Searching for direction in equities while tobacco mega merger takes shape

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  In today's equity update we highlight the lack of direction and zoom in on the mega merger between Philip Morris and Altria. With the intense focus on clean energy due to climate change we also take a look at how investments in the energy sector have done since the Great Financial Crisis in 2008.


As we alluded to in recent equity updates the market is boxed in. Across the major equity futures markets such as S&P 500, FTSE 100, DAX and Nikkei all futures are finding themselves trapped into a tight trading range. Our thesis remains that the next move will be big and given the negative trajectory in macro fundamentals and the ongoing escalation in the US-China trade war we think the odds favour a decline. Longer term we see the reconfiguration of the global supply chain as a negative for companies’ profitability because of increased capital expenditures. Today Google announced that’s moving its Pixel phone production from China to Vietnam. More of this news will hit the market over the coming months as the trade war heats up.

Has oil and gas attractiveness peaked?

With all the focus on clean energy these days due to climate change we have set up a monitor to track the investment returns on the oil & gas industry and the clean energy industry. We were quite shocked to the see the appalling returns in the energy sector. The oil & gas industry has only delivered a total return of 50% since early 2009 compared to 300% for the S&P 500. But clean energy has done even worse losing 34%. In absolute terms old energy peaked out in 2014 before the big rout in the oil price but on a relative basis the clean energy industry has outperformance the oil & gas industry since late 2012.

In general, we are negative long-term on the oil & gas industry as the world’s political capital is firmly behind clean energy. On the other hand, the last 10 years show that energy investing has been terrible so the most sensible thing for an investor is to be very selective and not buy into the whole industry.

Stocks to watch

While equities in general are looking for direction things are happening beneath the surface. Autodesk (ADSK:xnas) delivered a downward revision to its FY outlook on both EPS and revenue. Shares were down 8% in aft-mkt trading. The revision was clearly a shock to investors as analysts are overall very bullish on the stock with 73% having a buy recommendation on the stock. But the reaction to the Q2 earnings was natural as the company has an aggressive valuation that needs constant hits against estimates.

After having been separated for 10 years the two giant tobacco companies Philip Morris (PM:xnys) and Altria (MO:xnys) are in advance talks to merge and become the world’s biggest tobacco company with a market value of $195bn. The reaction to the news yesterday was quite negative after initial positive reaction. Watch the two stocks today for any signs of a reversal.

Thomas Cook (TCG:xlon) shares are down 95% since June last year as profitability has deteriorated and investors have questioned the company’s ability to honour its liabilities. But the big news today is a rescue plan led by Chinese Fosun Tourism Group providing $522mn in capital in an overall rescue deal of $1.1bn. While the news is positive for bondholders, shares are down 17% in today’s trading session as Fosun is acquiring 75% of the tour operator division and 25% of the airline. The 2022 6.25% bond was up 48% initially but is now only up 7% for the session.

Source: 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)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.