Flash boursier

Overview:

1. Equity indices swing upwards

2. Speculation of tightening by the BoJ

HOPES OF A TRADE TRUCE DRIVE EQUITY INDICES HIGHER

Commission President Jean-Claude Juncker last week went to Washington to see if he could stop a trade war breaking out between the EU and the US and thus avoid tariffs being slapped on their respective goods. This led to a joint statement be­tween Juncker and Donald Trump in which they agreed not to announce new import duties, there­by raising hopes for a truce. This was soothing mu­sic for investors. It is still too early to plot a course but it is encouraging to see the two sides willing to take time out from their tough talking on trade and work together to lower customs barriers.

For instance, the prospect that duties on European car imports might be removed by the US was all it took to drive a recovery in the DAX (the automo­tive industry in Germany employs some 800,000 people). Duties on steel and aluminium could also be reviewed. Another positive boost to global mar­ketplaces came from the economic stimulus mea­sures announced by the Chinese government.

The ECB last week stuck to its gradual tightening bias, stating that it would be premature to see the trade truce as a lasting sign that the bickering is over. Mario Draghi made no mention of when rates should rise, simply saying that they will remain low for as long as required to ensure that inflation can revert lastingly to just below the 2% mark. The euro was pulled down by these accommodative noises from the ECB.

On Friday it was reported that the US economy grew by 4.1% year on year in the second quar­ter. Data for the first quarter were also revised up. Personal consumption was a big driver behind this performance.

No policy change is expected by the consensus when the Fed will meet this coming Wednesday. Instead front pages have been dominated by the prospect that the Bank of Japan may adjust inter­est rates when it meets tomorrow and let the gov­ernment take over the heavy lifting through fiscal stimulus. But as Japan’s debt/GDP ratio exceeds 200%, the question is how would this be funded.

Nestlé SA (ISIN: CH0038863350, price: CHF 81.36)

In late June, we noted in this publication that Swiss blue chips had fallen out of fashion with investors. So Nestlé’s first-half results made welcome read­ing, as sales rose by 2.3% to CHF 43.9 billion – beating expectations. The group also gave an update on its makeover strategy.

The strong top line conveys a noticeable improve­ment in North American and Chinese markets. The infant formula business delivered excellent results in all operating regions, helped by product launches.

Efficiency drives and restructuring have started to pay. Nestlé said it was well on the way to achieving its 2020 margin targets. The rise in the share price is to our mind warranted. We remain bullish on this stock.

The share is a core investment in our discre­tionary portfolios.

Facebook (ISIN: US30303M1027, price: USD 174.89)

Facebook took a nasty hit in the markets in the wake of its latest earnings report, nosediving by 20%, which wiped USD 130 billion off its market capitalisation. That’s almost as much as IBM’s market value.

Revenue came in marginally below expectations at USD 13.2 billion, although most companies on the planet would not have sneezed at the 42% increase. The group also suffered a slowdown in new user acquisition. EU GDPR rules, under which social media have to put in place tighter safe­guards for personal data, resulted in the attrition of 1 million users in Europe. Huge investments to improve security are likely to continue depressing profits and growth in upcoming quarters.

Following the correction, Facebook has a better risk-return thanks to its less heady multiples. And it still generates blistering growth: earnings growth for the full year is estimated at between 25% and 30%.

Photo-sharing app Instagram reached the 1 bil­lion-user mark and is set to account for over 20% of revenues this year.

The share could experience some more volatility in the days ahead but we see it bottoming around USD 150.

Investment recommendation: Hold.

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