EDRG: The US residential real-estate market continues to show signs of stabilising

February housing starts confirmed growth in the multi-family rental segment. Units quadrupled in this building segment compared to its average levels of the fourth quarter of 2009. In contrast, after an upturn, individual housing starts retreated on the month.
The latest euro zone indicators have been poor in most cases, showing a slight but real worsening in the outlook, particularly in the industrial sector. The euro zone composite index, for example, slipped from 49.3 to 48.7. The first half will remain under recessionary pressures that the easing in financing terms will be unable to offset. Beyond that, the improvement in the environment is likely to gradually restore confidence, which is an essential condition for economic activity. The monthly survey of companies by INSEE, the French national statistics office, gives an alternative view to the week’s other figures. According to the survey, both confidence and the production outlook have improved, in the latter case back to the level of last August.

EUROPE
A week of consolidation on European markets as the sovereign-debt crisis recedes into the background. The Greek debt
swap went off well, and the triggering of CDS (which offer protection against credit events) will generate an impact of only $2.5bn.
In contrast, the euro zone’s macroeconomic situation took a turn for the worse in March, with a dip in German and French PMI indicators (particularly in industry) and a stepped-up pace job eliminations. The euro zone may slip back into recession in the first quarter.
Among earnings reports, Inditex did well in the fourth quarter. The retailer managed to generate strong organic growth (twice as high as expected), as well as a solid gross margin (120 bp above forecasts), while keeping its inventories under control. Another retailer, Metro (Germany) reported results in line with forecasts, while projecting mere stability in its growth and margin for 2012. Terna, the regulated Italian operator of the high-voltage grid released both its earnings and its four-year investment plan, while putting a floor under the dividend (thus offering a 6.3% yield on the basis of the current price).
The luxury goods company Hermes released very solid earnings this week for 2011, with sales up by 18%. Hermes reported its highest operating margin (more than 31%) since its 1993 IPO, and will pay out an exceptional dividend. It will thus pay out €740m in dividends, vs. €167m last year. With its $100bn in assets, the Qatari sovereign wealth fund continues to show interest in French companies. After Lagardère, Veolia, Total, LVMH and Vinci, Qatar Holding has raised its Vivendi stake to 2%. Air France announced a settlement with trade unions on Tuesday evening to begin negotiations on reworking the airlines labour agreements.
The Finnish state sold a portion of its Teliasonera shares this week, thus lowering its stake from 13.7% àto11.7%, and took out an option to sell another 2% by issuing a bond exchangeable into Teliasonera shares.

US
Slight dip in US markets this week. Real-estate figures were a mixed bag, with housing starts down but building permits up. Existing home sales fell by 0.9% in February, although in year-on-year terms, this segment, in general, is doing far better than it used to. Statements by Ben Bernanke and Timothy Geithner at a congressional committee meeting to discuss the European crisis got the markets’ attention. In their view, a further effort is necessary to bring European banks’ accounts back into line, and more recapitalisation is needed. US unemployment figures released yesterday were slightly better than expected, with initial jobless claims at 348K, vs. 350K forecast.
Apple was cheered after announcing a dividend for the first time in 17 years. A BHP Billiton official reported that “Chinese demand for iron ore is slowing” and could fall below 10% if it hasn’t already done so. Meanwhile, the Chinese automakers association forecasts only 5% growth, at most, for this year. Moreover, there are fears of slower Chinese growth.
However, the markets shrugged off Moody’s’ threats – reiterated on Sunday evening – to downgrade the banking sector, with the BKX continuing to post gains, post-announcement. As for earnings reports, Accenture confirmed the solidity of demand in IT services and raised its guidance for 2012. Also in high technology, Micron reported a greater-than-expected loss, but its 2012 outlook is still encouraging. The main bad news was the results of FedEx, which despite a solid first half , put out a cautious outlook on US growth in 2012.
The last five days have seen strong gains by high tech and consumer staples, while manufacturing and energy have fallen sharply.

JAPAN
The Topix ended mostly flat, up 0.2%, as profit taking pressure capped the upsides after the index touched its highest in more than eight months. Later in the week, an alleged insider trading by a Japanese major trust bank weighed on the market and yields on 10 year Japanese Government bond rose to 1.06%, up since early February. But the downside of the markets was limited as exporter stocks were supported by the weaker yen. The currency continued to weaken against the euro, by 2.1%, after posting a JPY111/EUR for the first time since late last August. It also softened against the dollar by 0.5%.
Stronger prospects on global economy lifted the Topix shipping sector the most, by 10%. The weakening yen sent euro-sensitive stocks sharply higher. Ricoh soared 10% and Nintendo jumped 5%. Capacitor maker Murata gained 6% and memory vendor Toshiba added 4% also helped by strong sales in Apple’s newly launched iPad. Insurer Dai-ichi Life rose 6% in expectation that rising long-term interest rates would improve its investment returns.
The property sector lost 4%, reversing a double-digit gain it posted last week. Among individual top losers was Sharp again, down 6%, after new president asserted it would maintain its huge loss-making TV business basically as is. Power companies TEPCO and KEPCO lost more than 5% as planned price hikes and restarts of nuclear plants became more uncertain, respectively. Sumitomo Mitsui Trust and Daiwa Securities dropped nearly 5% dragged by the insider trading scandal.

