The Daily Update - Flower's and Apples

Italy’s revised draft budget is due to be submitted to the European Commission today. Deputy Prime Minister Luigi Di Maio of the Five Star Movement has insisted that the government will adhere to the spending commitments it pledged to the public during the elections to “be a credible country”, aggravating tensions with the European Commission (EC), which expects a budget cut to be presented. Finance Minister Giovanni Tria reiterated the government’s stance of not changing the deficit target of 2.4% / GDP. The clash between Italy and Brussels looks set to escalate as Italian Prime Minister Matteo Salvini said, “the budget doesn’t change because the EU sends us letters”. We wonder if flowers may work.

Apple, the darling of American tech stocks, is down over 12% this month with a 5% fall yesterday as demand for iPhones seems to be waning as customers wait longer between upgrades and the market becomes saturated. However, as Apple can pull in more money from data storage, streaming music and digital videos, it is their suppliers that really get hurt. Japan Display Inc. which gets half its revenue from Apple dropped 9.5% in Tokyo this morning and Hon Hai Precision Industry Co. the main iPhone assembler has dropped 25% since the end of September.

We do hold Apple bonds in our global portfolios as the Aa1/AA+ company currently spreads at around 94bp off UST’s against ‘Fair Value’ of 53bp at a duration of 15.4 years. We have held Apple for a while and increased our exposure when President Trump allowed a tax break on US companies to repatriate offshore earnings, with Apple a major beneficiary. In the past, Apple has been a very active issuer in the bond market however, with the huge amount of cash repatriated we thought issuance would fall away and then the spread could tighten. This seems to have worked as this time last year the same bonds were at a spread of 110bp and we still think there is room for further tightening.

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