(News Bulletin 247) – Numerous dizzying plunges have been recorded on the CAC 40 and other large companies. Weaker market liquidity, competition from bonds as well as the geopolitical context are all elements that favor market nervousness. And therefore amplify these sanctions.

The results season this fall 2023 looks a bit like a “museum of horrors” or a ghost train, it depends.

Within the CAC 40, Alstom plunged almost 38% in one session at the beginning of October, after issuing a heavy warning about its cash generation. Worldline lost 59% over one day last week, after having slashed its 2023 targets and setting aside its outlook for 2024. These two groups certainly constitute two of the smallest capitalizations in the CAC 40. But Sanofi has then demonstrated that heavy goods vehicles are not immune from heavy sanctions from the market. The pharmaceutical group sank 19% last week, following results below expectations coupled with very disappointing indications on its profit for next year and an abandonment of a margin target for 2025.

Let’s not forget the falls outside the CAC 40 either: the specialist in active ingredients for the pharmaceutical industry Euroapi lost 59% in one session following a profit warning which probably cost its general director his job, Karl Rotthier, thanked last week. Plastic Omnium, a solid automotive supplier, lost 22.8% over one session, following the lowering of its annual outlook.

Let us also point out that this is not a French disease: the Dutch payments group Adyen fell by more than 40% on the Amsterdam Stock Exchange following disappointing results this summer. The German Siemens Energy has twice lost more than 30% this year, due to a technical problem with wind turbine components, in June, then, in October, following press reports reporting that the company was seeking assistance in the form of bank guarantees, which the group later confirmed. In the same sector the Danish Orsted collapsed on Wednesday by 25.7% after abandoning an offshore wind farm project in the United States and announcing a heavy depreciation of assets.

If disappointments deserve punishment, these tumbles raise the question of market nervousness and a certain exaggeration.

The independent research firm AlphaValue thus deemed Sanofi’s plunge “unjustified”, the group being, according to it, the victim of a stock market panic. This observation was shared on Tuesday by HSBC bank. The general director of Worldline, Gilles Grapinet, who does not usually comment on investor reactions, assured L’Agefi and Les Echos that the fall in his company’s shares amounted to “completely forgetting both the fundamentals of (its) society as well as its market”.

“Today we may have a bit of exaggeration, ‘overshooting’,” agreed Mabrouk Chetouane, head of global market strategy for Natixis Investment, in News Bulletin 247.

What can account for this nervousness in the market and the harshness of the sanctions imposed on companies that disappoint? Here are some elements of explanation.

>> Liquidity which is reduced and accentuates variations

Liquidity remains a determining factor which perhaps tends to be neglected, even though it allows the movements of a given asset to be moderated. On the foreign exchange market, probably the most liquid market in the world (we are talking about 7,500 billion dollars per day of transactions), large pairs, such as the euro-dollar or the pound-dollar only rarely experience variations in more than 1%. Conversely, on very small capitalizations, movements of 50% – even on a day without any news – are commonplace.

But liquidity is falling on the markets. “For several months, market liquidity has been reduced, quite simply because central banks like the European Central Bank and the American Federal Reserve (Fed) have implemented restrictive monetary policies and are starting to reduce their balance sheets, which is decreasing ( this) market liquidity. In this context, equities have less support”, develops Vincent Juvyns, global market strategist at JP Morgan.

If this mechanism affects all equity markets, European markets seem to be hit harder. Barclays noted at the end of October that although, over the year as a whole, the equity markets recorded positive flows and therefore inflows, the overall figure was weighed down by outflows in Europe.

“There is indeed a market which is perhaps in the process of being deserted,” explained last week on News Bulletin 247, Romain Daubry, head of derivatives markets and member of the Experts information unit at Bourse direct.

“We have been talking about it since September, there is no longer any interest on the Eurostoxx (the pan-European index, Editor’s note) with 3 million contracts open compared to more than 4 million on average usually, this means that the order books are empty. Afterwards, there is the observation of what is happening value by value, but such brutal deviations reflect empty order books, it reflects speculation which intervenes and which amplifies these movements, and this reflects the complete disinterest of operators in the market,” he explained.

