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The hunt for yield continues

EDITO

The hunt for yields continues

In the current environment, where zero interest rate policies are here to stay, G7-wide if not worldwide, the quest for yield is the rule of the game. In this context equities are really navigating in uncharted territories. Not only are dividend yields in most countries now structurally above sovereign bond yields, a situation last seen in the first half of the previous century, but they are now more than six time higher, if not infinitely higher in markets with zero or negative long term rates as for example Switzerland or Germany. Even more compelling is the fact that most listed corporates can now issue medium to long term debt at a much lower rate than not only the earnings yield but also the dividend yield.  This puzzling situation is a clear call in favour of releveraging and positive for share buybacks and acquisitions as all these moves would be earnings accretive.

This market environment justifies maintaining our positive stance on equities even after a spectacular first  quarter, as it opens the door to a virtuous cycle.  Abundant liquidity provided by stakeholders, starting with central banks, is not only influencing short-term interest rates but also creating a supportive environment for EPS momentum, even though admittedly this will also partially if not mainly be driven by financial leverage and currency depreciation. The US market has shown the way over the last few years and now the door is open for the same scenario in Europe and Japan, with the last candidate for such a strategy being emerging  markets.

This year, we are more confident than ever on earnings expectations in those parts of the world where currencies are weak and leverage is low. This is the case of the euro zone and Japan, where we continue to find very attractive stocks providing a sustainable dividend yield in excess of the corporate bond yield.

Romain Boscher
Global Head of Equities

Exceptionally easy financing conditions for corporate

Dividend yield and corporate bond yields in the euro zone

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Source: Thomson Reuters Datastream

Supportive conditions for share buybacks and dividends

S&P buyback index, S&P dividend index and S&P500, Dec. 2004 to Dec. 2014

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Source: Amundi ETF & Indexing, Bloomberg

 

Past performance is not a reliable indicator of future results or a guarantee of future returns.

CONVICTIONS

 

Japan: the Fanuc moment

What’ s going on in the Japanese market? Last year, we saw Amada (6113) announced that it was going to use 100% of their net profit for shareholders with a combination of dividends and buy-backs. This time, Fanuc (6954). This blue chip company is famous for its numerical control technology and robust balance sheet with USD 8.3bn of cash at hand. And the firm has also been notorious for “poor-accessibility” in the market. It accepts no one-on-one meeting. You have to travel for hours to their headquarters at the foot of Mt. Fuji only to receive very elusive comments vis-à-vis their business outlook. The catalyst was a letter from Third Point. In response to demand from the U.S. investor, the company launched a CAPEX plan of USD 1bn to bolster manufacturing and R&D facilities. Moreover, Yoshiharu Inaba, president, made an announcement on establishing “Shareholder Relations” for dialogue with investors. What a change!

You should find more evidence about Japanese firms turning more attention toward asset owners and managers over the last couple of years. Firms have become more conscious about capital efficiency or ROE, which has brought the dividend distribution and buy-backs levels record high. Japanese firms, however, they could not have begun such transformation without the government’s initiatives. It is where you see the third arrow in Abenomics making steady progress – corporate governance reform for long-term economic growth sustainability. The government has introduced the new rules.

The principles for responsible institutional investors, a.k.a. Japan’s stewardship code and the corporate governance code have created impetus for new dynamics among the stakeholders. The stewardship code urges asset owners and managers to have more of dialogues for company’s long-term growth and shareholder value creation.

175 institutional investors have adopted the principles including GPIF, the government pension plan. On the other hand, FSA, the regulatory body, finalized the draft of the corporate governance code in March. The aim is to forge the right eco-system for companies with animal spirit by requiring the appointment of at least two independent directors and making the Board of Directors (BOD) challenge executive decisions objectively from diverse perspectives. These are going to have significant impact on the economy over the long run. Slowly but steadily, companies have begun to increase capital expenditure and revisit business portfolios to beef up profitability. The stock market has welcomed such moves and built expectation on companies to strengthen their earning power. The Nikkei 225 index recovered the 19700 mark first time in 15 years. As this momentum builds up, the economy should achieve a better economic growth and hence increase national wealth. So, stay tuned!

Yasunari Iwanaga
CIO, Amundi Japan

Europe: further upside ahead

As we end a first quarter characterised by an abundance of liquidity from the ECB following the launch of QE, it is important to stand back and assess the performance of European equities. European markets have had a very strong run since the start of the year (especially the Euro zone with gains ranging between +15% and +22%) and it is logical to ask  if they still  have upside potential. 

