US Earnings Season is upon us!
It seems like yesterday that we started the New Year, yet we are now gearing up for the first earnings season of 2016. It’s a good time to take a quick look at the major themes over this quarter which has resulted in European shares trading around 12% lower than the start, the FTSE a surprise outperformer down only 1%, US stocks remaining flat around all-time highs, commodity prices bouncing up from their recent lows, the high yield bond market recovering most of its losses following a liquidity amplified sell-off and the European sovereign bond markets which have outperformed most asset classes.
The first three months of the year were marred by negative sentiment in most financial assets as a result of BREXIT fears, the slowdown in China and the drop in oil prices which had stalled the drive for global economic expansion. The usual mundane tone of stagnant European economies remained, which prompted the ECB to announce further stimulus measures. Despite the announcement of the measures, the euro has strengthened against the dollar, up to 1.14 from the low of 1.06 last December. The weakening of the dollar was amplified by the decline in oil prices, as less currency was required to purchase the commodity by foreign currency.
The low interest rate environment is set to remain in the near future as the search for yield continues, driving prices in the fixed income market ever higher. At this point, the yield in most high risk fixed income names does not seem to be commensurate with the risk involved with holding the bonds, especially after the strong rally in March which effectively wiped out the selloff in the beginning of the year.
The high yield market is set to be shaped in a rather unique way, where investors look for the carry on the bonds, yet the risk on these credits remains. In individual high yield names when things turn sour, they turn bad very quickly often not giving investors the chance to exit the trade. This is further amplified by the declining liquidity in the credit markets as most investment banks look to de-risk their operations by downsizing their bond trading desks. This, combined with the newly announced behemoth of a bond buying program by the ECB is set to reduce the liquidity in bond markets further, making entry and exit from positions more difficult. Investors looking to attain exposure to high yield markets would do well to add diversification to their portfolios through collective investment schemes (funds) as these would have greater, easier access to newly issued credit, which is not available to smaller investors individually.
With US season set the make the headlines in the coming weeks, it makes for a welcome distraction from the more negative BREXIT and China slowdown fears that have troubled the markets. Analyst expectations for the upcoming announcements are cautious as the economic data which has emerged over the first quarter has pointed towards an economy which appears to be topping out. US Fed Chair Yellen recently said the US economy is approaching full employment, thus setting the scene for positive news from US companies in terms of gross performance, however challenging in terms of earnings growth. Analyst expectations are from an underperformance of the US Banking sector. Alcoa is set to unofficially kick off proceedings after the closing bell today.
This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd. has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.