Anchor Capital: Essential market review, Tuesday 6 January

By Anchor Capital 

South Africa Market Review

South African markets closed in the red yesterday, amid renewed concerns over instability in the eurozone and prospects of an interest rate hike in the US in 2015. Sasol dropped 6.0%, after oil prices dropped sharply yesterday. Lonmin, Anglo American Platinum and Impala Platinum Holdings declined 4.8%, 4.6% and 4.3%, respectively. Standard Bank Group, FirstRand and Capitec Bank Holdings plummeted 4.9%, 4.6% and 4.4%, respectively. On the upside, Gold Fields, Harmony Gold Mining and AngloGold Ashanti climbed 6.4%, 6.2% and 4.4%, respectively. Sibanye Gold gained 1.2%. The company revealed that Gold One International has transferred its entire in the company to Gold One South Africa. The JSE All Share Index dropped 3.4% to close at 47,831.04.

UK Market Review

UK markets finished lower yesterday, as energy sector stocks were hit following a sharp tumble in crude oil prices. BP plunged 5.1%, amid growing speculation that its 4Q15 earnings would be negatively affected by the current slump in crude oil prices as well as a weak ruble. Tullow Oil and Royal Dutch Shell fell 4.3% and 4.1%, respectively. Mining sector stocks, Anglo American and BHP Billiton dropped 4.9% and 4.5%, respectively, after copper prices slipped to a four year low. Bucking the trend, travel sector stocks, Carnival and International Consolidated Airlines Group rose 1.7% and 1.3%, respectively. The FTSE 100 Index declined 2.0% to close at 6,417.16.

US Market Review

US markets ended lower yesterday, led by declines in energy sector stocks and amid fears surrounded over the snap elections in Greece. Noble Energy, Diamond Offshore Drilling and Anadarko Petroleum tumbled 9.6%, 8.7% and 7.9%, respectively, after oil prices dropped sharply. Kansas City Southern and Union Pacific lost 4.3% and 3.4%, respectively, amid concerns that low energy prices might lower spending on capital equipment and crude transportation. Morgan Stanley declined 3.1%, after it revealed that an employee stole wealth management data of its clients. The S&P 500 Index dropped 1.8% to settle at 2,020.58, while the DJIA Index declined 1.9% to close at 17,501.65. The NASDAQ Index lost 1.6% to finish at 4,652.57.

Asia Market Review

Markets in Asia are trading in negative territory this morning, following yesterday’s sharp decline in crude oil prices. In Japan, oil sector stocks, Inpex Corporation and Japan Petroleum Exploration plunged 5.9% and 4.5%, respectively. Nissan Motor declined 3.3%, even after it reported better-than-expected US sales in December. In Hong Kong, casino operators paced heavy sell off, with Galaxy Entertainment Group and Melco Crown Entertainment declining 4.6% and 3.2%, respectively. In South Korea, Samsung Electronics lost 2.8%, ahead of its quarterly earnings guidance due later this week. The Nikkei 225 Index is trading 2.7% in the red at 16,934.84, while the Kospi Index is trading 2.0% lower at 1,878.38. The Hang Seng Index is trading 1.5% lower at 23,376.82.


At 06:00 SAST today, Brent crude oil rose 0.5% to trade at $52.59/bl. A Bloomberg survey showed that inventories in the US probably rose by 750.00k bls last week. Yesterday, Brent crude oil fell 6.0% to settle at $52.35/bl., amid concerns over a supply glut in global oil market. Saudi Arabia sharply reduced its monthly oil prices for European buyers to defend its market share. Meanwhile, Saudi Arabia raised its February delivery oil price for Asia.

Yesterday, the Illinois North Central No.2 Yellow corn spot prices rose 2.9% to $3.79/bushel.

At 06:00 SAST today, gold prices advanced 0.1% to trade at $1,205.50/oz. Yesterday, gold gained 1.4% to close at $1,204.86/oz., amid uncertainty surrounded over the snap elections in Greece.

Yesterday, copper declined 1.7% to close at $6,213.50/mt. Aluminium closed 1.0% lower at $1,787.25/mt.


Yesterday, the South African rand weakened against the US dollar, amid a light macro calendar in the US and South Africa. Going forward, traders will eye the ISM non-manufacturing Purchasing Mangers’ Index (PMI) and factory orders data in the US today for further direction to the US dollar-South African rand pair.