We believe that markets were anticipating an economic recovery in the euro zone. In other words, European  equities rose on the back of higher P/E ratios. As a result, certain indices such as the Eurostoxx 50 are today trading on multiples of more than 16x, the highest level since 2006-2007. We should therefore expect a rise in real economic profits to enable markets to continue to progress. We believe that in the coming months companies will beat consensus expectations. Why?

We know  that the European market currently benefits from three support factors: very low interest rates, the sharp depreciation of the euro and falling oil prices. Historically, the consensus has a relatively poor track record in anticipating major currency movements or the impact of oil price swings. We estimate that these two factors alone could drive the market higher. In fact, their impact on profits is often underestimated. If we take the example of exchange rates, on the basis of  the work of our Equity Strategy team on the currency effect alone in 2005  EuroStoxx 50 earnings should grow by 14%. The Factset consensus  forecasts only 7% earnings growth while IBES looks for 9% growth this year compared to 2014. It must be remembered that we are only talking here of the currency effect and  are not factoring in either the oil price decline nor the improved  macro environment.

On the basis of a more comprehensive analysis of earnings trends in 2015 for EuroStoxx 50 companies, our Strategy team estimates that earnings may grow by 22%. In other words, European equities should (without excluding a more than probable tactical consolidation) continue to trend up.

Lastly, let us not forget that despite the impatience of close observers, a number of countries are putting in place structural reform measures which should enable us to envisage the future with greater confidence.

Laurent Ducoin
Head of Europe Stock Picking

Listed real estate: an euphoric market

European real estate stocks are up 40% over one year and 20% year to date in euro terms, lifted by central bank QE, first in the UK and now in the Euro zone. The asset class has benefited from the hunt for yield in a market characterised by abundant liquidity and rock bottom interest rates. This has led to a fall in yields to all time lows on prime property in the direct real estate market. Risk premiums remain all the same high in European markets, and in certain cases this goes hand in hand with growth in rental markets.

Among listed real estate equities, the best performers have been have been companies offering strong growth, both in asset value as in rents: office property companies in London, German residential property companies, a number of shopping centres. Year to date, excluding the currency effect, Euro zone property companies, notably shopping centres and commercial property in France and Germany as well as in peripheral countries, have been the outperformers. Where are we today in terms of valuation (2015 estimated data weighted by market capitalisation)? Share prices are sharply higher than stated revalued NAV in Continental Europe, especially for growth stocks and prime property. This can be explained by the rapid fall in interest rates and capitalisation rates, along with conservative valuation methods in some countries. Premiums reflect investors’ anticipation of further compression in real estate yields. Implied profitability (EBITDA/EV), before financial leverage, stands at 4.4% in Continental Europe and at 3.4% in the UK. Property companies have reduced gearing, diversified funding sources, and, depending on refinancing possibilities, lowered the average cost of debt. According to the companies and the markets where they are invested, recurring earnings growth is expected to range between 0 and over 10%. Real estate companies distribute 77% of their recurring profit and their dividend yield is at 3.4%.

Laurence Taliercio
Portfolio Manager, Listed Real Estate Equities

  

 

 

 

 

The Fanuc moment: impact of improved corporate governance

Fanuc share price over past year

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Source: Thomson Reuters, Datastream

 

 

 

 

 

 

 

 

Earnings revision momentum in the Europe

Significant improvement in Euro zone earnings momentum since end of 2014

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Source: Thomson Reuters, Datastream, Amundi Research

 

 

 

 

 

 

Listed real estate in Continental Europe: share prices are significantly higher than NAV

15.04.EQ5

Source: Markit, Company data, Morgan Stanley Research

 

Past performance is not a reliable indicator of future results or a guarantee of future returns.

Strategy focus

ASEAN Insight

ASEAN (or the Association of South East Asian Nations) is a political and economic cooperation of 10 member countries (initially 6), formed in August of 1967 with the aim of promoting economic and social progress amongst its members. To this end, the group has achieved considerable success over the years with total value of intra ASEAN trade tripling in just 8 years to USD 519.8 bn in 2010 from USD 159.9 bn in 2002. Closer economic integration ahead is also on the horizon with firm plans to build a comprehensive trans ASEAN railway network (dubbed the Kunming-Singapore Railway line), which runs from Singapore, through to Malaysia, Thailand, Laos, Vietnam, and right up to Kunming in China. As a result of its accelerated growth prospects, the region has attracted strong FDIs as well as portfolio inflows over the years. There was a brief reversal of fortunes in 2H 13 however on some “taper tantrum” action following the Fed’s comments that it would gradually unwind its QE program. This remark came as a surprise, and sparked liquidity outflows from the region, notably from the economies with weak Current Account Deficit (CAD) issues.

