• GB Davis

Winners and Losers - Sector Analysis - Where to Start (4/29/20)

  • April 29, 2020: Asia-Pacific: South Korea and Japan's Golden Week holidays to begin, lasting through May 6.

  • Fitch has downgraded Italy to BBB-, one notch above junk.

  • ScotiaMocatta, originally founded as Mocatta Bullion in 1684, was a precious metal and base metal trading company that operated as the metals trading division of the Bank of Nova Scotia (Scotiabank) from 1997 until January 2019, is shutting down.  This however was planned, as ops were already taken in by Scotiabank itself in 2019 after 7 traders jumped ship to the Bank of Montreal - do you think those are important traders?  ScotiaMocatta was one of the 10 market-making members of the London Bullion Market Association. Additionally it was a direct participant in the London gold fixing. It had a history of 340 years, and was the only original member of the London Gold and Silver fixes to maintain its seats on both respectively.  From Wiki: ScotiaMocatta was formed by Scotiabank's acquisition of Mocatta Bullion from Standard Chartered Bank in 1997, which had in turn acquired it from Hambros Bank in 1973.  The company dates back to Moses Mocatta, who emigrated from Amsterdam to London. There he established himself as gold, silver and diamond merchant by 1671, when he opened an account with the English goldsmith-banker Edward Backwell (ca. 1618–1683). Moses Mocatta first sent silver to India in 1676, because silver was cheaper in London than in Bombay or Shanghai. In 1684 the bullion dealer and refiner ″Mocatta″ was set up and served as a broker to the Bank of England and the East India Company in the 18th and 19th centuries. It was renamed ″Mocatta & Goldsmid″ in 1799, after Asher Goldsmid was admitted as partner in 1787.[2] The firm was solely controlled by the Mocatta and Goldsmid families for 286 years before it merged with Hambros Bank in 1957. Subsequent to 1957, the firm was managed by Edward Mocatta, with involvement and shareholdings variously from Hambros Bank, Standard Chartered Bank, Henry Jarecki, Scotiabank, the Mocatta family and others. With Peter Hambro as Deputy Managing Director and Henry Jarecki as Chairman, the firm dealt in options and futures trading in precious metals and pursued bullion deals in Russia, the United States, South America, Switzerland, Mexico, Germany, China, Hungary, Australia, Japan and South Africa, and became the largest gold and silver counter party to the Soviet Union.  The Mocatta firm has historically acted for central banks, notably the Bank of England and the United States Treasury in market stabilisations, notably the 1913 run on the Indian Specie Bank, and the 1980 attempt by the Hunt brothers to corner the silver market.      

  • GERMANY (MAR) IMPORT PRICE INDEX (MOM) ACTUAL: -3.5% VS -0.9% PREVIOUS; EST -0.9%  

  • UBER DISCUSSES LAYING OFF ABOUT 20% OF EMPLOYEES

  • British Retail Consortium data for April 2020.  Non-food prices in April were 3.7% lower than a year before, the sharpest drop since the survey began in 2006 biggest fall in sales since December 2008 Food price inflation rose to its highest since June 2019 at 1.8% in April, up from 1.1% the month before. Shop prices overall fell by 1.7%, the largest decline since January 2017 (Forex Live)

  • We will be Spending Some Time Trying to Figure Out which Companies in which Sectors/Subsectors are going to be Winners and Losers

  • Fitch Ratings-London/Chicago/New York-27 April 2020: A majority of sectors across corporates, financial institutions, infrastructure, public finance, sovereigns and structured finance would experience heavy Rating Outlook and Watch activity, as well as numerous ratings changes in the event of a downside coronavirus scenario involving renewed large-scale lockdowns across major economies and double-dip slowdowns that delay any meaningful recovery beyond 2021, Fitch Ratings says. Earlier this month, Fitch published details of our baseline and downside coronavirus cases against which all ratings groups globally are evaluating the pandemic's impact. Rating actions will be taken in line with expected credit trajectories under the baseline scenario, while the downside scenario provides a consistent context for analyzing further downside risks. Relative to Fitch's baseline, our downside scenario includes an even sharper contraction in major economies in 2020. However, the principal point of differentiation with our base case is in the recovery trajectory. Whereas our baseline assumptions include severe contractions during the 2-3 month lockdown periods we anticipate in many major economies, followed by above-average growth next year, our downside scenario includes a much more prolonged recovery phase with a delayed return to pre-crisis levels of economic output.  (FILE ATTACHED)

