Head of Equity Strategy
Summary: In today's equity update we discuss the fresh macro data from Japan and New Zealand showing consumer and business confidence are still falling. On top of bad macro data, US tariffs on Chinese goods are hiked over the weekend and Boris Johnson added drama to Brexit with his advice to suspend Parliament. The big question is who wants to take risk here and how it should be done.
Macro fundamentals disappointed overnight again. New Zealand business confidence in August fell to lowest levels since 2008 and Japan consumer confidence in August missed expectations by a mile and accelerating to the downside. Based on incoming data we are again raising the recession probability – the next six months are going to be critical. Yesterday, Ray Dalio the founder of Bridgewater Associates wrote a piece comparing the current situation to the period 1935-1945 in which central banks no longer have the fire power to control and stimulate growth. Ray Dalio says the global economy is entering the final stage of the long-term debt cycle where interest rate cuts are increasingly impotent. Only fiscal stimulus can alleviate the slowdown.
Trump’s new tariffs hike goes into effect over the weekend (September 1) and given last weekend’s string of tweets how many traders are keen on taking risk into the weekend? We continue to argue that traders should not take the risk over the weekend and investors should increasingly turn portfolios defensive.
Is Brexit chaos coming?
Yesterday was another eventful day in London as the UK Prime Minister Boris Johnson advised the Queen to suspend Parliament raising strong discontent due to its timing leading up to the new Brexit deadline on October 31. The political developments around Brexit but also Italy are strong arguments for our continued stance that investors should underweight the European value trap in equities.
S&P 500 earnings momentum still surprisingly strong
Despite all the weakness being thrown at equity markets from macro fundamentals we were surprised to note yesterday that S&P 500 is still seeing EBITDA growth around 5% y/y. The slowdown in profit growth even seems to be stabilizing contrary to the sharp decline in 2015 due to rapidly falling oil prices that cut profits in the energy sector.
The key to S&P 500 earnings growth remains the technology sector. So far, more technology regulation in Europe and the US-China trade war have not hit earnings growth enough. But our view is that over the next six months earnings growth will begin surprise to the downside as even technology companies will begin to feel the heat.
Stocks to watch
While financial markets are sending clear signals that USD funding under pressure China’s largest technology company Tencent (00700:xhkg) just raised $6.5bn in what is the largest USD-denominated credit facility by any Chinese company. This is obviously a strong signal for Tencent that has been struggling for years with more competition and temporary gaming ban which has slowed revenue growth from 45% to around 20% over the past two years.
Pernod Ricard (RI:xpar) is not feeling the slowdown in China as the French alcoholic beverage company delivered its largest earnings growth in seven years due to strong Chinese demand. As a result, the company is planning to buy back more of its shares which seems like a potentially bad decision given the company’s high valuation (50% above MSCI World). Shares are up 19% year-to-date outperforming the general market.
Williams-Sonoma (WSM:xnys) raises its FY earnings forecast on strong quarterly earnings release. The stock price is flirting with resistance levels from Q3 2018 and mid-2015. The positive surprise in guidance could help the stock head into new territory.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
