Earnings Encourage Equities
Transcription
Earnings Encourage Equities
Weekly Market Update | 27 October 2014 WEEKLY MARKET UPDATE 27 October 2014 Earnings Encourage Equities Early sign of easing concerns in Europe Citi Economic Surprise Index After seeing global sell-offs in recent weeks, the equity markets managed to rebound sharply last week, supported by earnings reports beating expectations and improving sentiment in Europe. CESIUSD Index CESICNY Index 60 30 0 In the US, of the 191 companies in the S&P 500 that have reported 3Q14 earnings, through 23 Oct 2014, 133 have topped estimates and 34 had missed. Financials and Materials are leading the way in terms of beating estimates thus far. -30 -60 -90 Jul-14 CESIEUR Index We have argued that the recent global equity corrections should be viewed as technical ones. The sharp rebounds in equities support our views that the market is reacting to oversold conditions. Finally in Europe, the ECB and EBA announced the results of their Comprehensive Assessment (CA). The end of the CA and recent ECB easing measures may modestly support financial conditions in coming months, but ECB QE is still needed to boost demand in Citi’s view. Aug-14 Sep-14 Source: Bloomberg as of 24 October 2014 Pause in bond rallies or change in directions? Accumulated 3-month Bond Index Returns World Govt Bonds Index HY Index (local ccy) Global EMD Index 2% 0% Performance Equity markets rallied last week and have recovered some of the severe loss experienced since mid September. The MSCI AC World index went up almost 3% this week led by Japanese equities. The Dow Jones and S&P 500 index gained 2.59% and 4.12% respectively last week. European equity markets also finished higher with the Stoxx Europe 600 Index up 2.66%. Finally, Japanese equities saw sharp rebounds with the Nikkei and Topix gaining 5.22% and 5.53% respectively. -2% -4% -6% -8% Jul-14 Aug-14 Sep-14 Source: Bloomberg as of 24 October 2014 Sharp rebounds after oversold conditions Accumulated 3-month Equity Index Returns EM equities underperformed DM counterparties with Brazil (Bovespa: 6.79%) and Russia (Russia: -3.38%) dragging down their regional benchmark MSCI Latin America (-3.57%) and MSCI Emerging Europe (2.02%) respectively while MSCI Asia ex Japan held up relatively well (+1.86%). Within Asia, all the markets finished in the positive territory except onshore China (Shanghai Composite: -1.66%). MSCI World Jul-14 MSCI EM Aug-14 MSCI Asia 4% 2% 0% -2% -4% -6% -8% -10% -12% Sep-14 Asset Allocation Equities — Despite the recent volatility, we believe global growth fundamentals have changed very little. With market corrections historically occurring three times as frequently as economic recessions, the selloff likely represents a buying opportunity. Credit — We remain more constructive about euro-denominated High Yield issuers vs. US, and still favour Single-B rated credits. Rates — Divergent central banks’ policies will dominate rate markets with the US/UK potential hikes while Eurozone and Japan remain anchored; Favour duration exposure in Euro Govt Bonds. Commodities — A stronger US dollar is a headwind for commodities overall, whilst individual supply/demand fundamentals pull in different directions. Source: Bloomberg as of 24 October 