The flight to 'quality' drives markets this quarter; with chip makers, defence companies and tech dominating
It’s the final week of March and end-of-quarter, which is when when portfolio rebalancing takes place and investment managers bring their asset allocations back into alignment. Meaning, moves in markets could be volatile this week.
The Nasdaq 100 has been as a shelter play, hitting highs and is now up 17% this quarter, with the index gaining traction as bond yields and the US dollar are continuing to fall to new lows. The big story is that Mega-cap tech stocks with robust cash flows are being favoured, amid the economic uncertainty. Nvidia shares are up the most in the US this quarter, up 83% as its data centre and networking business are expected to report strong cash flows in 2023. Meta shares are up 71% with investors buying into the expectation Meta’s revenue will rise in 2023 and recover from the prior drop. Tesla shares are up 54% this quarter, with its balance sheet expected to ripen from costs cutting, while its future profits could pick as the lithium price has fallen 47% this year.
In Europe, The Stoxx600 trades up 4% this quarter, and we are continuing to see the same theme play out; that investors are favouring quality businesses with strong cash flows. Rolls Royce shares are up the most this quarter in Europe, up 50%, with its civil aerospace, defence and power generation business units seen as haven-defensive plays. Rolls Royce is in Saxo’s Defence basket, with the basket up 14% this year and 20% YoY. Remember, in times of a recession, defensive sectors such a utilities, healthcare and consumer staples typically outperform, along with defence companies.
In commodities the defensive playbook theme dominated as well, with gold gaining strength
Gold is up 9% this quarter, as bond yields and the US dollar index continued to pare back. Gold equites are benefiting too, with Newcrest Mining shares up 28% YTD. But before gold makes a sustained move higher, the market will need to see further evidence. The Fed’s preferred inflation gauge released this week, could possibly push gold onto higher ground, if inflation is weaker than expected. Over the medium to longer term, if the Fed pauses rate hikes, which is what former Fed Vice Chairman Alan Blinder thinks should happen, then the case for gold would strengthen.
Oil is now down 14% this quarter amid recessions concerns
So keep an eye shares in ExxonMobil, Chevron, Shell, BP, TotalEnergies and Woodside. Some investors have been holding long-term position, in oil and oil equities, pre-empting OPEC could make supply cuts, while others are protecting against potential further oil price falls, by using options. Also consider countries such as Australia could be cutting LNG production from July, in a bid to cut reduce emissions. That could support prices later this year, at a time when demand is expected to pick up ahead for EU winter.
What’s on the economic horizon for the rest of the week
The Fed preferred inflation gauge, PCE will be centre stage and it could be a major catalyst for markets, with core PCE expected to remain at 4.7% YoY. If its hotter than expected it could result in higher bond yields, a higher US dollar, and that would pressure tech stocks and especially those banks already under pressure. If the Nasdaq 100 does pull back consider, some investment managers might take 'the dip' as an opportunity to buy into quality names in the index. Also consider, as its end of quarter, volatility could be amplified amid profit taking.
EV makers and lithium talk will dominate company earnings this week
This week’s calendar is dominated by the EV industry. And watching their outlooks is key. Car makers including China’s BYD, Great Wall and America’s Canoo, report as well as China’s biggest lithium producer, Genfeng.
The market is expecting lithium giant Genfeng to report a 290% jump in income on the year. But its outlook will be vital, as its shares are down 16% this year amid the lithium price pull back.
So, what do you need to consider with EV car makers? Firstly, the prices of EV makers raw materials have come down considerably, which could point to EV makers costs falling in Q1 of 2023, which may in theory help fast track profit growth, that's if car markets can get their ducks in a row. So what metal costs are down? The Lithium carbonate price is down 47% this year, lithium hydroxide’s price is 11% lower, Nickel is down 21% and Aluminium is 2% lower. And his offsets the 7% lift in the copper price.
Secondly, consider there is greater than ever competition in the EV market, meaning sales growth for new EV entrants could be challenging. Merc last year announced its newcoming EV would be cheaper than Tesla. That later resulted in Tesla dropping its EV prices, which fuelled an price war. Ford cut prices, along with Lucid, China’s Nio, BYD, Great Wall and Xpeng. But, new entrants such as Canoo and Rivian didn’t cut costs, as they’re grappling with falling cash reserves. While steady hands VW, GM, Volvo are implying they don’t need to cut costs.
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