Earnings watch, historic repricing of equities, and Ark performance
Head of Equity Strategy
Summary: In today's equity update we highlight the most important earnings releases this week and why they matter. The key focus during the Q1 earnings season is profit margins that have come under pressure amid rising prices on raw materials, logistics costs, and recently galloping wages. We also take a look global equities priced against commodities and how equities are already down 28% since the peak against commodities which is the biggest repricing since July 2008. Finally, we highlight Ark Innovation ETF and its performance against Nasdaq 100 since Cathie Wood recently splashed out excessive return expectations for the fund.
Important week on earnings
Last week the Q1 earnings season kicked off with US financials reporting a mixed bag of earnings with JPMorgan Chase reporting a surprise jump in credit provisions indicating that the credit cycle has likely turned. This week the earnings calendar is busy with the most important earnings releases shown below.
- Tuesday: Shenzhen Mindray Bio-Medical, Johnson & Johnson, Netflix, Lockheed Martin, IBM, Halliburton
- Wednesday: China Mobile, China Telecom, ASML, Heineken, ASM International, Sandvik, Tesla, Procter & Gamble, Abbott Laboratories, Anthem, CSX, Lam Research, Kinder Morgan, Baker Hughes
- Thursday: Contemporary Amperex Technology (CATL), Sartorius Stedim Biotech, Nidec, Investor AB, ABB, Danaher, NextEra Energy, Philip Morris, Union Pacific, AT&T, Blackstone, Intuitive Surgical, Freeport-McMoRan, Snap, Dow, Nucor
The key theme to watch in the Q1 earnings season is net profit margins which have rolled over and the preliminary figures we have from MSCI World and S&P 500 suggests that profit margins are continuing lower amid rising input costs. If Nasdaq 100 can sustain its higher net profit margin over time and also see less compression during the current commodity and wage inflation cycle, then it could lead to a valuation multiple expansion for this group of equities.
The most important earnings releases and why:
- Netflix – the first technology earnings and increasingly difficult competitive landscape and slowing subscriber growth. Netflix has guided 2.5mn net new subscribers in Q1 which is significantly below previous Q1 quarters before the pandemic. Suspension in Russia will add to headwinds in 2022.
- Halliburton – has already reported earnings in the US pre-market session with revenue and EPS beating expectations. With the US and Europe moving to become independent of Russian energy, oil and gas drilling should in theory expand going forward and Halliburton being one of the world’s largest oil and gas services companies should quickly see this rising demand.
- ASML – supply chains in semiconductors are still stretched due to excessive demand from many different industries. In addition, the US and Europe are rapidly expanding investments in domestic semiconductor manufacturing to reduce reliance on Taiwan which has become a geopolitical risk following the war in Ukraine.
- Tesla – the world’s largest pure EV-maker is most important earnings release this week but a lot is at stake. Production is being constrained in China due to lockdowns and globally by component shortages for cars; Rivian’s CEO recently said that EV-makers will soon experience a dramatic shortage of batteries. Soaring lithium and aluminum prices have forced Tesla to hike prices multiple times recently and the question is to what extent it has impacted demand.
- CATL – the world’s largest battery manufacturer and a key supplier to Tesla and Chinese EV-makers. The company is reporting its full-year 2021 result, but it is the 2022 outlook that is the most interesting with analysts expecting 88% increase in revenue. Given the lockdowns in China the earnings release could hopefully also give a glimpse into the important supply chain for electric vehicles.
- ABB - one of Europe’s largest industrial companies within automation which will provide insights into the demand in Europe’s industrial sector and to what extent the galloping energy and raw materials prices are impacting production.
- NextEra Energy – the green transformation has soared lately as investors have warmed to these stocks again following the war in Ukraine as the US and Europe are moving to become energy independent of Russia which will include more renewable energy production.
- Snap – kicks off the social media earnings season and last quarter Snap was the clear winner in terms of growth and beating expectations. Can the company do it again?
Equities drop the most against commodities in 14 years
Equities always go up, or so the saying goes, and it is in fact the asset class with the highest positive drift over time. However, with inflation rampant in the global economy, for many reasons we have explained in several of our research notes, the game in equities is changing. Equities is a nominal asset class pricing growth, productivity, and innovation, and its trajectory in nominal terms is typically up and only disturbed by an occasional recession. However, high inflation means that equities priced in real terms becomes a real thing to think about as an investor. When commodities and inflation are well behaved there is no reason to talk about nominal vs real, but today that discussion is paramount. Equities have not been repriced against commodities to this extent since July 2008. Global equities are down 26% against commodities in the past 12 months and 28% since the peak in their relative total return indices in November 2020. The correlation between commodities and equities, which is typically positive, has recently moved close to zero suggesting commodities are becoming a great source of diversification to equities and something we think investors should think about when they construct their portfolios.
Ark Innovation does worse than Nasdaq 100
Cathie Wood, founder and CEO of Ark Invest, recently doubled down on her Ark Innovation ETF fund saying that she expects 50% annualized gains over the next five years. In another interview she said that the Ark Innovation fund had outperformed over a 5-year period, which is correct but also a cherry-picking in terms of period. Normally we would not comment on a fund manager, but Saxo has a considerable amount of clients that have invested in Cathie Wood’s funds and we feel we have an obligation to counter these lofty expectations.
One should note that 50% annualized gains are extraordinary in a historic context and would be such an outlier that it would be the greatest luck or pure genius if it happened. The Ark Innovation ETF has delivered 16.8% annualized returns since inception in 2014 and there are no real arguments for why returns should suddenly be triple of the previous return stream except for mentioning of disruptive innovation will accelerate; no one care to discuss how an acceleration in innovation is even measured. It should also be noted that since inception the Ark Innovation ETF has underperformed a low-cost ETF tracking Nasdaq 100 by 1.8%-points annualized; in other words, no alpha or outperformance and certainly not in risk-adjusted terms.
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