Capex, dividends or M&A? How to spend $3.6 trillion

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CAPEX, DIVIDENDS OR M&A? HOW TO SPEND $3.6 TRILLION (1155 GMT)

Corporates listed on the S&P 500 equity benchmark index are sitting on a mountain of cash and this year they could lift spending by 16% to a record $3.6 trillion, per UBS estimates.

The big question for investors, though, is how exactly will they break that down between capex, research and development, mergers and acquisitions, dividends and buybacks.

The Swiss bank has some insight to offer.

"We expect the key spending priorities to include capex and R&D, which are set to rose ~20% y/y, while dividends and buybacks could total >$1.7tr equivalent to a ~4.6% yield," strategists at UBS including Keith Parker say.

"Cash M&A will likely remain robust but stay flat y/y".

(Danilo Masoni)

UKRAINE TENSIONS PUT DEFENCE STOCKS ON THE RADAR (1002 GMT)

On Feb. 14 when fears of an imminent Russian invasion of Ukraine were so palatable to spark a big risk off move across markets and send virtually every stock in Europe deep down in the red, BAE Systems was among the rare exceptions.

Times of rising geopolitical tensions can generally be an opportunity for the defence industry, and indeed, according to Berenberg, this could be one - especially if NATO boosts spending.

"The heightened threat environment is likely to put upward pressure on the defence spending outlook for NATO members, even in the event of no Russian invasion," said analysts at the German investment bank.

"This would clearly benefit European and U.S. defence suppliers. We also believe current tensions highlight the importance of a capable western defence industry for a peaceful and sustainable society, a factor that is often overlooked by the ESG investment process," they added.

Berenberg highlights BAE, Rheinmetall and Chemring as key buys with large exposure to "conflict-driven" demand, but also sees the entire sector as offering good value as it trades in line with long-term PE average of 12.

Rheinmetall and BAE have the largest exposure to weapons and ammunition, while Chemring and BAE are most exposed to cyber security and electronic warfare, it added.

Morgan Stanley said ESG criteria by asset owners partly explains why European defence trades at around a 20% discount to the market, but believes a re-rating is possible if the rotation into value continues.

Among its overweights, Morgan Stanley said "Thales offers the best combination of profitability, and supportive end markets".

(Danilo Masoni)

STOXX STAYS AFLOAT (0841 GMT)

European shares kicked off the session in a muted fashion amid worries over developments at the border between Ukraine and Russia, although some upbeat earnings updates from heavyweights like Kering and Reckitt provided support.

As a result, the pan-regional STOXX 600 equity benchmark index saw choppy trading around parity in early deals and was last just flat on the day.

Not all earnings updates however pleased investors and there were some weak spots such as Sinch and Standard Chartered which fell 9% and 3% respectively. Nestle was little changed after a lower opening as the food giant said it would defend its margins against cost pressures this year.

Here's your snapshot:

(Danilo Masoni)

WAITING FOR EARNINGS TAILWINDS IN ROUGH WATERS (0724 GMT)

Beneath the surface of the wild swings that have gripped markets this year, there is a strong trans-Atlantic current of rising corporate profits steadily beating estimates.

The question is, when will asset prices take notice?

Investors are still busy navigating their way out of the rough waters of Ukraine war scenarios and rate hike whirlpools, but once the geopolitical and macro storms clear up, they might find favourable tailwinds in calmer waters awaiting them.

The rate of earnings beats on Wall Street has come above the typical quarter at 78%. Even in Europe, where the fourth-quarter reporting season peaks this week, it is cruising above usual averages, at over 62%, per Refinitiv data.

And what's more, 2022 could be another year where profits smash initial estimates. Swiss bank UBS sees 15% EPS growth this year for Europe, double the actual consensus, betting firms will keep passing rising costs on to customers.

Commerzbank reported fivefold fourth quarter beat, Standard Chartered raised its core profitability goals and promised extra payouts, and Airbus saw core profit almost trebling on a partial recovery in jet deliveries.

So stocks could offer an inflation hedge, but tread softly. Roblox fell 26% in the latest display of how the tide has turned for high-flying tech and pandemic darlings that don't keep up with expectations. Remember Facebook and Delivery Hero?

For now markets remain on edge after Russian-backed separatists in Ukraine accused government forces of attacks and the U.S. said Russia's claim of withdrawing troops was false, although on the positive side, the Fed minutes soothed worries over a supersized rate hike next month.

European and U.S. stock futures are heading south, government bonds are catching a bid and gold is nearing 8-month highs.

Key developments that should provide more direction to markets on Thursday:

Japan ran its biggest trade deficit in a single month in eight years in January as high energy costs swelled imports

Nestle said it expected underlying sales to rise around 5% and a broadly stable margin this year after strong demand for coffee and pet food as well as price hikes helped growth accelerate ahead of expectations in the fourth quarter

Finance Ministers and Central Bank governors from G20 meet in Indonesia

Norway Central Bank Governor Oystein Olsen

ECB chief economist Philip Lane; Bank of Spain´s governor Pablo Hernández de Cos; Cleveland President Loretta Mester

U.S. housing starts/initial jobless claims/Philly Fed index

U.S. 30-year TIPS auction

Fed speakers: St. Louis Fed President James Bullard

U.S. earnings: Baidu and Walmart

Emerging market central banks: Philippines, Turkey

(Danilo Masoni)