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Weekly – Investment Adviser– 15 November

PERFORMANCES 2019

EquitiesBonds
MSCI World+20.4%CHF Corp+2.4%
S&P 500+23.4%US Govt+7.2%
Stoxx 600+20.2%US Corp+13.0%
Nikkeï+15.6%US HY+11.9%
SPI+26.6%EUR Gvt+8.5%
Chine+29.7%EUR Corp+7.8%
Emerging+8.1%EUR HY+7.9%
CurrenciesCommodities
USD index+2.3%Gold+14.5%
EURUSD-4.1%Silver+9.8%
EURCHF-3.5%Brent+17.0%
USDCHF+0.7%CRB index+6.8%
USDJPY-0.9%
EM FX-3.8%

 

French soft power

The French President just inaugurated with pomp in Shanghai the third foreign branch of the emblematic Pompidou contemporary art Museum. This is the sole foreign arts institution of this kind allowed in China so far. Its new outpost is showing an exhibition called “The Shape of Time,” featuring works from Wassily Kandinsky, Zhang Huan, Christian Boltanski, Cristina Iglesias, etc. At first, this spells good news (opening-up) from the Chinese political regime, who officially fights the westernization of the Chinese society, be it in politics or in art and culture. But Chinese officials picked out a few works that they found unsuitable for public view. Among the censorship victims, there is Cao Fei, an emblematic young Chinese artist who namely condemns the – Great numeric Wall -.

Une seconde vie urbaniste

Macron is emulating de Gaulle / Chirac, when it comes to promoting French difference. His current charm offensive towards China is an attempt to turnaround the trade deficit with Beijing. In this respect, his emphatic promotion of French beef, in times of trade tensions with the US and of the Chinese acute pork swine crisis, is opportunistic and very symbolic. More subtly, Emmanuel Macron is also presenting himself, as the prime reference / chief negotiator regarding the ongoing talks of a free trade agreement (between the EU and China) to be signed sometime in 2020.
The vacuum created by the decline of Germany / Merkel opens a window
Macron is working relentlessly to restore the influence of France as a Nation

C. Lagarde is a strong supporter of ¨gender budgeting¨(new policy-mixes set by… women). In this respect, this is another significant (female) nomination after that of Ms U. Von der Leyen. Times will tell if this actually spells concrete changes in practical political terms. Christine Lagarde is also used to tread delicate paths in international relations. In Bercy, she already confronted European partners, when France didn’t comply with fiscal rules / constraints. She reassured the most conservative tenants of austerity, when coping with the Greek debt crisis. She also survived the probe of the Tapie (Crédit Lyonnais) affair, and was strongly supported by the IMF during it. When it comes to monetary policy, her profile of an innovative / pragmatic dove is well-adapted to current economic circumstances. But her induction period will be short, considering the current turbulences / dissent among the Governor Council of the ECB.

The rumored currency pact between China and the US might also push Christine Lagarde further out of the comfort zone !

Christine Lagarde provides the ECB with a new communication and a pleasant face
She knows Macron well (who strongly supported her ECB nomination) and is well-respected by German top policy-makers

  • The glamorous Macron and Lagarde duo symbolizes the resurgence of France soft power
  • The development of relations with China deserves particular attention
  • It will illustrate EM and CL capacity to improve Europe status, and defend its short-term interest (namely trade and currency)

 

Currencies. Unclear BoE

The dovish tone dissents came in a surprise 7 vs. 2 votes despite a still hawkish BoE report. Official guidance continued to point to the need for a modest tightening of monetary policy, in a limited and gradual move. But the minutes showed an increased recognition of downside risks, and a new reference for the first time to the potential need to ease policy. The BoE central view remains hawkish; we tend to disagree.

The minutes suggest the monetary policy outlook is obviously linked to Brexit developments and, by extension, the outcome of the looming general election. This is not new. However, the BoE has sharply revised down its inflation outlook. It expects the inflation to remain below target until Q3 2021 vs. Q3 2020 previous-ly. It means that rates cut is more and more likely. All told, the outlook for UK monetary policy remains highly uncertain.

  • Wait for the political developments
  • Downside pressures on the GBP until year-end elections

 

Currencies. The RBA towards unconventional easing

The discussion on policy was particularly interesting. The statement provides the most open analysis ever seen. The Board is mindful that rates are already very low and that each further cut will bring them closer to the point at which other policy options come into play. This is the most open approach to unconventional policies ever mentioned. Up to now, it was unlikely. However, there is no firm commitment to move in that direction, but the wording indicates it may be considered.