2014 Week Ahead Key Data and Event Date Country Period Survey Prior 27-Oct EC M3 Money Supply YoY Data & Event Sep 2.2% 2.0% Citi Fct 2.4% 28-Oct JN Retail Sales YoY Sep 0.8% 1.2% -0.6% 28-Oct US Durable Goods Orders Sep 0.50% 28-Oct US Consumer Confidence Index Oct 87 86 89 29-Oct JN Industrial Production MoM Sep P 2.2% -1.9% 1.9% 30-Oct EC Economic Confidence Oct 99.7 99.9 99.3 30-Oct US Initial Jobless Claims Oct 25 283K 283K 290K 30-Oct US GDP Annualized QoQ 3Q A 3.0% 4.6% 3.3% 31-Oct EC CPI Estimate YoY Oct 0.40% 0.30% 0.40% 31-Oct US Chicago Purchasing Manager Oct 60 61 59 31-Oct US Univ. of Michigan Confidence Oct F 86.4 86.4 87.0 1-Nov CH Manufacturing PMI Oct 51.1 51.1 50.7 -18.20% -1.70% Source: Bloomberg as of 24 October 2014 Page 1 Weekly Market Update | 27 October 2014 Drivers and Risk By Market United States Driver: US hiring intentions, capital spending surveys, unemployment claims and 3Q14 EPS thus far, suggest that equities should be owned and bought. Barring some exogenous development, the traditional lead indicators are supportive of both US GDP growth and further earnings upside, sustaining stock indices, especially in what may prove to be an extended period of low bond yields. Risk: Greater anxiety about terrorism, Ebola and possibly the US mid-term election outcomes could pose as risks. Implication: Thus, while markets have recaptured a fairly good chunk of the decline with the S&P 500 around 1,950 again, we still envision 2,000 by year-end and 2,100 by mid next year. End-2014 Target: 2000 Mid-2015 Target: 2100 2050 2000 1950 1900 1850 1800 1750 1700 1650 Source: Bloomberg as of 24 October 2014 Europe Driver: The year-on-year growth rate for 12m forward earnings had turned positive for the first time since 2011. The current reporting season shows roughly 60% of companies are beating estimates on earnings/sales, which is also encouraging. S&P 500 1600 End-2014 Target: 370 Mid-2015 Target: 385 360 350 340 Risk: European disinflation trends are disconcerting amidst seeming disagreements between the ECB and the Bundesbank on policy initiatives, while periphery debt has experienced a spike in yields. 330 Implication: We see the recent market pull-back as an opportunity and in particular view the underperformance of Cyclicals vs Defensives as opportunity to re-look at European Financials. 290 320 310 300 DJ Stoxx TMI Source: Bloomberg as of 24 October 2014 Japan Driver: Citi analysts continue to favour Japanese equities on the back of 1) we anticipate upward revisions to company guidance; 2) valuations look more appealing; 3) we think potential additional easing measures by the BOJ could include an increase in ETF purchases. End-2014 Target: 1390 Mid-2015 Target: 1470 1400 1350 1300 Risk: We expect the government to go ahead with the next consumption tax hike in autumn 2015. Tax hike could negatively impact on households’ real income, dampening consumer spending. 