Head of Equity Strategy
Summary: The equity 'Misery Index' is up 36% since late October last year due to the vaccine announcement driving growth expectations higher but most importantly opening a path to easing the mobility restrictions that are holding back general economic activity level, but especially activity in the 'misery' industries which spans airlines, oil & gas, restaurants & leisure, banks, and hotels. Our misery index is clearly part of the reflation trade but is most likely a later stage performing segment compared to the commodity sector pricing in reflation right now. We also take a look at today's earnings from Delta Air Lines that show a light of hope for 2021.
Back in October we introduced the concept of an equity ‘Misery Index’ consisting of the industries oil & gas, airlines, hotels, and restaurants & leisure, which are the hardest hit segments of the equity market. Banks are probably the part of the misery index that has recovered the most and has the best upside potential over the short-term (discussed in yesterday’s equity update) due to rising yield curve and stimulus.
Our misery index is still down 13% late 2019 despite stimulus and a roaring bull market in the broader equity market and especially technology stocks. However, since late October, just before the Pfizer vaccine was announce, the misery index is up 36% indicating that investors are betting on these hardest hit industries. Most of the rebound in these industries came during November when the market discounted the vaccine rollout and normalization of the economy, but the trade has lost momentum as new Covid-19 mutations have forced new and prolonged restriction across many countries constraining activity in many of these ‘misery’ industries. This trend is also underscored in today’s US initial jobless claims figures rising 965K from 784K in the week before and significantly missing estimates. The recent Beige Book and payrolls report suggests that most of the increased layoffs are in the leisure and hospitality sector with the Northeast hit the hardest.
Delta Air lines is part of our misery index and has reported Q4 earnings numbers today with the adjusted EPS coming out at -$2.53 vs est. $2.49, but investors are upbeat about the Q4 revenue figures at $3.97bn vs est. $3.58bn. showing that passenger traffic bounced back more than estimated in Q4, with most of the rebound driven by the first two months rather than December where new restrictions were increased. It shows that as soon as vaccines are rolled out the activity level will rise dramatically. The CEO also says in a statement that there is a good chance that Delta Air Lines will reach profitability in Q3 this year. But in the short-term the cash burn will continue with Q1 revenue probably down 60-65% from Q1 2019 according to the airliner. Shares are up 4% in early trading approaching the local highs from early December.
AI: The good, the bad, and the bubble
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Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
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As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
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Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
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The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
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Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
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While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
