with slight sales growth expected in FY19 from higher sales volumes and portfolio effects. In addition the company guides ROCE (return on capital employed) slightly higher than cost of capital. Being generally critical of management expectations our take on the outlook is that the company sees a lot of uncertainty and there is risk to the downside to this revenue growth expectations. The historical evidence shows that companies are often very bad forecasters in the late stage of the business cycle, so at this point investors should discount companies current outlooks.
Housing market outlook in HK and China
Tomorrow one of the largest residential property developers, Sun Hung Kai Properties, is reporting 1H results with analysts expecting EPS to decline 16% y/y and revenue declining 13% y/y. This should not be a surprise given the housing weakness in China and Hong Kong. But more importantly the outlook and any clues about the sentiment and especially credit conditions among buyers is very important to watch.
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