Global stocks produced mixed returns as signs of improving economic growth were offset by fears of rising interest rates and a worsening debt crisis in Greece. Telecommunications stocks proved to be a bright spot, driven higher by M&A activity, while the rate-sensitive utilities sector fell the most. Emerging markets stocks advanced, supported by monetary easing in China. Bonds declined and the dollar slipped 4% against the euro.
Index Returns (Quarter)
U.S. stocks were flat for the quarter, with optimism over a growing U.S. economy and Federal Reserve comments about gradual interest rate hikes tempered by concerns over the Greek debt crisis. A slowdown in corporate earnings growth also weighed on stocks. The Standard & Poor’s 500 Composite Index and Dow Jones Industrial Average were both relatively flat. The Nasdaq composite index advanced 2%, surpassing its previous high from the technology bubble during the period as investors sought growth-oriented stocks.
Health care had the strongest returns in the S&P 500, adding 3% on potential mergers-and-acquisitions activity and the Supreme Court’s ruling upholding subsidies under the Affordable Care Act. Cigna shares gained 25% as Anthem moved to acquire its smaller rival for $54 billion; Anthem shares rose 7%, though Cigna ultimately rejected the offer. Several hospital stocks soared, led by HCA and Tenet, which climbed 21% and 17%, respectively. Gilead Sciences leapt 20% as the firm easily beat quarterly earnings and revenue estimates and raised its guidance for 2015.
M&A also supported gains by the consumer discretionary and telecommunication services sectors, which both advanced 2%, as did financials, where investors seemed to believe the prospect of higher interest rates would boost growth at financial services companies. But the specter of rate increases hurt demand for dividend-paying stocks, including real estate investment trusts and utilities, which was the weakest sector with a 6% loss.
Among the quarter’s larger deals, Charter Communications offered to buy Time Warner Cable for $79 billion following Comcast’s decision to call off its tie-up with TWC; Charter also bought privately held Bright House Networks for $10 billion. Charter shares lost 11% in the wake of a weak first-quarter earnings report, while Time Warner Cable gained 19%. AT&T shares advanced 10% as it neared the completion of its deal to acquire DirecTV. Elsewhere in the sector, Netflix gained 58%; the streaming video service forecast strong subscriber growth and expanded into more global markets. Hostile takeover actions also rose as several high-profile overtures were spurned, including Monsanto’s $45 billion offer for Swiss fertilizer maker Syngenta and Energy Transfer Partners’ $53 billion bid for natural gas pipeline company Williams.
Initial public offerings more than doubled in the second quarter from the first, according to IPO ETF manager Renaissance Capital. Issuance rose across most sectors, particularly technology, consumer discretionary and energy. Notable IPOs included fitness accessory maker Fitbit and online crafts marketplace Etsy.
Federal Reserve officials said there were signs that economic growth was rebounding and seemed to indicate that once the central bank begins raising rates, it will do so at a gradual pace. First-quarter GDP contracted 0.2%, as inclement weather, labor actions at West Coast ports and the strong dollar took a toll on economic activity. But U.S. employers continued to add jobs at a healthy clip, and the unemployment rate fell to 5.3% in June. Consumer confidence jumped in both May and June, according to the Conference Board, and new home sales rose to their highest level in seven years in May.
Bonds declined despite a late-quarter rally fueled by demand for safe-haven assets as the Greek debt crisis reignited. Among corporate bonds, spreads to Treasuries widened to 145 basis points and all sectors recorded losses. High-yield corporates were flat. The new-issue market was busy. AT&T issued $17.5 billion of bonds (the third-largest deal on record) to help finance its acquisition of DirecTV. Municipal bonds declined, with high-yield issues faring worst as Puerto Rico’s governor said the commonwealth was unable to pay its debt.
European stocks declined as the sovereign debt crisis in Greece flared up again. Despite signs of improving economic activity in the 19-member eurozone, investor worries that Greece would default on its debt and exit the currency bloc sent European stocks and bonds plunging at times, including the last few days of the quarter. Contentious negotiations between Greece and its international lenders continued, but the outcome remained uncertain at quarter-end. Overall, the MSCI Europe Index lost 4%.
The Greek crisis shifted into high gear in June as the deadline approached for Greece to make a €1.55 billion loan payment to the International Monetary Fund. Greek leaders failed to make the payment and proposed a modified bailout package that would restructure the nation’s debt and extend repayment by two years. Greek leaders also called for a referendum in July to allow voters to decide whether to accept austerity measures demanded by creditors. Yields on short-term Greek debt soared well above 30%, reflecting the high level of uncertainty.