ASIA
A new major and positive political announcement in China with the decision to transfer authority to appoint the heads of the country’s top insurance companies from CIRC (China Insurance Regulatory Commission) to COD (the Central Organisation Department), which normally appoints top party officials. The takeover of these appointments suggests that major reforms are coming in a sector that has been hit hard in the last two years. Life insurance is a part of the foundation on which capital markets are being developed in China and, clearly, the central government is not happy with the sluggishness of these markets – whether equity, bond or money markets – over the last two years. The recent announcement of new investment quotas in RMB for foreign companies shows that reforms are back on track at a pace that will be surprising. An overly pessimistic view of these issues looks like a risky position. A close examination of these announcements gives us precious clues on what is being planned for the next five years in China. The transition of power is moving into its last phase this year, and the new structure is coming into focus. Some key sectors will benefit from these reforms. In its impatience for clear announcements, the markets could overlook decisions that will be truly essential for the coming years, such as the gradual freeing up of retail petrol prices. We’re not yet seeing full deregulation of prices but, rather, adjustments vis-à-vis the oil price that are more and more frequent and significant. For the two sector majors, Petrochina and Sinopec, which have performed poorly in recent years, these changes have begun to produce a reversal in fortune that we expect to continue.
Li & Fung, the logistics and sourcing leader for a large number of international clients, including Wal-Mart, came in above forecasts. Its revenues rose by 26%, vs. the 24% consensus estimate. More importantly, the operating margin rebounded sharply in the second half in the group’s three large divisions. Li&Fung’s Asian sourcing customers accounted for 12% of sales, vs. just 4% the previous year. So this is a new source of growth for the group, on top of its traditional markets in mature economies. The announced dividend also beat forecasts, and management reiterated its target of doubling its operating income over the next two years through: 1) strong growth in Asian demand; 2) better penetration of Japan, a new, but highly promising market for the company; and 3) solid US demand and an increased contribution from Wal-Mart under the USD2 billion sourcing contract, which is slightly behind schedule.
There was a nice surprise from the Hong Kong-listed Hon Hai subsidiary Foxconn International in the mobile phone
segment. After years of losses, the subsidiary reported a profit for Q4 2011, driven mainly by stronger orders from Nokia (which is shifting some production from Europe to Asia) and from Huawei, the Chinese telecom equipment giant, which has expanded into smartphones. This is very good news for the Honhai group, which has kept this subsidiary on life-support for several years, thus failing to reproduce in mobile telephony the success it achieved in computers, and can now count on a positive contribution from this subsidiary. This subsidiary has never handled iPhone manufacturing, as all Apple products have remained the exclusive reserve of the Taiwan-listed Hon Hai parent company.
In consumer goods in China, many companies have confirmed a rebound in sales in March, after a very weak February on the heels of the Chinese New Year in January. Tenfu, a leader in brand-name tea and tea-based snacks, reported a 15%- plus increase in sales compared to March 2010. Groups with well-known brands should be able to raise prices this year to offset higher shop rents and employee wages. The lowest wages are expected to increase by 15% this year and double within six years. This is very good news for consumer spending in China and, probably, for Tenfu brand tea.

OTHER EMERGING MARKETS
In India, an audit revealed that, between 2004 and 2009, there were irregularities in the awarding of 155 blocks of coal
rights, which resulted in USD 209 billion in lost income for the Indian state. So the obvious question is who defrauded the state and how they will be punished. Deposits continued to slow, to 13.8%, thus raising the loan-to-deposit ratio to 76.7%, its highest level since December 2010. So the banking system’s liquidity problem, unfortunately, is still with us, despite the 75bp cut in the mandatory reserve requirement two weeks ago.
In light of the above, we suggest a cautious stance by investors on the Indian market.

