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Equities - Market Update

Authors: Jerusan Jegatheeswaran Co-VP Education/Research, Dragos Cada Co-VP Education/Research, Sam Luo Research Analyst, Matthew Morgan Research Analyst, Bilal Lodhi Research Analyst

Latest Developments in Equities

S&P 500 Finishes Above 2,800 for the First Time Since November 8

The US stock market finished strong on Friday, with the S&P 500 closing above 2,800 for the first time since November 8th. This was driven by investor optimism as US-China trade talks progressed, the technology sector and oil prices rebounded, andfears of tighter monetary policy were reduced.

The Dow Jones Industrial Average finished 110.32 points higher (+0.43%) on Friday to 26,026.32, while the S&P 500 gained 19.20 points (+0.69%) to 2,803.69 and the Nasdaq Composite Index increased by 62.82 points (+0.83%) to 7,595.35. For the week, the S&P 500 rose 0.4%, the Nasdaq gained 0.9%, and the Dow ended a nine-week winning streak, its longest since May 1995, with a decrease of about 0.1%.

US-China Trade Talks Progress

Just before the week began, President Trump tweeted: “I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very ... productive talks, I will be delaying the U.S. increase in tariffs, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!” Indeed, US officials are currently preparing a final trade deal that could be signed by US President Trump and China President Jinping within weeks as a summit between the two leaders is anticipated as early as mid-March.

While optimism that a trade deal will be finalized exists, President Trump has expressed that he is willing to walk away if he is unhappy with the terms presented to him. This is evidenced by the recent Trump-Kim summit that ended with talks between the US and North Korea breaking down and Trump refusing to lift sanctions on the nation. The possibility of a US-China trade deal breaking down presents the risk of serious economic damage for both countries. If no deal is reached, the US could impose the 25 percent tariffs on $200 billion of imports from China that were threatened earlier. The International Monetary Fund estimates that this would cut 0.2 percentage points from U.S. growth this year and 0.6 percentage points from China’s expansion.

US Federal Reserve Signals Patience Regarding Interest Rate Hikes

Federal Reserve Chairman Jerome Powell said Tuesday the central bank will take a “patient approach” as it weighs future interest rate hikes. This is consistent with the more “market- friendly” strategy he and other Fed officials have recently favoured. In a research note, Capital Economics said that the Fed is unlikely to raise rates again this cycle and its next move will probably be a rate cut early next year as the economy weakens. This represents an abrupt reversal by Powell and other Fed policymakers since raising the federal funds rate to 2.5% when the Federal Open Market Committee met on December 19, 2018. That rate hike in particular was the fourth increase in 2018 which led forecasts of two more rate hikes for 2019. After this, stock markets dropped substantially as investors reacted to the aggressiveness of the Fed in light of a slowing global economy, the US-China trade dispute, and the fading effects of federal tax cuts and spending increases. Since this market reaction, Powell and other Fed policy makers have relaxed on the idea of rate hikes in 2019 with Powell suggesting at a news conference that a rate cut was just as likely as an increase. As a result, markets have recovered, with the S&P 500 reaching November levels again.

Tesla Shares Tank

Tesla’s stock price dipped more than 4% on Thursday night before the market opened and a dropped a further 7.84% on Friday. The company was expected to continue reporting profits since its historic Q3 earnings release with earnings of $1.75 per share, smashing predictions that Tesla would report a loss yet again. However, Elon Musk expressed this week that he does not expect the company to report a profit. Meanwhile, Tesla unveiled a cheaper Model 3 that will be priced at $35,000 and said it would lay off employees to cut costs.

M&A Market Update

Latest Developments for M&A

Uber Potential Acquisition of Careem

As per Bloomberg, Uber is in “advanced talk” to acquire Careem, a ride-hailing business based in Dubai for $3 billion, in a cash and share transaction. Uber aims to access the middle east market and is hoping to resolve a costly rivalry in the region. Careem has built a robust ride hailing eco-system in middle east, with over 1 million drivers and operating in over 100 cities. If a deal would go through, it would signal Uber’s commitment to the Middle East, where one of its biggest investors, a Saudi Arabian sovereign wealth fund overseen by the Crown Prince Mohammed bin Salman himself, is based. The deal would also form an alliance for Uber with the biggest backers of its main competitor at home, Lyft Inc. Rakuten holds more than 10 percent of Lyft, and is also an investor in Careem. Careem’s last funding round in 2016 valued the company around $1 billion, making it one of the most valuable technology startups in the Middle East

Uber plans to benefit from the deal by utilizing the existing base of Careem and using to further expand Uber’s global presence, especially vital, for its upcoming IPO later this year. Furthermore, Uber is expanding its operation in the Middle East because the region’s youth population is rapidly growing and more than 40% of the population is under 25 years old. Uber believed that this would help them reach a billion users and help catapult its valuation up to $120 billion.

Negotiations are still ongoing, and no final agreements have been reached, the people familiar with the matter said.

Versum Materials rejected bid from Merck KGaA

On March 1st, Versum Materials announced that its board of directors rejected an unsolicited bid from Merck KGaA, a German pharmaceutical company. It also indicated that it would keep up with the all-stock merger with Entegris, a chemical company based in Massachusetts. Versum believes that if the Entegris deal gets approved and closed, it would create long-term value for its shareholders. Merck planned to acquire Versum for approximately $5.2 billion in cash, which represents a 52% premium to Versum’s share price before the Entegris deal. However, Versum did not believe the Merck deal was attractive after consulting with financial advisers (Lazard and Simpson Thacher & Bartlett LLP) and it would have to pay a breakup fee of $140 million if it backs up from the Entegris deal. It is unclear at the moment whether Merck would come back with a better offer or move on. Back in January, Versum agreed to merge with Entegris to make important components for the semiconductor industry. Versum’s share price was trading at $48.60 on Friday, March 1st, up ~16% from Feb 28, the day the deal was announced.

Biogen Acquisition of Nightstar Therapeutics Plc

On March 4th, Biogen Inc (an American multinational biotechnology company) announced that it will buy Nightstar Therapeutics Plc (A UK-based, clinical-stage gene therapy company) for about $800 million in cash as the company looks to tap into a potentially lucrative gene therapy market. Biogen’s offer of $25.50 per share, represents a premium of 68 percent to Nightstar’s close of $15.16 on March 1st, 2019. Gene therapy, an emerging field of biotechnology, uses specially engineered viruses, or viral vectors, to deliver genetic material into defective cells, in hopes of improving or potentially even curing an inherited condition.

Post AT&T Acquisition of Time Warner - AT&T restructuring its WarnerMedia Business

AT&T Inc is restructuring its WarnerMedia business, according to a memo sent to employees, as it prepares for a streaming video battle with Netflix Inc and Walt Disney Co. AT&T aims to reinvest their savings into its programming businesses and It will launch an early version of its HBO-led subscription video streaming service late this year. AT&T shares opened down 1.2 percent at $30.44 on the New York Stock Exchange.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.