The yield on benchmark government bonds fell yesterday. The yield on 2015 bond fell to 6.41% while that for the longer-dated 2026 issue declined to 7.92%.

At 06:00 SAST, the US dollar is trading 0.2% lower against the South African rand at R11.6873, while the euro is trading 0.1% lower at R13.9600. At 06:00 SAST, the British pound has remained flat against the South African rand to trade at R17.8545.

Yesterday, the euro weakened against the US dollar, after preliminary data released in Germany revealed that the consumer price inflation in the nation eased more than expected in December. Later today, services PMI readings across key European nations are likely to attract considerable attention among market participants.

At 06:00 SAST, the euro advanced 0.1% against the US dollar to trade at $1.1944, while it has remained unchanged against the British pound to trade at GBP0.7827.

Economic Updates

In the UK, the Markit construction Purchasing Managers’ Index (PMI) registered a drop to 57.60 in December, lower than market expectations of a drop to 59.00. The construction PMI had recorded a level of 59.40 in the previous month.

In Switzerland, the SVME manufacturing PMI recorded a rise to 54.00 in December, higher than market expectations of an advance to 52.80. The SVME manufacturing PMI had recorded a level of 52.10 in the previous month.

The Ministry of Employment has reported that the number of people unemployed in Spain recorded a drop of 64.40k in December, lower than market expectations of a decline of 72.00k. The number of people unemployed had recorded a decline of 14.70k in the prior month.

The flash consumer price index remained unchanged on a monthly basis in Germany, in December, less than market expectations for a rise of 0.10%. In the previous month, the consumer price index had registered a flat reading.

Sentix GmbH has reported that compared with a reading of -2.50 in the prior month, the Sentix investor confidence index advanced to 0.90 in January, in the eurozone. Markets were expecting the investor confidence index to rise to -1.00.

The President of the San Francisco Federal Reserve (Fed) Bank, John Williams, opined that the pace of increase in interest rates after an initial liftoff should be gradual, citing that the US economy still requires the central bank’s easy monetary policy. He also indicated that the Fed policymakers have been discussing to raise US interest rates by the mid of FY15.

Autodata Corporation has indicated that, in the US, total vehicle sales fell to a level of 16.92mn in December, higher than market expectations of a drop to a level of 16.90mn. In the prior month, total vehicle sales had recorded a reading of 17.20mn.

The HSBC/Markit services PMI index rose to a level of 53.40 in December, in China, compared with a reading of 53.00 in the previous month.

The seasonally adjusted trade deficit in Australia increased to AUD925.00mn in November, from a revised trade deficit of AUD877.00mn in the previous month. Markets were anticipating the nation’s trade deficit to expand to AUD1600.00mn.

Corporate Updates

South Africa

Sibanye Gold: The company announced that it has received a notification from Gold One International Limited that due to internal restructuring the latter has transferred its entire 19.82% holding in the total issued ordinary shares of the company to Gold One South Africa (Proprietary) Limited.

SABC appoints new CFO: Chartered accountant, James Aguma, has been appointed the SABC’s new Chief Financial Officer, it was announced on Monday.

UK and US

Facebook: Media reports revealed that the company is acquiring, a natural language developer.

Pfizer: The company stated that it has acquired a controlling interest in Redvax GmbH, a spin-off from Redbiotec AG, a privately held Swiss biopharmaceutical company, enabling the company to gain access to a potential vaccine against a herpes virus.

Gilead Sciences: The biotechnology company revealed that it has scored an exclusive rights deal with the drug-store chain, CVS Health Corporation, for two Hepatitis C treatments.

Morgan Stanley: The bank announced that an employee who worked at its wealth-management division stole client data and posted it online due to which it has terminated that employee and notified law enforcement and regulators.

Ford Motor: The company indicated that its US sales totalled to 2,480,942 vehicles in FY14, flat compared with FY13 sales, and its total sales for December 2014 was 1.2% higher, compared with the same month last year, but less than market anticipations of 2.8%.

General Motors: The automaker revealed that it delivered 274,483 vehicles in the US in December 2014 and its total sales were up 19.0% compared with a year ago, better than market expected increase of 13.0%.