CONVERTIBLES
For once, the primary market was completely quiet in two regions. There were no Japanese or US issues to report. In Asia, ex-Japan, there were two new issues. China Hongqiao, an aluminium maker, and Amtek India, a maker of machine tools for the automotive industry, issued US$150m and US$130m in CBs, respectively. We sat these two out. Meanwhile, Solidium, an investment firm owned by the Finnish government, issued a bond exchangeable into €600m of shares in the telecom operator TeliaSonera. We took part, as we have a high opinion of the issuer’s credit quality. Shoprite, the South African major retailer, issued 4.5 billion rand in convertible bonds (about €450m), which we sat out. In other major news this week, Delhaize launched a tender offer for its June 2014 bond with a nominal of €500m. We own this straight bond.
Glencore officialised its cash bid for the Canadian group Viterra. The Swiss trading company said that it was offering a 48% premium to Viterra shareholders over the 8 March closing price. This acquisition is part of Glencore’s strategy of building up its positions as a world leader in grain and oilseeds trading. In Asia, newsflow was abundant on CB issuers.
Kaisa, the Chinese developer, reported a 49% decline in operating profit, despite a 40% YoY increase in sales. Meanwhile, the contraction in margins and Chinese real-estate pricing pressures led S&P to shift its outlook on Kaisa from stable to negative. OLAM International announced that it was forming a joint venture with Gabon in rubber plantation operation. China Unicom announced +780,000 additional high-speed Internet subscribers and 3 million additional mobile subscribers. Guangdong Investment and Shuin rose on results that were far ahead of the market consensus. Two Asian issuers (Noble and China Power International) and a Japanese issuer (Asahi Glass) reported progress on the signing of syndicated bank loans. This is good news for the credit standing of these issuers.

COMMODITIES
Brent has been “stuck” between 120 USD and USD 130 for a little more than a month now. Saudi Arabia has stepped into the fray, claimant that the current price is not justified by mere supply and demand fundamentals, and that, if need be, the kingdom is prepared to raise its output, in order to lower the oil price closer to USD 100/bbl., which it feels is its fair price. This announcement did not have the intended effect (i.e., bringing the oil price down) for three reasons. First of all, the market doubts Saudi Arabia’s ability to raise its output by 25% on a sustained basis (+2.5 million bbl./day). Second, even if it did, the oil would have to transit the Strait of Hormuz (and this is the main risk currently facing the oil markets). And, third, such an increase in output would not offset a shutdown in Iranian exports, if one were to occur. Consumer countries are also dangling the possibility of dumping some of their strategic reserves on the market. However, there does not seem to be a consensus among OECD member-countries in this area. The last time consumer countries did this, last year, it did not have the intended effect (prices dipped only very briefly). Most important, these reserves may have to be kept, in the event of a true supply-size squeeze (due to a shutdown in Iranian production, for example). In short, barring a real improvement in relations between Iran, Israel, the US and Europe, oil is likely to remain very expensive. Remember that Iran subsidises its fuel to the tune of almost 85% and that costs it almost 25% of its GDP… So current sanctions against Iran will have a heavy economic impact! A war can still be avoided, but we will have to be patient…
China has just raised prices of refined petroleum products by 6%/7%. While it is often feared that this type of manoeuvre undermines demand, in fact, it is mainly meant as an incentive for refiners to produce more by lowering their financial losses. In fact, we expect an increase in Chinese oil imports.
Gold continues to weaken due to selling flows by traders (sale of futures) and the strike by Indian jewellers who are opposing the hike in the gold import tax. ETF holders have not contributed to the weakness in gold, and central banks continue to buy… the problem of excess public debt is far from having been resolved and will return to the spotlight.

ASSET ALLOCATION
Investors took a more cautious stance in light of less favourable economic newsflow. After recent weeks’ gains, the equity markets consolidated in limited volumes. Between the 15 March and the 22 March closes, the world’s major indices moved as follows, in local currency:
– Standard & Poor’s 500 -0.7%
– Euro Stoxx 50 -2.5%
– TOPIX -0.2%
– MSCI Emerging markets -2.9% (in euros)
The major bond markets were nervous. The 10-year Treasury yield, in particular, hit 2.38% (back to its level of last August) before pulling back to 2.28%. The Bund briefly hit 2.05%, a high since December 2011, but ended at 1.9%. Italian and Spanish bond yields ended above 5% (including 5.4% for Spain, which was hit by doubts on the government’s fiscal determination).
The euro rose slightly during the week (to 1.32 vs. 1.31) vs. the dollar. The yen traded in a narrow range around 83 to the dollar. After slipping recently, the Chinese yuan rallied to about 6.30, a level it last reached in early February. We bought into market consolidation to add to our US equity exposure, following the change last week in our US score. Within emerging markets, we are very gradually shifting our weightings from Asia to Latin America, Brazil in particular. Meanwhile, the release of below-forecast European leading indicators exacerbated the correction, thus giving us a new tactical opportunity to sell European index puts. We are long, on the whole, on the equity markets, and the current corrections offer new opportunities to increase our weightings. EdR Europe Flexible weathered the consolidation nicely, cushioning almost all the week’s losses. We are gradually raising the fund’s exposure cursor to about 45-47%.