1250 Implication: We still think the yen may weaken relative to the dollar medium term due to factors like a US economic recovery, and believe sectors with high exposure to overseas demand hold promise. With expectations for additional easing by the BoJ mounting as well, we believe the financial sector could outperform. This would also likely be true if PM Abe puts a priority on ending deflation and decides to postpone the second consumption tax hike. 1050 1200 1150 1100 Japan Topix 1000 Source: Bloomberg as of 24 October 2014 Asia Driver: As global equities sold off, Citi’s sentiment indicators for EM plunged into despair territory for three consecutive weeks, triggering buy signals across the board. The last time buy signals were triggered for EM was in mid-2013 when the Fed hinted QE tapering. That buy signal itself generated average 12M returns of 15%; 6M returns of 6%. End-2014 Target: 610 Mid-2015 Target: 680 620 600 580 560 540 Risk: The biggest risk for EM is another global recession, as this would lead to weakening trade flows and capital outflow rather than inflows. The asset side of the Asia CB balance sheet is showing the strongest growth rate in two years. Even in Lat Am, there is some pick up but in EMEA, the liquidity picture is rolling over again. Implication: Within Asia, Citi analysts prefer CA surplus/commodity consumer countries as they are likely to be beneficiaries of weaker commodity prices and stronger US growth. 520 500 480 MSCI Asia ex JP 460 Source: Bloomberg as of 24 October 2014 Page 2 Weekly Market Update | 27 October 2014 Currency Forecast Currency 24-Oct-14 Weekly Market Performance Forecasts Last price Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 1.19 1.16 1.14 1.13 1.12 G10-US Dollar Euro Japanese yen (20 – 24 October 2014) (04/07/2014~04/11/2014) EURUSD 1.27 USDJPY 108.2 112 114 116 117 5.5% Japan TPX Index 4.1% 118 US S&P 500 3.1% MSCI AC World British Pound GBPUSD 1.61 1.55 1.52 1.50 1.48 1.47 Swiss Franc USDCHF 0.95 1.02 1.05 1.06 1.08 1.10 Australian Dollar AUDUSD 0.88 0.83 0.81 0.79 0.78 0.77 New Zealand NZDUSD 0.79 0.74 0.72 0.70 0.68 0.65 1.5% China HSCEI Canadian Dollar USDCAD 1.12 1.17 1.18 1.18 1.19 1.19 1.3% Korea KOSPI 2.7% EM Asia Chinese Renminbi USDCNY 6.12 6.07 6.05 6.03 6.03 6.02 Hong Kong USDHKD 7.76 7.75 7.75 7.75 7.75 7.75 Indonesian Rupiah USDIDR 12069 12,057 12,170 12,170 12,130 12,090 Indian Rupee USDINR #N/A N/A 61.9 62.3 62.5 62.6 62.7 Korean Won Malaysian Ringgit USDKRW USDMYR 1057.50 3.28 1,055 3.28 1,059 3.30 1,054 1,046 3.31 3.33 USDPHP 44.81 45.0 45.0 44.9 44.8 44.7 USDSGD 1.28 1.29 1.30 1.31 1.31 1.32 Thai Baht USDTHB 32.41 32.8 32.8 32.8 32.9 32.9 Taiwan Dollar USDTWD 30.40 30.2 30.1 30.0 29.9 29.8 Taiwan TAIEX 1.2% UK FTSE 100 1.2% HK Hang Seng 1.0% Citi High Yield Citi Global Emerging Mkt Sovereigns -0.1% Citi World Broad Inv Grade -0.6% Gold -1.7% 3.34 Singapore Dollar MSCI AsiaXJapan 1.6% 0.2% 1,038 Philippine Peso Europe Stoxx Europe 600 1.9% China Shanghai Composite -2.0% MSCI Emerging Europe -2.1% Oil -3.6% MSCI Latin America -10% 0% 10% Source: Bloomberg as of 24 October 2014 EM Europe Russian Ruble USDRUB 41.81 43.4 44.6 45.1 45.3 2.5 South African Rand USDZAR 10.93 11.26 11.37 11.40 11.40 0.00 Market Performance (Year-To-Date) EM Latam Brazilian Real USDBRL 2.47 2.60 2.64 2.67 2.70 2.73 Mexican Peso USDMXN 13.56 13.4 13.3 13.2 13.2 13.1 (As of 24 October 2014) 9.0% Source: Citi Research and Bloomberg as of 24 October 2014 8.8% US S&P 500 6.2% Citi World Broad Inv Grade 2.1% 1.4% Forecasts Last price 24-Oct-14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 US 0.25 0.25 