Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Investment Strategist
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.