Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Apple warning spooks the market while BHP surprises on earnings and dividends
Peter Garnry
Chief Investment Strategist
Summary: Apple issues a revenue warning for Q1 as production and retail store closures have lasted longer than anticipated just a month ago. It highlights the supply chain issues related to the COVID-19 outbreak in China. BHP reports strong H1 result resulting in a declared ordinary dividend that is much better than expected by the market. HSBC is sending a strong signal to the market that the banking industry will face structural headwinds for the next three years as the bank is planning to lay off 35,000 employees and reduce risk-weighted assets by $100bn.
Apple shares listed on German exchanges are down 6% this morning as the US technology company issued a downward revision to revenue for the current fiscal quarter ending 31 March. The main issue is of course the COVID-19 outbreak in China which is constraining sales in China but also production and thus sales globally. While many companies have by now issued warnings it seems it had to take Apple for the market to wake up. Equity futures are negatively impacted across all markets.
“Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors.
The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province — and while all of these facilities have reopened — they are ramping up more slowly than we had anticipated. The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues. These iPhone supply shortages will temporarily affect revenues worldwide.”
BHP shows why it’s best-in-class
BHP delivers something for all in their 1H result with underlying profit up 39%, but take it with a grain of salt as net operating cash flow was only up 2% y/y, but issued a potential demand and outlook warning due to COVID-19:
“If the viral outbreak is not demonstrably well contained within the March quarter, we expect to revise our expectations for economic and commodity demand growth downwards. This caveat applies, to varying degrees, across our portfolio and we will continue to monitor. In this regard, we highlight the distinction between a permanent loss of demand in oil due to foregone transport services; and temporary demand losses with the opportunity to be reclaimed, as in steel and copper end-use.”
Despite this warning which on the surface looks terrible the overall BHP business did very well with ROCE of 19% which is exceptional for a business operating in the lowest part of the global supply chain with close to zero moat. The improved cash flow generation has allowed The Board to increase the ordinary dividend per share to $0.65 which was much better than the consensus estimate of $0.58 and the reason why investors were excited in Australian trading.
HSBC does the ‘kitchen sink’ exercise
HSBC reports shareholder profit that’s down 53% y/y driven by a large $7.3bn goodwill impairment. Shares are down 4% in London on earnings miss but also the fact that the bank is announcing to cut 35,000 employees over three years and reducing risk-weighted assets by $100bn sending the signal to the market of a negative structural view over the coming years. This is clearly still terrible to be a bank as central banks’ policies continue to pressure the net interest margin. HSBC is signaling an expected return on tangible equity of 10-12% by 2022 which underscores the difficulties to run a bank at profitable levels for shareholders. HSBC announces the press release that the COVID-19 outbreak in China and the social unrest in Hong Kong have negatively impacted the business in the Greater China segment. For global investors the bank issues the following view on the macro economy:
“The macroeconomic environment as a whole remains uncertain. As a result of the impact of the coronavirus outbreak, we have lowered our expectations for growth in the Asian economy in 2020. The main impact will be in the first quarter, but we expect some improvement as the virus becomes contained. The agreement of a ‘phase one’ trade deal between China and the US is a positive step, but we remain cautious about the prospects for a wider-ranging agreement given disagreements that still exist, particularly over technology. We expect growth in the US to be resilient, but slower than in 2019.”
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