Global investors have remained sanguine about the situation unfolding in Ukraine, but concern has started to rise over what a further deterioration of events might hold for global markets. Bank of America Merrill Lynch last week warned that investors may have underestimated the potential impact of an escalation of the conflict in eastern Ukraine and of Western sanctions. Russian markets have already started to feel the cost of the stance taken by President Vladimir Putin, with investors withdrawing $63 billion of capital from Russia over the first three months of the year. A further withdrawal of international investment and trade could come as Russia braces itself for zero to 0.5% growth in 2014, rather than the 2.5% forecast at the start of the year. Last week, the MICEX index in Moscow fell 1.6% to a six-week low, after rating agency Standard & Poor’s downgraded Russia’s foreign-currency debt to a negative outlook and just above junk status.
The concerns over the developments in Ukraine have helped push down yields and lift prices on government bonds, as well as attract investor interest in other perceived ‘safe haven’ assets, including gold and the Japanese yen. The yield on ten-year US Treasuries fell by a further 2 basis points (bps) on Friday, with the benchmark for long-term borrowing costs in the US and international markets down 4bps over the five-day period. The German Bund also fell by 5bps on Friday to 1.48%, falling by 4bps over the week. The UK’s ten-year gilts also fell 5bps on Friday to 2.64%. Meanwhile, gold last week rose by $13, with $9 added to its value on Friday, to end the week at $1,302 per ounce, offering a further sign that investors are beginning to feel uneasy about the developments in Ukraine. The developments again underline the futility of short-term market predictions, particularly as bond yields were widely expected to rise and prices continue to fall in 2014.
Beyond the Ukraine stand-off, indications of the pace of the US economic recovery and of China’s growth slowdown continue to dominate global markets. This week the US reveals its first-quarter growth figures, while the Federal Open Market Committee is expected to trim another $10 billion from its monthly asset purchases; US job data are likely to show further expansion of the economy. Meanwhile, the Bank of Japan’s policy meeting is expected to show its 2% inflation goal is achievable, despite concerns over the trajectory of its stimulus measures. Hopes of further monetary easing, however, supported the Nikkei 225, although caution over the corporate results season translated into a 0.6% loss over the week to 14,429 points.
Global equity markets last week looked less confident as the crisis in Ukraine deteriorated and US earnings releases sent mixed messages. The S&P 500 index came under pressure during a volatile week, losing 0.8% on Friday as 60 of its 204 companies released earnings. Although Apple and Microsoft delivered strong results, other technology and momentum stocks lost ground amid investor nerves over valuations, including Amazon and Facebook down 10% and 5% respectively. However, Bloomberg reports that, so far, a healthy 75% of companies have exceeded profit estimates, while 53% have beaten sales forecasts. The US index closed the week at 1,862 points; up 0.1% over the period, and just off its 1,897 points record achieved earlier in April.
In Europe, the tensions in Ukraine continued to weigh on companies with exposure to the region, with a number of Germany’s big corporates with ties to markets to the east taking a dent during the week. The FTSEurofirst 300 index fell 0.8% on Friday, but gained 0.3% over the shortened week to close at 1,333 points – which is just off a 52-week high of 1,355 points reached at the beginning of April. Renewed merger and acquisition (M&A) activity in the healthcare sector helped lift the index. Global healthcare M&A volumes so far this year have amounted to $153 billion out of more than $1 trillion total M&A worldwide, according to Thomson Reuters, including Swiss group Novartis and UK peer GlaxoSmithKline’s $20 billion deal last week to trade assets. Fund manager Ken Broekaert of Burgundy believes that pharmaceuticals, including Novartis and Glaxo, is “one of the few sets of companies where you’ve got a quality business with high margins, high returns on capital, that’s still trading at quite a reasonable valuation”.
In London, pharmaceutical sector M&A activity helped to lift the FTSE 100 index by 0.9% over the five-day period and to close at 6,686 points. The highly-international index was not hit as hard as continental European peers by jitters over the Ukraine, as the index reached seven-week highs. Pharmaceutical giants GlaxoSmithKline, AstraZeneca and Shire gained 6%, 8% and 10% respectively over the period. Pfizer confirmed on Monday that it had made a £58.8 billion offer for AstraZeneca, at £46.61 per share, which drove the UK group’s shares up by 13% during early trading. Shire is also in the sights of US drug-maker Allergan.
Investors hunger for yield in the opening months of 2014 continues to revive the corporate bond markets. Last week’s €7.9 billion bond sale by French telecoms group Numericable attracted a large amount of global interest, offering yields of 4.88–6.25% in order to finance its purchase of France’s second-biggest telecoms group, SFR. The Numericable issue, which is the biggest euro-denominated bond yet, follows Verizon’s $49 billion issue in September last year. Both raised money to finance acquisitions, although Verizon carries investment-grade ratings, and highlight investors’ willingness to take on more risk in search of income.
Global corporations have sold $156 billion of high-yield bonds so far this year as they take advantage of rock-bottom borrowing costs, with the average yields of Bloomberg’s investment-grade and high-yield bond indices at 2.48% and 5.14% respectively. Investors have also been emboldened by low corporate default rates, which are half the historic average of about 4%. Other impending issues include the Chinese National Offshore Oil Company’s dollar bond sale and Pepsi, which expects to raise €1 billion through two bond tranches.
The National Bank of Greece has borrowed €750 million, with more than €2 billion of orders for its five-year senior unsecured deal, with a coupon of 4.38%. Myles Bradshaw, Europe strategist at fund manager PIMCO, said: “Investors are moving down the credit curve, but Greek spreads look less appealing when compared to other emerging market and high-yield names.” Europe’s periphery governments and banks are taking advantage of low borrowing costs as concerns recede over the region’s economy. But, for investors, a portfolio with a mix of asset classes, across bonds, property and equities, offers a balanced long-term investment strategy.
Investors this week will have further evidence from the Office for National Statistics (ONS) of the economic recovery and improved conditions for UK companies. Markets expect the ONS to report growth of 0.9% in the first quarter, building on the 0.7% rate at the end of 2013. An acceleration of growth will raise more questions over whether the Bank of England will need to start to raise interest rates – although the Bank’s own revised figures last week are a slightly more bullish 1% growth for the first quarter.
However, Monetary Policy Committee minutes released last week reiterated that a rise in the base rate remains some way off. Markets expect rates to hold until at least mid-2015, which is an assessment that we share. In the meantime, hard-pressed savers faced with near-zero returns have received a further blow with the news that Cash ISA rates have been slashed only three weeks into the new tax year. The unprecedented early move indicates that providers have already attracted too much money into their best-buy deals.
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