NASDAQ OMX Group: The company announced that it would acquire Dorsey, Wright & Associates LLC for a total consideration of $225.00mn.

Kite Pharma: The company announced that it has it has entered into a strategic research collaboration and license agreement with Amgen, wherein the former would receive an upfront payment of $60.00mn and would be eligible to receive milestone payments up to $525.00mn.

Galliford Try: The company indicated that its subsidiary, Morrison Construction, has secured a GBP45.20mn deal to build and operate the first phase of the redevelopment of the Royal Edinburgh Hospital. The company further stated that Morrison Construction would carry out the construction work, while it would invest GBP2.20mn in the funding for the project and provide facilities maintenance in a deal worth GBP18.50mn over 25 years.

AVEVA Group: The company announced that it has acquired 8over8 Limited from management and certain private individuals for a consideration of GBP26.90mn.

Financial Times

Wetherspoon and Heineken settle Irish dispute: JD Wetherspoon has said it will serve Heineken’s beers in its pubs again after the companies settled a dispute over pricing in Ireland.

Deputy CEO Sullivan to leave RBS early: Chris Sullivan, Deputy Chief Executive at Royal Bank of Scotland, has left the bank several months earlier-than-expected after his evidence to a parliamentary committee was criticised by MPs.

Lloyds Banking Group seeks key ringfencing rule exemption: Lloyds Banking Group is seeking an exemption to one of the key measures of the UK’s new ringfencing regime, as the country’s big banks take radically different approaches to rules aimed at protecting taxpayers from future financial crises.

Bank Fashion falls into administration: Bank Fashion has fallen into administration, putting 1,500 jobs at risk as the struggling retailer becomes the first high street casualty of the year.

Birmingham shopping set to be transformed after revamp: With close to GBP1.00bn of investment in stores and transport infrastructure, Birmingham hopes to overtake Glasgow and Leeds as the leading shopping city outside London.

Most homeowners not saving for interest rate rise, survey finds: Three-quarters of UK homeowners are not saving extra money to cope with the interest rate rise that is expected for this autumn, a survey has shown, raising the prospect that they will be caught unprepared.

Germany overtakes UK in corporate Executive pay stakes: Germany has overtaken the UK as the home of Europe’s top-paid corporate Executives in a shift that partly reflects public and investor pressure on remuneration at British listed companies.

Wall Street tailspin spreads to Asian markets: US crude oil dropped below $50.00/bl for the first time in five and a half years, sending energy stocks into a tailspin and fuelling a broader sell-off on Wall Street that spilled into Asia as fears grew of a global economic slowdown.

Ex-Banco Espírito Santo unit fined by UK regulator: The investment banking arm of Portugal’s Banco Espírito Santo is to be fined by the UK financial watchdog for breaching listing rules only a month after it was acquired by China’s Haitong Securities.

ValueAct takes swipe at MSCI as activists flex muscles: MSCI, the stock market indexes company, has become an early target for what is expected to be a wave of hedge fund activism in FY15.

JPMorgan settles forex manipulation lawsuit: JPMorgan Chase became the first bank to settle civil lawsuits claiming damages for the alleged manipulation of foreign currency markets, which could put pressure on other groups to follow suit.

BMW offers China dealers $820.00mn to stave off potential revolt: BMW has agreed to pay $820.00mn in China dealer rebates for FY14, a person involved in the negotiations said on Monday, as the German automaker tries to stave off a potential dealer revolt in the world’s largest car market.

Rolls-Royce stresses brand value as sales purr ahead: The head of Rolls-Royce has stressed the need to maintain the British motoring brand’s exclusivity, after reporting a fifth consecutive year of record car sales.

Spanish engineer Carbures’ shares plunge on return to market: The share price of Spanish engineer Carbures collapsed on Monday as the country’s junior market was hit by its latest accounting controversy.

Xaar hires Kodak Executive as new Chief: Xaar, the industrial printing group, has poached a Kodak director as its new Chief Executive, as it seeks to recover from a series of profit warnings and a halving of its share price last year.

Universal Music and Havas form partnership to mine consumer data: Vivendi’s Universal Music Group and advertising group Havas have joined forces in the hope of boosting revenue from artists via data mining at a time of falling record and digital sales.

