The Macro Picture

IMF downgrades the global outlook.  The IMF has cut the global growth outlook to the lowest level seen since the financial crisis as the major advanced economies are slowing down and tariffs are affecting trade on global scale. Mr. Adrian, Financial Counselor and Director of the Monetary and Capital Markets Department at IMF, anticipated what now seems inevitable: “downside risks to growth in the medium term remain elevated. Under an adverse scenario, global growth could be negative three years from now”. Corporate debt and financial risk-taking have deteriorated creditworthiness of borrowers in developed countries. In the Euro area, an increase in interest rates might cause massive losses for insurance companies and banks due to their large government bonds holdings. Furthermore, the international sovereign organisation believes Brexit and the trade negotiations-related tensions have fuelled investors’ bearishness. The IMF recommends continuing the de-leveraging process already started by ECB and PBOC. The meeting follows weakening soft data (PMI, IP, Consumer Confidence, PPI) from several countries released earlier this week.

Central banks update. Low inflation (1.8%), increasing Q1 growth forecast to 2.3% and strong labour market (+196,000 jobs in March) pushed the Federal Reserve Bank to hold a more optimistic Minutes last Wednesday. The US central bank anticipated that the balance sheet shrinking might slow down in May and September. The Minutes leaves the door open for more rate hikes throughout the year, but it does not even exclude a rate cut should the economy worsen. Futures are currently pricing in 55% likelihood for a rate cut and no chance for a rate increase.

Overseas, Mario Draghi held another dovish press conference where the main themes have been weak economic data, which keep economic downside risk elevated, and the potential launch of a new two years low-cost refinancing programme meant for banks to support the Eurozone economy. The Euro slipped after the conference and the area government bond markets rallied with the 10y Bunds yielding -0.039%, 5bps higher than the 2.5 years low.

Trade tension escalates The US Trade Representative announced the imposition of $11bn tariffs against imports from the EU due to their support for Airbus that would have adversely impacted the United States. The EU responded that preparation is already underway to hit back, while the French airplane manufacturer will take “far larger countermeasures against the US.” The statement follows a WTO report that found Airbus benefitting from more than €16bn in subsidies from 1968 to 2006.  Note the above-mentioned tariffs are minor compare to US vs China ongoing imposed tariffs on about $360bn of each other’s goods.

Hot Topics

Louis Vuitton beat on better-than-expected handbags and leather goods sales boosted the stock price by more than 4% to the historical peak of €342.80 on Thursday. The fashion and leather division grew by 15% in Q1, driven mainly by customers from the Far East. On the other hand, the watch and jewellery division struggled and was the slowest growing as competition from online resellers becomes fierce. The luxury conglomerate’s sales rose 11% on an organic basis (ex. FX and M&A). Luxury goods are a defensive sector and have historically outperformed the market in period of slowdown and uncertainty, given the non-cyclical nature of the business. Mega trends-wise, worth noting that according to Credit Suisse Global Wealth report, the number of millionaires (now 42.2mn) is expected to grow by 30% by 2024, globally, mainly led by India (+50%), China (+60%) and Europe (+36%). In this way, the number of Ultra-High-Net-Worth individuals (>$50mn) is expected to double up by 2050, while the overall global wealth should rise by c. 25% in the next 5 years (currently the richest 10% owns 80% of the global wealth).

Please see below LVMH and its competitors last 24m performance

Boeing’s endless crisis seems to worsen day-by-day. The airplanes manufacturer released its Q1 orders and announced a 737 Max production rate decline from the current level of 52 airplanes per month down to 42 starting from mid-April. Note the management previously planned to ramp up the 737 Max production rate per month in June. The production cut would drag deliveries from the expected 650 units per annum down to c. 515, converting into a loss in FY revenue of c. $6.9bn. JPMorgan and Goldman Sachs analysts have both downgraded their Price Target and EPS estimate, following the company’s update. Although Boeing is currently trading at about 32% discount on PE vs its main global competitors (Airbus, Bombardier), there seems to be more downside rather than upside as lack of clarity around future deliveries and grounding costs impact on margin would likely push investors to hold or sell their positions.

