Head of Equity Strategy
Summary: In today's equity update we highlight the lack of direction and zoom in on the mega merger between Philip Morris and Altria. With the intense focus on clean energy due to climate change we also take a look at how investments in the energy sector have done since the Great Financial Crisis in 2008.
As we alluded to in recent equity updates the market is boxed in. Across the major equity futures markets such as S&P 500, FTSE 100, DAX and Nikkei all futures are finding themselves trapped into a tight trading range. Our thesis remains that the next move will be big and given the negative trajectory in macro fundamentals and the ongoing escalation in the US-China trade war we think the odds favour a decline. Longer term we see the reconfiguration of the global supply chain as a negative for companies’ profitability because of increased capital expenditures. Today Google announced that’s moving its Pixel phone production from China to Vietnam. More of this news will hit the market over the coming months as the trade war heats up.
Has oil and gas attractiveness peaked?
With all the focus on clean energy these days due to climate change we have set up a monitor to track the investment returns on the oil & gas industry and the clean energy industry. We were quite shocked to the see the appalling returns in the energy sector. The oil & gas industry has only delivered a total return of 50% since early 2009 compared to 300% for the S&P 500. But clean energy has done even worse losing 34%. In absolute terms old energy peaked out in 2014 before the big rout in the oil price but on a relative basis the clean energy industry has outperformance the oil & gas industry since late 2012.
In general, we are negative long-term on the oil & gas industry as the world’s political capital is firmly behind clean energy. On the other hand, the last 10 years show that energy investing has been terrible so the most sensible thing for an investor is to be very selective and not buy into the whole industry.
Stocks to watch
While equities in general are looking for direction things are happening beneath the surface. Autodesk (ADSK:xnas) delivered a downward revision to its FY outlook on both EPS and revenue. Shares were down 8% in aft-mkt trading. The revision was clearly a shock to investors as analysts are overall very bullish on the stock with 73% having a buy recommendation on the stock. But the reaction to the Q2 earnings was natural as the company has an aggressive valuation that needs constant hits against estimates.
After having been separated for 10 years the two giant tobacco companies Philip Morris (PM:xnys) and Altria (MO:xnys) are in advance talks to merge and become the world’s biggest tobacco company with a market value of $195bn. The reaction to the news yesterday was quite negative after initial positive reaction. Watch the two stocks today for any signs of a reversal.
Thomas Cook (TCG:xlon) shares are down 95% since June last year as profitability has deteriorated and investors have questioned the company’s ability to honour its liabilities. But the big news today is a rescue plan led by Chinese Fosun Tourism Group providing $522mn in capital in an overall rescue deal of $1.1bn. While the news is positive for bondholders, shares are down 17% in today’s trading session as Fosun is acquiring 75% of the tour operator division and 25% of the airline. The 2022 6.25% bond was up 48% initially but is now only up 7% for the session.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