>> Bond competition and unforgiving high rates

The violent falls in securities are part of a context of rising bond yields, particularly sovereign ones (that of the 10-year US Treasury bond exceeded 5% before falling this week), which creates several effects likely to tend investors in the stock markets. First of all, higher rates are synonymous with more expensive or more complicated financing to obtain.

This puts pressure on indebted companies and pushes the market to make a sometimes radical distinction between companies. But these higher rates also mean that bonds offer inexpensive valuations with attractive yields, thereby competing with stocks.

“Stocks are facing increased competition from the bond market which has become much more attractive in this context of uncertainty, with high yields on bonds,” adds Vincent Juvyns.

“I have the impression that the equity markets are being held hostage by a rate universe that is extremely unfavorable to them. We would not have had this configuration with very low rates. Disappointments are coming but” the recent market sanctions are “to be compared with this unfavorable rate environment”, estimates for his part Mabrouk Chetouane, of Natixis. According to him, this bond pressure “polarizes” market reactions, without making any distinction in terms of the size of the listed companies.

>> Geopolitics, lack of economic visibility and structural reasons

Geopolitics and macroeconomics, which are always scrutinized by the market, have been particularly tense since mid-summer. The Chinese economy continues to worry investors and each American indicator published seems to be able to be read in various ways by the market, sometimes as good news and sometimes as bad.

“The market is characterized by a word that comes up everywhere: it’s volatility,” summarizes Mabrouk Chetouane, who explains that American statistics in the United States “go in all directions.”

“We are in a world where it is very difficult to have a visible reading” and in view of this, companies “which do not provide guarantees of stability to their shareholders are heavily sanctioned,” he adds. .

And obviously the situation in the Middle East doesn’t help. “The international environment is also proving difficult, which is weighing on risk appetite even though equities had performed well in the first part of the year. The conflict between Hamas and Israel was added to a long list which includes the war in Ukraine”, explains Vincent Juvyns. “In this context, publishing disappointing results and/or outlooks is doubly punished,” adds the market expert.

Hervé Goulletquer, economic advisor at the Accuracy firm, explained last week that long-term problems are added to the factors already mentioned. “We don’t have many institutional investors, we don’t have investment funds. pension in France”, he lists, thus citing “structural” elements already known but which could constitute “an aggravating factor”.

The market is in “doubt”, continues the market expert, and in this context companies have an interest in surprising “positively and not negatively”.

>> Causes specific to each company

If market problems explain investors’ nervousness, they obviously do not justify everything on their own.

Alstom was already in the market’s crosshairs before its heavy warning. The Barclays bank had, a few weeks before the group’s announcement, pointed out its high debt as well as a risk of deterioration of its credit rating. The company was also, at the end of last year, the most short-sold stock by investors on the SBF 120 and it had already issued a warning on its cash – admittedly for different reasons – during the summer 2021. To the point that Stifel highlighted in October that unpleasant surprises of more than 1 billion euros on its cash generation seemed to become “a bad habit” for the group.

Euroapi for its part had already heated up the market. Its earnings warning last month was the second in less than a year. In December 2022, the company was in fact forced to suspend its production and cut its annual objectives to take into account “discrepancies” concerning the manufacture of certain hormones at its Budapest site.

For Sanofi, the share’s dizzying fall can be explained by a violent and unexpected surprise effect, with very significant deviations from expectations. The company has indicated, for example, that it expects net profit per share from its activities to decline next year, while the consensus anticipated an increase of 6%, according to Oddo BHF.

As for Worldline, the 59% fall may indeed seem severe, despite the cocktail of bad news delivered by the payments specialist. But in reality, the payments sector had fallen out of favor in the eyes of the market for a long time – since the end of 2021 – and had already suffered a violent contraction in its stock multiples. Investors therefore seemed to be expecting mishaps which occurred this summer for Adyen and this fall for Worldline.