03/04/2018

Flash boursier

Key data

	USD/CHF	EUR/CHF	SMI	EURO STOXX 50	DAX 30	CAC 40	FTSE 100	S&P 500	NASDAQ	NIKKEI	MSCI Emerging MArkets
Latest	0.96	1.18	8'740.97	3'361.50	12'096.73	5'167.30	7'056.61	2'640.87	7'063.45	21'159.08	1'169.27
Trend
%YTD	-1.83%	0.53%	-6.83%	-4.07%	-6.35%	-2.73%	-8.21%	-1.22%	2.32%	-7.05%	0.93%

Highlights :

1. Volatility is back

2. European economic data short of estimates

Tough first quarter

The first quarter of 2018 has just ended and it was not a good time for equity markets. In 2017, euphoria had dominated proceedings. It was extremely hard to spoil the party atmosphere. But no more. Volatility is back on the rise and the buying craze seems to be over. Granted, economic growth remains robust but investors are becoming increasingly attuned to stock-specific factors because macroeconomic conditions are not brilliant everywhere.

To put recent events into perspective, the Dow Jones’ one-day trading range averaged 550 points in the first quarter – the result of trading action in late March. In 2017, it was only 70, and only three days exceeded the 300 points range. One reason is said to be the technology sector, which has recently come under pressure in a flurry of bad news.

Volatility is therefore back in town and will probably remain high for some time to come. The trade dispute between the US and the rest of the world will continue to preoccupy investors. Worse still, disappointing macroeconomic data are also beginning to raise concerns, in particular in the Eurozone, where latest economic figures have been well below expectations. European PMIs have fallen sharply overall. Although these indices are still situated well above the expansion boundary, momentum has weakened considerably.

The contrastive behaviour of government bond markets has not been surprising. Bond market reactions had been rather muted since the significant increase in volatility in early February. But prices rose sharply last week, with 10-year US Treasury bonds breaking to the upside of their narrow 22-day trading range as their yield fell back to 2.75%, down about 20 basis points from the peak of 2.95% this year.

A broadly diversified portfolio is the best antidote to this uncertain climate in financial markets.

Givaudan (ISIN: CH0010645932, price: CHF 2176)

Flavourings and fragrances specialist Givaudan is buying French group Naturex in two stages for total consideration of EUR 1.29 billion. An initial payment of EUR 522 million will secure a 40% equity holding. The remainder will be acquired later in the year.

Naturex produces and sells natural ingredients for the food & beverage and cosmetics sectors. Buying Naturex will hoist Givaudan into a leadership position in its industry. But the price tag of EUR 135 per share is expensive, representing a 40% premium to the share price before news of the deal broke. As the acquisition will be financed by borrowing, Givaudan’s credit rating could take a knock.

However, the deal makes sense in the longer run as the margins at the French firm will come into line with those of Givaudan, which are far higher. The Givaudan share is quite richly valued, at 26 times earnings. Payback from the acquisition is only likely to be seen in the medium term.

In the meantime, Givaudan lacks price drivers. We would wait for retracement to CHF 1850/1900 before considering buying.

Tesla (ISIN: US88160R1014, price: USD 252.48)

Times are hard for Tesla. The share is more than 25% down on its 12 March share price. The bond it issued last August has fallen to a post-issuance low of 87% of its par value, resulting in a yield of 7.6%. Rating agency Moody’s has cut the rating on this bond to Caa1, citing concerns over the production glitches affecting the Model 3 and the risk of a cash crunch. Moody’s warned that the carmaker needs to raise an additional USD 2 billion in extra funds.

Tesla has also been forced to cut its production forecasts. It had been aiming to roll out 5,000 vehicles per week at the end of 2017 and 10,000 by the end of 2018. It now expects to produce 2,500 per week by the end of April and 5,000 from July. In addition, the Model 3 has never been profitable. Tesla has also had to recall some 123,000 Model S vehicles because of a corrosion problem that can occur in certain weather conditions. The icing on the cake is that the company is under investigation from US authorities after a fatal accident involving a Tesla X.

After long believing in the production targets of founder Elon Musk, investors are now seeing the glass as half empty just as rivals such as Jaguar, Porsche, BMW and Audi are preparing to launch their own electric vehicles.

Steer clear.

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