  • Regional Manufacturing Surveys in April New York (Empire): -78 (lowest ever) Philadelphia Fed: -57 (lowest ever) Kansas City Fed: -30 (lowest ever) Richmond Fed: -53 (lowest ever) Dallas Fed: -74 (lowest ever)    

  • Week ending April 24, EMEA Coronavirus-related rating actions in the past week included downgrades in the auto and gaming sectors for Continental AG (BBB/Stable) and GVC Holdings Plc (BB/Negative). Fitch Ratings also revised the Outlook on Electricite De France (EDF; A-) to Negative as the pandemic has depressed electricity demand and contributed to production cuts.  (Fitch)

  • European High Yield Revisits 2011-2012 Crisis Conditions (20 April) Rising default rates and subdued issuance throughout 2020 and into 2021 reflect deteriorated European high-yield (HY) corporate-bond credit fundamentals and uncertain market conditions. The global spread of the coronavirus affected the full spectrum of EMEA HY credit markets. Current HY levels were previously observed in the eurozone crisis years of 2011-2012. Year-to-date, ‘BB’ average yields rose to 4.29% from 2.69% in March 2019; ‘B’ yields increased to 8.18% from 5.74%; and ‘CCC’ yields to 15.42% from 9.14%. (Fitch)

  • Fitch cut its fertiliser price assumptions across all major nutrients due to cheaper energy feedstock, looming oversupply, and short-term risks resulting from the coronavirus pandemic. The outbreak raises risks of lower demand for fertilisers as a result of food-chain disruption at all levels, from farming to food processing, retail and inventory management.

  • The Outlook revision mainly reflects a large production cut in nuclear generation in France related to the coronavirus pandemic, and ongoing problems with new nuclear, adding to a Fitch-expected increase in leverage to slightly above Fitch’s rating sensitivity on average for 2020-2022. It also reflects growing uncertainties about the nuclear-market reform in France – which we still expect to be implemented – in terms of timing and final impact. The pandemic and lockdown have caused daily electricity demand to fall by up to 20% yoy and depressed both spot and forward electricity prices. (Fitch)

  • Fitch Downgrades Continental AG to ‘BBB’; Outlook Stable (20 April) The rating action reflects deterioration in Continental’s financial profile and Fitch’s projections that the auto-supply group’s credit metrics will not return to levels that are consistent with a ‘BBB+’ rating in the near-term. Lower new vehicle sales and cuts in production due to the pandemic will compound Continental’s challenges in repositioning the business in response to the automotive industry’s shifting trends. Fitch’s base case assumes an approximate 15% decline in vehicle production in 2020, which will only be partly recouped in 2021.