Sony Chief hits at ‘vicious’ cyber attack: Sony Chief Executive, Kazuo Hirai, said that both former and current employees at its movie studio were victims of “one of the most vicious and malicious cyber attacks that we have known”, in his first public comments on November’s hack.

Coach set to walk off with Stuart Weitzman: Coach, the US accessories group, is closing in on a deal to buy Stuart Weitzman, the woman’s luxury shoemaker, according to people familiar with the matter.

Mulberry: Rose 4.7% to GBP8.85, on very thin volume amid a retread of speculation that the handbag maker could be taken private.

President Energy: Bounced 12.9% to GBP0.18, having dropped last week after reporting technical problems at its second frontier exploration well in Paraguay.


Oil and gas capex: patience and virtue: On Friday, Linn Energy a producer with oil and gasfields across the US, said it would more than halve its FY15 capital spending budget to $730.00mn. It cited both lower oil and gas prices and a reduced asset base. Linn is one of the rare producers structured as a master limited partnership, a tax-efficient vehicle that funnels nearly all cash flow to shareholders through distributions. MLPs have thrived in a low returns environment. But they need to generate enough cash flow to keep the dividend humming. Producers structured as MLPs, such as Linn, are an anomaly. More than 90.0% of the aggregate enterprise value of MLPs comes from energy logistics companies (so-called midstream and downstream). The allure of MLPs is not just that they distribute cash, but that those distributions grow steadily over time. So Linn has not totally abandoned growth. It also announced a $500.00mn drilling joint venture with the lending affiliate of Blackstone, whereby the fund puts up all the cash and earns a preferred return. Public shareholders love monthly distributions but patient capital, like Blackstone’s, looks like it will win biggest.

KazMunaiGas: back in the GDR: The capitalist equivalent would be the global depositary receipt. This workhorse of emerging stock markets allows companies to raise capital on a foreign bourse without the bother of a full listing and the greater disclosure requirements this would bring. GDRs are thus big business: about $3.20trn of them were traded in FY14 (says Bank of New York Mellon, one of the leading custodian banks in the GDR market). The year’s largest public offering took the form of depositary shares. US investors in Alibaba may easily have missed the distinction. On Monday, Kazakhstan’s state-owned oil and gas company withdrew the offer it made in July to buy out the GDRs of its exploration subsidiary, KazMunaiGas EP (it already owns 60.0%). These have enjoyed a quiet life on London’s market since raising $2.20bn for the company in FY06. At $14.00, they trade below their listing price. The parent offer of $18.50 was a 15.0% premium to the previous close. Oil’s continuing collapse has, in effect, killed the offer and, for now, the buyout’s rationale — which was to integrate the explorer back into a restructured national oil company, that could then be listed in full. KMG’s parent owns a 17.0% stake in the vast (and vastly troublesome) Kashagan field. Quite a story. And — given the GDR structure — an easy one to miss.

Executive pay: hand over the cash: Paying managers in shares is widely considered to be wise. How else to align their interests with those of shareholders? Until the 1950s, salary accounted for almost all of Chief Executive pay in the 50 largest US companies, according to research from MIT and Stanford. By FY05 that had fallen to 40.0%, with shares and options making up the rest. But the growing use of shares has coincided with a big jump in overall pay. In the UK 15 years ago, the average FTSE 100 Chief Executive earned 47.00 times more than a full-time employee according to Thomson Reuters IDS. Last year it was 120.00 times. It is far from clear that anyone other than the Executives themselves (and pay consultants) benefit from this. A report from the UK CFA Society and Lancaster Business School argues that CEO pay has a low correlation with company performance. CEOs obsessing about the short-term share price are more likely to prioritise share buybacks, which do not create value, over long-term investment, which can. More generally, over their tenure CEOs with much of their wealth in company shares may have different risk appetites than investors. Excessive payment via shares also adds to the growing, and unwelcome, complexity of Executive pay. There is more to do. Paying $1.00 in shares has the same economic impact on shareholders as paying $1.00 in cash. So boards should drop the preference for shares. Instead, they should decide what performance will create long-term shareholder value, and then incentivise management, mostly in cash, to deliver that.

*Published with special permission from Anchor Capital (ACG)

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