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.

Enlarge
Source: Bloomberg, Saxo Bank

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.