  • Fitch Ratings-Milan/London-28 April 2020: The coronavirus pandemic's impact on demand for European fast-moving consumer goods varies by sub-sector from neutral for food and tobacco to more significant for beverages and discretionary items, Fitch Ratings says. The impact on Fitch-rated consumer companies' credit profiles depends on their product portfolio structure, diversification, financial flexibility and measures taken to offset the pandemic pressures, including share buybacks suspension, where necessary. Large investment-grade companies are better positioned to sustain their ratings than smaller companies in the 'B' category, particularly those that have recently adopted leveraged capital structures. Unilever presented an example of diverging demand dynamics across sub-sectors in its 1Q20 results. The company has a diversified portfolio, including food, which is hardly affected by the pandemic, personal care, where demand has fallen due to lower grooming standards during the lockdowns, and cleaning products, which benefit from increased consumer attention and spending. These mixed trends led to overall flat sales during the quarter, excluding currency and M&A effects. Food companies are largely unaffected by the pandemic; the disappearance of their sales to bars, restaurants and canteens was compensated by increased sales of meals consumed at home. The impact on tobacco companies' sales is minimal, but Philip Morris International reported lower sales from the closure of travel retail and a deceleration in the migration to next-generation products. We expect beverage and some other consumer goods companies to see a significant drop in EBITDA in 2Q20, despite cost-cutting measures, before a slow recovery in 3Q20 and 4Q20 due to gradual lifting of social and travelling restrictions and still subdued consumer confidence. Increased volumes of beverage sales for home consumption do not compensate for the loss of more profitable sales to bars and restaurants. We expect all other consumer goods sub-sectors, including clothes, perfumes and cosmetics, to be negatively affected by social distancing measures, as well as by lower sales to clinics or aesthetic centres. Our projections for 2021 incorporate Fitch's macroeconomic assumptions of persistently weak consumer spending that will prevent a full recovery to 2019 levels.  We view large consumer goods companies' financial policy response as adequate and commensurate with their ratings' headroom. Those companies whose credit profiles are more vulnerable to the pandemic, such as Diageo, Pernod Ricard, Anheuser Busch-InBev (ABI) and Coca-Cola European Partners, have scaled down their shareholder remuneration, while stronger companies have kept it unchanged. Issuers' liquidity management measures are also adequate and their existing liquidity positions will help to withstand potential working capital swings and financial market disruptions in the coming months. Investment-grade companies, including ABI, Carlsberg, Imperial Brands, Diageo, Pernod Ricard and Coca-Cola European Partners have been able to raise new debt, albeit at a premium. We estimate that the suspension of share buybacks is sufficient to protect the ratings of Diageo and Pernod, given their moderate leverage and our assumptions regarding the impact of the pandemic on their profits. ABI, which has higher leverage, has not engaged in share buybacks, so it cut interim dividends. Conversely, Nestle and Carlsberg Breweries, which have ample rating headroom, will continue share buybacks and this will not affect their ratings.  

  • Defensive Sector, Mixed Prospects  Fitch Ratings does not expect telecom to suffer the same disruption as other global sectors during the coronavirus pandemic. Carriers throughout Latin America are reporting a significant uptick in network activity across fixed and mobile. Despite this increased demand, the impact of quarantine measures and economic deterioration will likely offset the gains from additional screen and voice time in the short term. Longer term trends, while broadly positive for the sector in terms of data consumption and network coverage, are not immune to macroeconomic pressures. FX depreciation and tighter funding could hamper carriers’ ability to fund fiber and 4G deployments. Telecom spending as a proportion of GDP per capita is likely to continue declining in most markets as competition remains high. Primarily Prepaid Mobile Markets Prepaid customers continue to outnumber the more profitable post-paid customers in Latin America, in contrast with the European and U.S. markets. The outbreak of the coronavirus could slow the migration from prepaid to post-paid as disposable income declines and unemployment rises. Lower post-paid users would imply more volatile cash flow profiles. Furthermore, Fitch expects handset revenues will take a hit in 2020 as consumers scale back discretionary purchases. This would be negative for LatAm telcos’ ability to increase cash flow in 2020 and 2021, and could result in negative rating actions, particularly for more leveraged issuers. Broadband-Driven Fixed Service Growth Broadband has been a source of growth for operators as low penetration and limited overlap contribute to a less-competitive environment than mobile. Fitch expects the pace of broadband expansion to slow as carriers reduce network expansion in 2020. Pay-TV penetration, while low, may be a casualty of consumer cutbacks. Fixed-line voice is in secular decline throughout the region, mirroring global trends.