General Electric shares plumbed as much as 8% last Monday, erasing March gains, as a close-to-the-company and reputable analyst at JPMorgan, outlined why the future of one of the biggest US conglomerates won’t brighten any time soon. Free Cash flow generation, Power unit struggle to recover and GE capital financing programs start are still “hot topics”. During the recent JPMorgan conference, GE’s CEO Larry Culp announced the Industrial Business unit will burn cash this year and will exceed the $2.7bn cash-outflow of last year. Note GE reported the worst-ever operating loss of $630m for the Power unit division last 30^th of October. The company guides for negative 2020 cash flow in the Power and Renewable energy units, while the Healthcare division is expected to grow but not enough to offset the $1bn loss from the biopharma business disposal. Furthermore, GE might suffer growing competition deriving from Siemens partnership with Chinese companies and rumours on a potential merger with Mitsubishi Heavy Industries to expand its turbine business. On the other hand, albeit the aviation division is still generating $4.2bn free cash flow, the Boeing crisis might harm the orders stream. The final question is whether GE will be immune to the coming recession, when selling assets will be even tougher and lower interest rates will inflate insurance and pension liabilities.

Please see below GE and Siemens last 6m performance

Saudi Aramco, the largest oil company in the world, has received a record $85bn bid for its first-time-ever bond market debut. The company expect to raise funds for over $10bn through six tranches of bonds with different maturity and yield. The 10yrs notes are expected to yield 125bps higher than US Treasuries with same maturity, compared with Saudi bonds currently at 1.27%. However, such high-demand might suggest pricing might be higher and consequentially yield lower as risk premium falls. Aramco has also been a central topic for their potential IPO which has been postponed at least to 2021.

TESLA’s share plummeted 11% last Thursday, following a record decline in deliveries in Q1. The car maker delivered 63,000 vehicles (vs 90,966 in Q4 last year). The newly launched Model 3 sedan missed analysts’ average deliveries estimate by c.1000 cars. Nevertheless, the management reiterated its forecast for FY2019 deliveries of 360,000-400,000 albeit investors’ concerns on demand shortfall. The company announced a sales stuff cut across several states in the US in order to enhance and promote its cost-saving online ordering process.

Please see below Tesla last 4m performance

Debenhams: Story of a failure. The UK retailer was declared in administration last Monday, with the stock price falling for more than 10% before the trading halt. The company rejected a rescue bid of £200m by Mike Ashley, Newcastle United and Sports Direct owner holding c.30% of the company. The tycoon had already saved House of Fraser by purchasing it for £90m last August. Debenhams piled up more than £720m in debt and it is now in the hands of its lenders, a long list which includes hedge funds like Alcentra, Angelo Gordon and Silver Point Capital. the management plans the closure of as much as 50 stores, putting at risk 4,000 jobs.

Debenhams was valued £1.7bn during the IPO, now it is worth about £20mn. House of Frasers, Debenhams and Superdry last year’s profit warnings are all bad signal of a deteriorating UK retail market, despite this real household disposable income and spending per head continues to grow.

Macro spotlight For This Week

Tuesday:

*February 2019 Production in construction in the Eurozone

*Economic analysis of the latest UK labour market headline statistics and long-term trends for April 2019

Wednesday:

*Inflation (HICP) March 2019 in the Eurozone

*March 2019 Producer price inflation in the UK

*December 2018 UK government debt and deficit

*February 2019 UK House Price Index

*February 2019 U.S. International Trade in Goods and Services

Thursday:

*October to December 2018 Profitability of UK companies

*March 2019 Retail sales, Great Britain

Friday:

*Gross Domestic Product by Industry, 4th quarter 2018 and annual 2018 in the US

Chart of the Week

Fact of the week

According to a recent study posted on Bloomberg earlier this week, the 7 richest spirit families (Suntory, Bacardi, Pernod Ricard…) own stakes worth around $70bn combined. The global alcoholic beverages market accounts for about $1.3tn in value terms and it is expected to grow at a CAGR of 3.9% by 2026, reaching a total revenue level of $1.8tn.

Quote of the Week

“There may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021”
Jamie Dimon, JPMorgan CEO during his Q1 conference call last Friday.