APAC Market Digest Monday Feb 14: What to watch this week and why look at China
Summary: The themes of higher inflation, higher energy and commodity prices and monetary tightening continue to ring loud and clear. Late last week’s higher than expected U.S. CPI numbers, hawkish Fed talks, and escalated tension in Ukraine have triggered widespread risk-off trades and it continued in APAC this morning. We set up the key elements to watch this week, including earnings and economic news timetables, plus a short note on the divergence of Chinese monetary policy from the rest of the world.
Written by APAC Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.
What’s happening in markets?
On fears of a Russian attack on Ukraine, the Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) fell sharply on Friday (2.8% & 1.9% respectively), and Crude oil (OILUSMAR22 & OILUKAPR22) rose 1.4% to U$$94.38 along with safe haven commodity Gold (XAUUSD) up 1% to $1,860. Our view is still unchanged, equities remain volatile with downside risk, as central banks are likely to react to stronger than expected inflation numbers. Also keep in mind, inflationary pressure is also impacting profit margins, which will also cause headwinds on 2022 earnings forward.
The risk off sentiment continued as the Australian share market opened Monday morning. Today the ASX200 (ASXSP200.I) rallied up 0.2%, after 2pm (Sydney time) with gold mining stocks fueling up the market. The ASX200 has ow risen 6% from its 28 Jan 2022 low, with better than expected US and Australian earnings results helping to lift the market. However, just 11% of the ASX200 companies reported results so far and this week the market is on edge in Australia, as it’s the busiest week of earnings results, plus traders are expecting volatility amid Russian: Ukrainian tensions. We believe commodities offer the most upside in 2022, and The ASX energy sector is also likely to see the most earnings growth on the ASX. The market suggests earnings per share (EPS) growth of 35% over the next 12 months. The Materials (mining) sector is expected to follow with 21% forward EPS growth. Meanwhile the least forward looking earnings is expected to come from the Financials 7% forward EPS growth. And Real Estate, with 7% EPS growth.
In Asia the Hong Kong and Chinese A-share markets managed to end last week with modest gains (Hang Seng +1.4%; CSI 300 +0.8%) despite further escalation in concerns about faster and bigger moves by the Fed in normalising U.S. monetary policies. In credit markets, Chinese corporate (excluding properties) U.S. dollar bond spreads came in 7bps (A-rated) to 37bps (B-rated) on average.
What to consider
US earnings season sees commodity stocks shine, in line with our quarterly outlook: Most US companies have reported results, so it’s a time to consider reviewing your investments; see how companies are performing financially, and what they are expecting ahead for 2022. 71% of the S&P500 companies reported quarterly results so far. Most have been better than expected, and reported 27% earnings growth, but the trend is that broad earnings have normalised and are back at 2019 levels. In line with our quarterly outlook, the most earnings growth has come from airlines and commodities (oil and mining) companies, fuelled by the reopening on the global economy and record oil prices. While the Real Estate sector has reported the least earnings.
The US energy sector (oil, gas, coal companies) generated average sales growth of 89% (with 12 out of the 23 companies reported so far). Stand out companies include; Halliburton’s (HAL) as its earnings rose 100%, Schlumberger’s (SLB) earnings rose 86%. While, the strongest sales were in; Exxon Mobile (XOM) reporting 83% sales growth, Marathon Petroleum (MPC) 96%, Valero Energy (VLO) 116% in the quarter.
The US Materials/Mining sector also reported Stella average earnings growth of 84%, and average sales growth of 31% as commodity prices soared on strong demand and limited supply. Half of the US mining companies (15 of the 28) in the S&P500 reported so far. US stand outs so far included Steel producer Nucor (NUC) reported 316% earnings growth, copper-gold-silver giant Freeport-Mcmoran Inc’s (FCX) earnings grew 146%.
Australian Earnings season ramps up this week, with the world’s biggest miner, BHP reporting tomorrow and CSL, the world’s biggest blood therapy reporting later this week. For Australian earnings season, it’s important to look at the key themes, industrials, oil and gas, mining stocks, which have produced the strongest earnings in the US, while the US real estate sector underperformed. So these themes will likely play out for the Australia too. On Monday 14 Feb: BLD, DXS, JBH, SKC, BPT report. On Tuesday 14 Feb: BHP, SBM, LIC, HUB report. On Wednesday 16 Feb: CSL, STO, FMG report, and a list of 13 others. On Thursday 17 Feb: WPL, DCA, TLS, WHC, S32 announce results. And on Friday 18 Feb: ING and QBE release results.
Also consider, the Chinese economy is at a stage different to other major economies. China cut interest rates three times from December last year, and has room to loosen monetary policies further. China’s momentum of economic growth has stalled somewhat in recent months, and ahead of the 20th Party Congress of the Chinese Communist Party (the “CCP”), you’d assume maintaining stability will be addressed as it’s a top priority for Chinese authorities. Also keep in mind, Chinese Headline CPI is at 1.5% and Core CPI is at 1.2%. China’s central bank, the People's Bank of China (PBOC) has also encouraged banks to lend, including to property developers and home buyers. In January, aggregate financing in China rose 10.5% YoY, recovering slightly from the weakness since summer last year. Real estate development loans and mortgage loans increased about RMB600 billion during the month. In its monetary policy report released last Friday, the PBoC emphasized ensuring steady growth in aggregate financing and guiding financial institutions to provide support to key industries and weak links of the economy.
Economic news: Australian Economic news: Tuesday February 15 RBA Meeting Minutes are released. Thursday February 17 Australian unemployment data is out. Unemployment expected to remain at 4.2% (which is 14 year lows). Asian Economic News: Wednesday 16 China announces January CPI and PPI.
Broad markets; Amid the heightened geopolitical tension, and risk that markets could pull back if the Fed puts the peddle to the metal with interest rates, we are adopting a defensive stance to equities; and see gold regaining a position as a hedge as its usually outperforms when official interest rates rise. On top of that, given the increasing price of oil expectation it could test $100 in the second half of the year, it could be worth considering a position. And to minimise downside to equities, you could consider taking some profits off the table or perhaps hedging your portfolio by shorting the S&P500 and Nasdaq for example.
Asian Markets: We are expecting the current divergence in monetary policies between China and the U.S. to see result in relative outperformance of the Hong Kong and Chinese A-share markets in the first half of 2022.
We prefer adopting a defensive stance on equities overall. The heightened tension in Ukraine is likely to add to the momentum of crude oil to continue to make new highs. We see opportunities in upstream energy exposures. Chinese property names may benefit from a favorable shift in government policies. Tip-toeing into the property sector, we prefer higher quality names with relatively strong balance sheets.
Written by APAC Strategists: Jessica Amir in Australia. Redmond Wong in Hong Kong.
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