2014: a comeback year for ASEAN equities

The weak showing in late 2013 did not last. The region made a strong comeback the following year as policymakers responded with progressive forward looking steps - ranging from rate hikes to other firm measures to rein in the CAD. These actions worked, as there was marked improvement in the CAD trend of the heavily scrutinised (and weak countries) previously. Moreover, reduced political risk premium in Indonesia and Thailand led to a further re-rating of both markets. Indonesia rallied on positive reform hopes following Jokowi’s Presidential election win at the polls, while the military seizing power via a coup in Thailand, in a perverse way, sparked a rally, as the episode finally brought to an end the political uncertainty gripping the country. In the Philippines, gains were strong as unlike some of its neighbours, the country had a healthy Current Account Surplus, and it continued to enjoy positive Overseas Filipino Worker (OFW) remittances. Additionally, the consumer stocks in the country continued to register strong earnings growth and positive beats. The strong macro conditions were further  “affirmed” in Dec 2014 with a credit rating upgrade by Moody’s to Baa2 (with a stable outlook) from Baa3 previously. Elsewhere, selected stocks in Singapore rallied over the year on the back of a few company-specific corporate action, and business restructuring plans to unlock value; while separately in Malaysia, the equity market struggled in late 2014 on the back of falling oil prices which hurt the country's oil export revenues.        

Selected ASEAN markets make new highs in 2015

Despite the challenges in late 2014, selected markets were able to build on the strong returns the prior year to register new highs in early 2015. The Thai, Indonesian, and Philippine markets posted new all time highs in 1Q 2015. Indonesia’s gains were fuelled by the speedy reform action taken by the new Jokowi administration to rationalise fuel subsidies, where it will apply the savings from reduced subsidies (estimated at USD 20 bn annually) toward more value adding infrastructure spending projects. Meanwhile, the Philippines continues to march higher as companies there stayed the course in meeting high investor expectations.          

Portfolio positioning and views ahead

Against a backdrop of high valuations (in absolute terms), bottom up stock picking is critical in identifying niche alpha generating ideas that are less dependent on external macro events. To this end, there are a few specific themes within the region where the investment thesis is sound. In the Philippines, the power capacity generation play looks appealing as the country faces a looming power capacity shortage. Companies that are investing in capacity expansion now will be able to reap the benefits in future from increased pricing power as the shortage unfolds. In Indonesia, the construction stocks and other peripheral industries related to the infrastructure spending push by the government stand to benefit from increased demand and activity in this space. The Jokowi administration is very committed to this initiative as the success outcome from this investment drive will be a key “report card” for Jokowi’s first  term in office. The amounts earmarked for infrastructure CAPEX has been raised to IDR 290 trn from IDR 190 trn previously. We are long the Indonesian construction names at this point. Elsewhere, there are opportunities in the Thai tourism space as the sector rides a rebound in tourist arrivals following the coup event that ended the prior period of political instability.

Reginald Tan
Portfolio Manager, Amundi Singapore

Edmund Leong
Investment Specialist - Equities, Amundi Singapore 

  

 

 

 

 

Net fund flows in selected ASEAN markets (US$ mil)

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 Source: Bloomberg, JP Morgan, EPFR

 

Improving current account deficit situation in Indonesia

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Source: Bank of Indonesia, Bloomberg

 

Philippines: strong OFW remittances & growth

15.04.EQ8

Source: Bank of Indonesia, Bloomberg

Past performance is  not a reliable  indicator of future results or a guarantee of  future returns.

Romain BOSCHER, Co-Head of Equities
Yasunori IWANAGA CFA, CIO Amundi Japan
Laurent DUCOIN, Head of Europe Stock Picking
Laurence TALIERCIO, Portfolio Manager, Listed Real Estate Equities
Reginald TAN, Portfolio Manager, Amundi Singapore
Edmund LEONG, Investment Specialist - Equities, Amundi Singapore

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