Stocks in other European markets lost ground. German stocks lost 9% as economic growth slowed in Europe’s largest economy and the nation’s business confidence index fell to a four-month low. Spanish stocks declined about 6% even as its gross domestic product growth approached 2.7% in the first quarter, one of the fastest GDP growth rates in Europe.
Health care stocks were among the biggest detractors in the European index, losing 5% in aggregate. Shares of GlaxoSmithKline slipped 13% as the pharmaceutical giant acknowledged that it faces increasing competitive threats from generic forms of Advair, its top-selling drug. Moreover, GSK cut a planned special dividend payment after reporting disappointing first-quarter earnings. AstraZeneca shares also fell 13%, largely on investor concerns about generic alternatives to its best-selling drugs, Nexium and Crestor.
Industrial and information technology stocks lost about 6% overall. Shares of Siemens declined as the engineering giant announced a new round of layoffs and a 5% decline in quarterly earnings. Ericsson shares fell sharply after the network equipment maker reported a big decline in first-quarter profit, partly due to fewer orders from major U.S. customers such as AT&T and Verizon. In the energy sector, shares of Royal Dutch Shell lost 10%; the oil giant reported a 56% drop in first-quarter earnings amid lower oil and natural gas prices.
The telecommunication services sector was the only area of the market to finish in positive territory, gaining 1%, largely supported by M&A activity. Shares of Vodafone rallied amid talk of a merger with U.S.-based cable company Liberty Global. Vodafone later disclosed that it was in the early stages of negotiating a potential asset swap with Liberty. In other deal-related news, shares of BG Group soared after Shell said it would acquire the British natural gas company for $70 billion. BG shares ended the quarter 29% higher.
In bond markets, the ongoing turmoil in Greece and uncertainty about the direction of U.S. interest rates dented European bond prices. At the start of the quarter, eurozone bonds rallied on optimism for the European Central Bank’s new quantitative easing program. However, investor sentiment shifted into reverse starting in mid-April. German bonds experienced wild swings, hitting a record low of 0.05% on April 15 and quickly rising above 1% just two months later. Overall, the yield on Germany’s benchmark 10-year note rose 59 basis points to end the quarter at 0.77%.
Japan was one of the top-performing developed stock markets as the MSCI Japan Index rose 5% and the Nikkei 225 reached its highest level in more than 18 years. Stocks were helped by aggressive central bank policies and positive economic data. The yen weakened 2% against the dollar, reaching a 12-year low against the U.S. currency. The MSCI Pacific Index advanced 2%.
In Japan, financials was the best-performing sector as each of the three megabanks surged more than 18%. Regulators have been increasingly pressured to eliminate the practice of cross-shareholding arrangements with business partners, a move that would greatly improve capital efficiency and help the banks meet tougher global capital rules. Insurers Dai-ichi Life and Tokio Marine Holdings also rallied. Dai-ichi Life shares soared 38% after the company reported better-than-expected earnings, supported by higher premiums. The rising stock market also benefitted Nomura Holdings, Japan’s largest brokerage firm, as asset management fees and commissions increased.
Japan’s telecommunication services sector gained 9%. NTT Corp jumped on projections that next year’s earnings would climb significantly. NTT Docomo shares rose after it unveiled the world’s first commercially available smartphone to be unlocked by an iris scan. The announcement of a special dividend further boosted KDDI shares.
Murata Manufacturing climbed 29%. The company announced record sales in the previous fiscal year, and operating income that increased 70%. Shares of Japan’s two largest trading houses also advanced. Itochu’s investment in Chinese conglomerate Citic has been beneficial as the latter has posted robust earnings. Mitsubishi Corporation announced a share buyback plan for the second consecutive year. Elsewhere, Fast Retailing rallied 20%, benefiting from better-than-expected sales in its Uniqlo Japan clothing retail division.
In contrast, Sharp was the worst-performing stock in the index, dropping 37%. Investors remain unconvinced that the proposed restructuring plan will return the company to profitability in the near term. An investigation into Toshiba’s accounting practices found that more business lines were involved in overstating profits than originally anticipated. Shares of the electronics manufacturer declined 17%. Astellas Pharma sold off on soft corporate guidance after a long run-up over the past year.
Economic data was generally positive. Japan’s GDP grew at an annualized 3.9% in the first quarter, helped by an uptick in business spending and strong exports to the U.S. and China. Consumer spending improved as both retail sales and household expenditures increased more than expected in May. Household spending rose for the first time since last year’s tax hike, increasing 4.8%, while retail sales were up 3%. However, industrial output disappointed, declining 2.2% year over year in May. The fall in output was due to declines in production at auto manufacturers and electronics parts makers as these companies worked to reduce a glut in inventory. Despite ongoing monetary stimulus implemented by the Bank of Japan, core-core inflation, which excludes fresh food and energy prices, increased just 0.4% in May.