Other comments also signalled that the rate cut cycle is nearing its end. The 2 latest cuts are already having some impact, as Sydney and Melbourne house prices have bottomed out since then. The statement provides the clearest insight yet into the RBA’s thinking about policy in 2020. The acceptance that, after rates reach a certain threshold, other policy options might come into play is quite significant. The recognition that asset prices are an additional positive channel of monetary policy is essential.

The RBA overview on growth, while largely unchanged from August, still appears to be overly optimistic. On the other hand, the downbeat view on wages, inflation and the unemployment rate make it clear that the RBA does not believe that its job is done and so we can expect further policy action from the RBA in 2020.

  • Asian currencies are amongst the top performing currencies in the world over the past week, with the CNY strengthening to reach its highest level since August. The bullishness comes as the US and China appear to be making progress in trade talks
  • The RBA is almost certain to remain on hold in December. Moving into unconventional policies is the next step for 2020
  • AUD upward potential still there

 

Equities. Share prices of companies in products and services to the energy industry are jumping

The two major US oil services companies, Halliburton and Schlumberger, saw their share prices rise, in line with the Value segment. In September, Halliburton shares were at their lowest since 2009 and Schlumberger shares since 2004. After a significant increase in capital expenses for oil production up to the peak of 2014, expenses fell in 2015 and 2016. Since spending has resumed growing, but never returned to the peaks.

After the 2014 experience, oil producers are focusing on cost management and dividend strength for large integrated groups. Chesapeake Energy, a major US producer in shale, warned that oil and gas prices were too low, affecting investments. In the United States, investments in shale gas / oil are declining.

This warning did not prevent the prices of the shares of Halliburton and Schlumberger from rising. The interest in Halliburton and Schlumberger is not based on revenues, but on the measures taken to reduce operational costs and their ability to maintain their competitive positions.

They will benefit from a leverage effect on profits when investments return in the United States and accelerate internationally.

  • We take advantage of the interest in the Value segment, of which the Energy sector is a part
  • Schlumberger could bounce on the $ 45-46

 

Equities. Relativize the IPO of Aramco

Aramco’s IPO prospectus has come out without revealing the size of the deal. The allocation process will begin on November 17th to end on December 4th; the disclosure of the initial price and the percentage of capital that will be publicly traded will be announced on December 5th. Initially, only 5% of Aramco’s capital will be listed. There would be a first listing on the Saudi Tadawul stock exchange in December (between 1% and 2% of capital), then an international listing in the first half of 2020 (between 4% and 3%); it would be London, Tokyo, Hong Kong or New York (low probability because of the USA Patriot Act). Individual investors will have a small part, with 0.5% of the capital; the rest of 4.5% will go to institutional investors.

The estimated valuation is wide, ranging from $ 1.2 trillion to $ 2.3 trillion. Taking stock valuations of the oil majors, we calculate a value between $ 1,450 and $ 1,900 billion. We are talking about the largest IPO ever launched, but only 5% of the capital will be listed, a floating between $ 70 and $ 100 billion, of which only half will be in an international place.

Unfavorable coincidences for Aramco? 1) Iran has announced the discovery of oil reserves of 53 billion barrels, increasing its reserves by one third, the same weekend as the publication of the Aramco IPO prospectus. 2) The announcement of the IPO’s price will be December 5th, the day of the OPEC biennial meeting in Vienna, a rather bad timing. With Russia, OPEC will discuss the strategy for supporting crude prices.

  • It is necessary to relativize this IPO which will be, at first, very small at the international
  • We will wait for the valuation of international institutional investors before looking more closely to Aramco
  • In the prospectus, Aramco warns that acts of war and terrorism would affect stock prices.

 

Equities. Disney and McDonald’s

Disney launched its streaming TV on November 12th, Disney+. The company already owns Hulu, #3 in the United States in terms of subscribers. Disney+ has a solid catalog of movies with Star Wars, Pixar and Marvel franchises. The launch of Disney+ is a success, since it reaches the threshold of 10 million users in the United States after 2 days. Disney+ is, for the moment, the only serious competitor to Netflix which already has 160 million subscribers. Disney will release the sequel of the Avatar saga with Avatar 2 in December 2020 in India, then beginning in 2021 in the world, then the next 3 in 2023, 2025 and 2027.

We take advantage of the decline in the McDonald’s share price, which has fallen 14% since early September, to buy the stock. The main reason for the price decline is the violent sector rotation from Growth to Value segment, which has severely penalized consumer staples companies. But McDonald’s fundamentals remain excellent and the company is regaining consumers with new concepts and services like McDelivery. Revenues stabilize after years of contraction.

  • We have purchased a reverse convertible on Disney and McDonald’s

 

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