European stock market close 2 May 2016
- FTSE – Golf course
- Cac +0.2%
- Dax +0.8%
- Ibex -0.1%
- FTSE Mib -1.0%
- Italy 1.47% -1bp
- Spain 1.58% -1bp
- Portugal 3.10% bp
- Germany 0.271% flat
- Greece 8.50% -8bp
Norway’s $870bn oil fund recorded its third quarter of negative returns in the past year as weak stock markets from China to Europe weighed on its results.
The world’s largest sovereign wealth fund had a negative return of 0.6 per cent in the first quarter
Trond Grande, deputy chief executive of Norges Bank Investment Management, the oil fund’s manager, said:
The first two months of 2016 were characterised by high market volatility and concerns for a Chinese slowdown. The turbulence eased considerably in March.
Equities returned minus 2.9 per cent in the quarter while bonds returned 3.3 per cent. Among stocks, Royal Dutch Shell, Verizon and Tesco contributed the most to the return while Credit Suisse, Novartis and HSBC were the worst.
It looks as though things could be turning hostile in the latest round of global pharmaceuticals M&A.
French drugmaker Sanofi has sent a letter to the board of Medivation, a San Francisco-based group that specialises in cancer treatments, offering to buy the company for $52.50 a share in a deal valued at around $9.3bn.
The move comes after David Hung, the chief executive of Medivation, told Sanofi earlier this month that his company was not interested in discussing a transaction.
Setting out details of its all-cash proposal, Sanofi said a combination of the two companies “represents a compelling strategic and financial opportunity to drive significant value for the respective companies’ shareholders, employees, patients and caregivers”.
It says it proposed purchase price “represents a premium of over 50 percent to Medivation’s two-month volume weighted average price (VWAP) prior to there being takeover rumors”.
Here are a few extracts of today’s letter to David Hung, Medivation’s president and chief executive from Olivier Brandicourt, Sanofi’s chief executive:
Is the stock market setting up for a Crash?
For the first time since the 2009 bottom, Earnings Per Share (EPS) have diverged sharply to the downside from stocks.
There are a lot of reasons why investors buy stocks… but at the end of the day, they all boil down to earnings: the company is only a sound investment if it actually makes money.
The above chart shows us that earnings recently peaked and have diverged sharply from stock prices. Here’s a close up of the last three years:
Before the Great Recession, almost two-thirds of Americans owned stocks. That number has since fallen to a little more than half, as you can see from the chart below:
This is an important development with ramifications for retirement planning, demographics and income inequality.
First, a little history: Since late in the last century, one of the defining developments of equity markets has been how new technology and competition democratized investing. We can trace this back even further, to May 1, 1975, when the brokerage industry had to stop charging fixed commissions and start competing on the basis of price.
Trading, research and market commentary moved online in the 1990s. Soon after, a large part of the adult population came to believe that: a) they should be in the market; b) they had the skills to pick stocks and/or time markets; c) everyone was going to get rich. Recall the Discover brokerage commercial in which a tow-truck driver, who by implication had struck it rich in the market, owned an island-nation? In 60 seconds the ad captured all the giddiness and naivete of that era.
Since the start of April, debt-for-equity swaps have been hailed as a way to resolve Chinese banks’ nonperforming loan problems. Some market watchers even predict that a wave of such swaps could lift the Shanghai Composite Index by 1,000 points.
On April 4, China’s Caixin Online news site ran an article titled, “Banks Bracing for Debt-Equity Swaps Revival.” Premier Li Keqiang told reporters in mid-March a new round of swaps could reduce corporate leverage ratios. Those remarks pave the way for commercial banks to use debt-for-equity swaps in the not-too-distant future, according to reports.
As of the end of 2015, official figures for nonperforming loans at Chinese commercial banks stood at 1.27 trillion yuan, equal to 1.67% of all outstanding loans. The amount has more than doubled in two years as loans to the steel industry and others turned sour due to the economic slowdown.
Nonperforming loans come to 4.15 trillion yuan, or 5.46% of all outstanding loans, if loans requiring attention are included. Nevertheless, there are growing hopes that by putting together a number of debt-for-equity swaps worth 1 trillion yuan, the bad loans can be disposed of rather quickly.
With the ECB now unabashedly unleashing a bond bubble in Europe of which it has promised to be a buyer of last resort with the stronly implied hint that European IG companies should issue bonds and buy back shares, and promptly leading to the biggest junk bond issue in history courtesy of Numericable, it will come as no surprise that the world once again has a debt problem.
For the best description of just how bad said problem is we go to SocGen’s Andrew Lapthorne, one of last few sane analyzers of actual data, a person who first reveaked the stunning fact that every dollar in incremental debt in the 21st century has gone to fund stock buybacks, and who in a note today asks whether “central bank policies going to bankrupt corporate America?”
His answer is, unless something changes, a resounding yes.
Here are the key excerpts:
Sensationalist headlines such as the one above are there to grab the reader’s attention, but the question is nonetheless a serious one. Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. These central bank policies are having some serious unintended consequences, particular on mid cap and smaller cap stocks.
All bar Italy that is
Recent reports that China’s government may bring back debt-equity swaps have raised hopes that such moves will boost stocks by taking bad loans off banks’ books while shoring up foundering businesses, though some worry that this will just conceal bad assets.
Banks would initially exchange as much as 1 trillion yuan ($154 billion) in bad loans for stock within three years, Chinese media group Caixin reported in an article Monday. The piece said that regulators will likely lift the ban on debt-equity swaps involving commercial banks, citing comments by top government officials.
Although the probable end of the ban is not new information, the reported size of the program has turned heads. China may approve the plan as soon as this month, Bloomberg wrote in a follow-up article Monday. Bank stocks rallied in Shanghai on Tuesday, the first trading day of the week, carrying the Shanghai Composite Index to a roughly three-month high.
This would not be China’s first experience with debt-equity swaps. As bad loans at Chinese banks swelled in the wake of the 1997 Asian currency crisis, Chinese regulators set up asset management companies to handle bad loans from each of the four major commercial banks. This took a heavy load off the banks, allowing them to list in Hong Kong and elsewhere.