Australian stocks were down sharply, retreating 7%. The country’s four large banks all weighed heavily on overall returns. Banking stocks had led the country’s multiyear bull run, but rising bond yields and weakening economic conditions contributed to a slowing financial sector in the second quarter. However, Macquarie was a bright spot, gaining 9%. The investment bank was less affected by the domestic slowdown as 70% of its income came from international operations. Oil and gas producer Santos also climbed by 10% as global oil prices stabilized during the quarter. The Australian dollar strengthened 1% against its American counterpart.
Hong Kong equities gained 6%, largely influenced by Hong Kong Exchanges and Clearing’s 45% return. The city’s sole bourse operator soared amid record trading volumes and a flurry of investment from mainland China. Casino operators again weighed on the market, with the five largest Macau-based gaming companies declining by double digits.
Emerging markets equities rose amid more accommodative policies in China and indications that interest rate hikes by the U.S. Federal Reserve would be gradual. The MSCI Emerging Markets IMI edged 1% higher, even with concerns about the Greek financial crisis weighing on markets in the last week of June. Energy stocks continued to rise, fueled by oil price gains after last year’s sharp drop. But the technology sector retreated, with several companies dimming their profit forecasts in the face of increased competition. Emerging markets U.S.-dollar denominated debt lost ground; local bonds also fell overall, despite currency appreciation in Brazil and Russia, which boosted local debt gains in both markets.
Chinese stocks rose 8% as investors appeared to cheer continued easing measures to help stabilize economic growth. The People’s Bank of China cut interest rates further, lowering the key benchmark rate twice during the quarter following reductions in late 2014 and early 2015. Bank shares climbed amid expectations that lower capital reserve requirements would help spur lending. Property stocks also benefited from less restrictive policies in response to last year’s weakness in the country’s real estate market.
Several other Asian markets weakened after rallying in 2014. Indian stocks slumped as exuberance over new reforms and economic improvements seemed to subside and investors appeared to take profits. The MSCI India IMI declined 4%. Infosys shed more than 11%, with the software services giant posting weaker-than-expected sales following a string of robust earnings reports. Indonesian stocks fell 14% amid disappointing economic data; local debt also fell, with losses exacerbated by the 2% depreciation of the rupiah. Thai stocks slipped as economic growth remained sluggish even in the face of lower interest rates. Meanwhile, technology stocks hampered equity markets in South Korea and Taiwan. South Korean stocks dipped 1%. Shares of Samsung Electronics fell after disappointing quarterly earnings, squeezed by increased smartphone competition.
Higher commodity prices helped support equities in Russia and Brazil. Energy heavyweights Gazprom and Petrobras both rebounded in the wake of challenging periods. Investors seemed to take heart that the Brazilian government might pursue more reform-oriented policies after the Petrobras scandal rattled markets earlier this year. The state-run energy giant announced plans at the end of June to slash its five-year spending plan to help manage debt and revive investor confidence. Earlier in the quarter, Brazil’s government unveiled budget cuts, reducing discretionary spending from 4.7% to 4.2% of GDP. Brazilian stocks rallied 7%; local bonds rose 6%, with the real edging 3% higher after double-digit losses in early 2015. Meanwhile, the MSCI Russia IMI climbed 8%. Russia’s central bank continued to ease monetary policy, taking the key interest rate down to 11.5% after last year’s sharp hike to 17% to help stem the ruble’s slide in the face of economic and political crisis. The ruble appreciated 4% against the U.S. dollar over the quarter and 8% for the year to date.
Elsewhere, Turkish equities gained slightly even as political turmoil ratcheted higher. In June’s legislative elections, President Recep Tayyip Erdoğan’s AK Party failed to garner enough votes to establish single-party rule, casting doubts on the leader’s decade-long political stronghold. Turkish local bonds declined, with the lira dropping 3%.
Oil-producing markets bucked the broader trend in U.S. dollar debt declines as Russian and Venezuelan debt posted strong gains. Russian local bonds rose sharply, boosted by the strength of the ruble. Meanwhile, a number of oil and gas companies throughout the emerging markets issued bonds to help counter the financial repercussions of last year’s slide in oil prices. China Petrochemical (Sinopec) sold $6.4 billion of U.S. dollar and euro-denominated debt in Asia’s third-biggest bond sale on record, next only to issues by the Bank of China and Alibaba in 2014. State-owned China National Offshore Oil Corporation (CNOOC) sold nearly $3.8 billion in U.S. dollar debt.