Chinese earnings to spark volatility

Peter Garnry

Head of Equity Strategy

The earnings season is 93% done in the S&P 500 and the results have been good with revenue and earnings surprising 1% and 5% respectively. Turning to growth numbers, revenue is up a healthy 10% year-on-year and earnings are up 26% y/y. US earnings (earnings per share) have been driven by the tax reform programme. If earnings are measured on EBITDA (operating profit before taxes), then the growth rate is in line with revenue growth.

In Europe, companies have barely managed to deliver against expectations and growth is lower than across the Atlantic with revenue and earnings growth of 7% and 5% respectively. Next week, 84 companies will report earnings out of the 2,000 companies we track during earnings season. From a macro point of view, the BHP Billiton earnings on Monday are most important together with dozens of earnings releases from major Chinese companies.

China makes H2 uncertain for BHP Billiton

BHP Billiton reports FY'18 Q4 earnings on Monday with market relatively upbeat given a good sales price of its US onshore oil and gas assets (i.e. above market expectations). Commodity prices are playing into BHP Billiton's strengths, which supports the miner's decision to increase output in H2 2018. However, recent cost increases and a potential slowdown in China from the ongoing trade war with the US could create a difficult environment for BHP Billiton. From a macro point of view, the earnings release is important to watch as it may give some updated information on the demand picture out of China. Our equity model (Equity Radar) has a positive (+0.27) rating on the stock driven by high yield factor and good momentum.

Rebound in China’s life insurance market?

China’s largest life insurance company Ping An Insurance reports H1 earnings on Tuesday with analysts expecting EPS to decline 5% y/y. As with all Chinese equities, Ping An Insurance has been under pressure this year as investor sentiment has soured on the trade war with the US. The market is hoping Ping An Insurance had a rebound in Q2 from healthier development in premiums. However, the key catalyst for the company’s shares will be the insurer’s outlook and especially views on its investment income which we expect to be under severe pressure from negative financial markets across the board in China. Our equity model has a negative (-0.08) rating on the insurer based on a negative yield and leverage factor.

Cracks in the bricks

China Overseas Land & Investment (COLI) is one of China’s largest real estate developers and been a long-term growth journey riding the massive investment in real estate over the past two decades. Recently real estate has increasingly weak in China as economic activity has arguably been slowing. COLI reports earnings on Thursday with both revenue and earnings expected to decline 2% y/y and 1% y/y respectively. Given the recent weakness in the Chinese economy and earnings misses in general, the probability has likely gone up for an earnings miss for COLI. From a macro point of view COLI’s outlook will give valuable information about the current strength of the Chinese real estate market.

Overall, we expect next week’s Chinese earnings to spark further volatility in the CSI 300 Index as investors will have little to hang their confidence on. The Chinese government has already initiated a strong fiscal and monetary response to the current slowdown and the impact will soon enter the real economy, but in the short-term sentiment is dominated by trade war concerns and earnings missing estimates.

The table below shows the most important earnings next week.

Source: Bloomberg, Saxo Bank
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)