  • New CLO Activity Plummeted: New U.S. CLO activity in 1Q20 was down on the previous quarter as well as at this time last year. The quarter’s 31 new or re-issued broadly syndicated loan (BSL) CLOs priced $16 billion in notes and equity compared to 50 CLOs with $24 billion last quarter. ‘AAAsf’ Spreads Narrowed: The spread on senior most notes declined in 1Q20 after holding relatively steady in 2019. Typical new and reissue BSL CLOs that priced in 1Q20 averaged 127 bps, down from the 4Q19 average of 136 bps. The annual average was 136 bps for typical new and reissue CLOs that priced in 2019. Refinancing Activity Significantly Greater: 1Q20 marked the most refinancing activity since 3Q17. Twenty-three CLOs refinanced more than $10 billion in notes, compared to 13 CLOs that refinanced less than $5 billion in notes in 4Q2019. The 23 CLOs refinanced 17 transactions that were issued in 2017. The ‘AAAsf’ spread for those 2017 vintage CLOs averaged 130 bps, which was reduced to average 105 bps in the refinancing. Refi Spread Cut Continues Lower: The average reduction of ‘AAAsf’ spread in BSL CLOs that refinanced in 1Q20 was 29 bps compared to the 31 bps spread cut achieved in 4Q19 refinancings.  

  • Cable networks historically have survived recessions with very little damage, but this time could be much different. A recent survey conducted by Kagan, a media research group within S&P Global Market Intelligence, found that if a person lost their job and was looking to reduce household expenses, they were most likely to cut a streaming subscription (37%), followed by a traditional TV service (28%).  (S&P)

  • Tomorrow, April 30, the Dallas Fed releases its Monthly Personal Consumption Expenditure (PCE) Inflation Rate, tracking 178 components - this is the Core Measure of Inflation that we, ourselves, queue on.  We believe, also, that it is the Core Inflation Data Series that the Federal Reserve system queues on in setting policy.  For its March report of February 2020 Monthly, data, Trimmed Mean 6-mo Inflation showed a third monthly decline from 2.0% to 1.9% to 1.8%.  What was included / excluded in the Trimmed Mean (i.e. 25-75% percentiles):

  • Fuel Oil

  • Spectator Sports

  • Gasoline and other motor fuel

  • Motor Vehicle Rental

  • Jewelry

  • Aircraft

  • Boats

  • Flowers

  • Small electronics

  • Calculators

  • Telephones

  • Dishes and flatware

  • Bicycles

  • Luggage

  • Children's clothing

  • Sugar and sweets


  • as well as some items actually inflating:

  • Poultry

  • Pork

  • Bakery Products

  • Foreign and Domestic Autos

  • Clothing Materials

  • CPUs

  • Food products, "not classified elsewhere"

  • Sporting equipment, supplies, guns and ammo

  • Coffee, tea

  • Major household appliances

  • Lubricants and fluids

  • Processed Dairy Products

  • We'll check back on their components tomorrow

  • Italian Car Sales: Decline 98% for the first 24 days of April for this year to 2,182 registrations, down from 107,930 the year prior, according to Automotive News Europe; and which data included  Renault not registered 317 EVs in one day for a rental car company.

  • 37% of Americans believe the country will recover in 2 or 3 months—with those that earn over $100K, being the most optimistic.

  • As restrictions in China lift, many categories such as gasoline, wellness, and pet-care services appear to be bouncing back, which could be a positive sign for other countries following a similar trajectory.

  • According to Oxford Economics, the inevitable decline in the travel and transportation industry is a reflection of mass social isolation levels and tightening travel restrictions. The U.S. travel industry can expect to see an average decline in revenue of 81%for April and May. Throughout 2020, losses will equate to roughly $519 billion—translating to a broader $1.2 trillion contraction in total economic impact.

  • Apparel is experiencing a similarly worrying slowdown, with consumption 40-50% lower in China compared to pre-pandemic levels. Both online and offline sales for businesses the world over are also taking a major hit.  (Did you see the Feb Dallas PCE data on clothing (deflating)?  Did you also see input prices for clothing (inflating) - we're still going to be looking for Retail Shorts - EVEN with the Malls starting to re-open.  (e.g. Simon Property Group is reopening 49 of its malls and outlet centers between May 1 and May 4)


©2020 by H-Fin Capital Advisors, Inc.. Proudly created with Wix.com