Head of Equity Strategy
Summary: Nike has done well during the pandemic and last night's Q1 results were overall also good, but at the margin the company warns about margin pressure from higher freight prices and rising input costs, on top of longer delivery times. On the positive side, Nike Direct showed strong performance with revenue up 25% in constant-currency terms. Evergrande is back haunting investors as the Chinese real estate developer has remained silent leaving bondholders and investors guessing whether the company paid its bond coupon yesterday.
Nike has seen a phenomenal rebound in its business from the lows during the pandemic. Revenue in Q1 (ending 31 August) was $12.3bn vs est. $12.5bn up 16% y/y and gross margin was 0.2%-points better than expected at 46.5%. EPS was $1.16 vs est. $1.12 up 22% y/y. However, shares traded 4% lower in extended trading as comments on the conference call about shipping times from Asia to North America had doubled to 80 days and all of its footwear factories in Vietnam were currently closed due to Covid-19 restrictions and were not expected to reopen until October.
The significantly lower inventory level of Nike is evident of these supply chain issues and company also warned that higher ocean freight surcharges would eat to margins. On the positive side, Nike’s direct-to-consumer channel grew revenue 25% on a constant-currency basis, which is key for Nike’s future margin expansion. The message from Nike was an echo of FedEx indicating that the Q3 earnings season could very well be all about margin pressure and could become a net positive for technology companies that operate under fewer constraints in the physical.
After yesterday’s rally in global equities the risk-off mood has returned with investors getting spooked by the silence from Evergrande which saw its shares tumble 12% in today’s session. Given how fragile the situation is around Evergrande and the wider real estate developer industry, it is incomprehensible why Evergrande, after announcing an agreed coupon payment due yesterday, has failed to update the market on a successful payment on its bonds. It leaves investors wondering whether the developer actually has the money and maybe is in a much more distressed liquidity situation than previously thought.
In terms of risk to sentiment, our view is still that the Chinese real estate developer situation can be solved by a transfer of risk from the private sector to the government balance sheet. We are much more worried about the unfolding energy shock in Europe, with rapidly rising electricity prices eating into household disposable income and margins of industry, and rising natural gas prices shutting down fertilizer plants. A food and energy crisis has the seeds to do much more damage, so this is a key risk to monitor for Europe going into the winter months.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
