ECM AM’s Warwick-Champion spots trends amid investment grade Q2 reports
Duncan Warwick-Champion, head of Corporate Research at ECM Asset Management, has identified two key themes amid the second quarter reporting season that affect views of investment grade corporates.
More than mid-way through the Q2 reporting season and a number of themes are emerging.
First, and somewhat as we had projected, there have been a number of profit warnings and downward revisions to full year guidance. Many of these revisions have been in the chemical, healthcare and oil sectors, though there are numerous examples across the industrial universe. Furthermore, even where some guidance has been affirmed, that guidance looks stretched relative to 1H operational trends.
The second theme appears to be an increased focus on shareholder remuneration and concerns. Several companies have announced increases in share buyback programmes, while debt-funded bolt-on acquisitions also appear to be back on the agenda in an effort to boost top line performance. Unfortunately, it is too early to accurately assess whether this shift in strategic focus will lead to a permanent decline in credit metrics as Q2 historically is a weak quarter from a credit perspective given the proliferation of dividend payments and generally negative working capital movements. More encouragingly we have seen some better numbers recently from some of the consumer-oriented companies, while the auto sector also appears to be reporting stabilising trends – even if it is too early to predict a recovery.
However, downward revisions to guidance and a shift more towards shareholder friendly policies does not appear to have blunted demand for fixed income assets. Indeed, the EN40 Corporate BBB index is 4bps tighter on the week at 167. Primary issuance this week by European investment grade companies was limited to a single €750m 7yr bond by Unilever which is currently trading marginally better than its reoffer level.