0.25 0.25 0.75 1.00 1.25 Japan 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Citi High Yield Gold MSCI AsiaXJapan 0.4% Taiwan TAIEX 0.2% MSCI AC World 0.0% Short Rates (End of Period) China Shanghai Composite 6.3% 4.4% Short Rates and 10-Year Yield Forecasts Citi Global Emerging Mkt Sovereigns -0.3% HK Hang Seng Europe Stoxx Europe 600 -3.9% China HSCEI -4.3% Korea KOSPI -4.6% Japan TPX Index 10-Year Yield (Period Average) -5.0% MSCI Latin America US 2.27 2.70 2.95 3.05 3.15 3.20 3.25 -5.3% UK FTSE 100 Japan 0.47 0.50 0.70 0.80 0.85 0.75 0.85 Euro Area 0.89 0.75 1.00 1.25 1.50 1.50 1.75 Source: Citi Research and Bloomberg as of 24 October 2014 -17.7% -22.3% Oil MSCI Emerging Europe -30% -20% -10% 0% 10% 20% Source: Bloomberg as of 24 October 2014 Page 3 Weekly Market Update | 27 October 2014 World Market At Glance Historical Returns (%) Last price 52-Week 52-Week 24-Oct-14 High Low 1 week 1 month 1 year Year-to-date US / Global MSCI World 409.23 434.24 382.57 3.08% -3.42% 2.80% 0.17% DJIA 16805.41 17350.64 15340.69 2.59% -2.35% 8.36% 1.38% S&P 500 NASDAQ 1964.58 4483.72 2019.26 4610.57 1737.92 3855.07 4.12% 5.29% -1.69% -1.57% 12.13% 14.12% 6.29% 7.35% MSCI Europe 439.86 506.61 411.49 1.74% -6.10% -7.18% -8.81% Stoxx Europe 600 327.17 350.85 302.48 2.66% -4.99% 2.12% -0.33% FTSE100 6388.73 6904.86 6072.68 1.24% -4.73% -4.83% -5.34% CAC40 4128.90 4598.65 3789.11 2.37% -6.45% -3.43% -3.89% DAX 8987.80 10050.98 8354.97 1.55% -6.98% 0.08% -5.91% NIKKEI225 15291.64 16374.14 13885.11 5.22% -5.42% 5.56% -6.14% Topix 1242.32 1346.43 1121.50 5.53% -6.32% 3.24% -4.60% MSCI Emerging Market 984.38 1104.31 913.65 0.78% -4.92% -4.51% -1.83% MSCI Latin America 3042.20 3720.81 2810.92 -3.57% -8.07% -11.12% -4.96% MSCI Emerging Europe 155.56 212.29 154.35 -2.02% -9.51% -26.21% -22.31% -9.13% Europe Japan Emerging Markets MSCI EMEA 298.42 350.22 289.31 1.28% -4.41% -14.69% Brazil Bovespa 51940.73 62304.88 44904.83 -6.79% -8.59% -5.35% 0.84% Russia RTS 1036.68 1504.93 1016.01 -3.38% -12.83% -30.60% -28.14% 1.44% Asia MSCI Asia ex-Japan 559.41 608.06 508.53 1.86% -3.54% 0.91% Australia S&P/ASX 200 5412.25 5679.50 5028.20 2.67% 0.68% 0.73% 1.12% China HSCEI (H-shares) 10391.64 11638.27 9159.76 1.54% -3.03% 0.67% -3.92% China Shanghai Composite 2302.28 2391.35 1974.38 -1.66% -1.76% 6.37% 8.80% Hong Kong Hang Seng 23302.20 25362.98 21137.61 1.21% -2.59% 2.04% -0.02% India Sensex30 26851.05 27354.99 19963.12 2.84% 0.40% 29.56% 26.83% Indonesia JCI 5073.07 5262.57 4109.31 0.88% -1.95% 10.41% 18.69% Malaysia KLCI 1818.86 1896.23 1766.22 1.71% -1.15% -0.00% -2.58% Korea KOSPI 1925.69 2093.08 1885.53 1.32% -5.40% -5.91% -4.26% Philippines PSE 7103.55 7413.62 5709.34 1.43% -3.42% 7.89% 20.61% Singapore STI 3222.55 3387.84 2953.01 1.73% -2.13% 0.14% 1.74% Taiwan TAIEX 8646.01 9593.68 8093.82 1.56% -4.97% 2.76% 0.40% Thailand SET 1539.91 1602.21 1205.44 0.73% -3.27% 5.02% 18.57% 81.01 107.73 79.78 -2.10% -12.70% -16.58% -17.69% 1230.90 1392.22 1182.52 -0.60% 1.14% -8.60% 2.09% Commodity Oil Gold spot Source: Citi Research and Bloomberg as of 24 October 2014 Page 4 Weekly Market Update | 27 October 2014 Disclaimer “Citi analysts” refers to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. 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