Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
The gravity of inflation; ITM Power plunges 31% on cash bleeding
Peter Garnry
Chief Investment Strategist
Summary: Higher than expected US core inflation yesterday spooked financial markets causing a significant repricing of US yields, expectations of policy rates in 2023, and seeing US equities declining more than 5% led by technology stocks. The US 10-year yield is fast approaching the June high at 3.5% which at the same corresponded to the 3,700 level in S&P 500, so under the assumption that nothing else has changed, US equities may have significant downside risks from current levels. We also take a look at ITM Power, which is part of our energy storage theme basket, which is down 31% today and a worse than expected cash burning.
The inflation shocker
Yesterday’s US August CPI report shocked financial markets that had set themselves up for a lower than estimated inflation rate. One thing was the +0.1% m/m on the headline figure vs expected -0.1% m/m, which in itself was surprising given the lower input from energy prices, but it was the 0.6% m/m on the CPI core index that shocked the market. From food to shelter costs, it is clear that inflation has become broad-based and entrenched around 5-6% annualized rate as the 6-month average on the core CPI has hovered around 0.5% m/m for over a year now.
The reaction was brutal with S&P 500 futures plunging 5.4% from its intraday highs wiping almost the gains since 6 September. In Fed Funds futures the curve shifted 35 basis points lower for the April 2023 contract to 95.65 suggesting a peak US policy rate of 4.35%. Given the dynamics we are observing and the lack of elasticity in commodity markets our view is that there are upside risks to this market expectations and that the policy rate could reach as much as 5%. Inflationary pressures will continue to act as gravity on equities and the escape velocity cannot be reached before inflation is firmly lower and the Fed pivots on its policy.
The US 10-year yield has also responded to yesterday’s CPI report trading around the 3.44% level ahead of US trading hours zooming in on the previous peak of 3.5% from mid-June. Back then the S&P 500 futures traded around the 3,700 levels suggesting a 6.7% downside risks to US equities. Investors have to ask themselves what has really changed over the past three months to justify US equities so much higher at the same interest rate level? Revenue growth expectations have not moved that much, and expectations for operating margins should be lower given the signals we have got recently from companies in the consumer discretionary and industrials sectors.
Cash burning shocks investors in ITM Power
Our Saxo energy storage theme basket is down this year but has done better than most other themes as demand for energy storage technologies has increased due to geopolitical risks around Ukraine forcing Europe to accelerating its green hydrogen initiatives. ITM Power is the smallest energy storage company we have in our basket and the UK-based company reported full-year results today shocking the market with a dramatically worsening in its gross margin. The company reports work-in-progress in September 2022 at 77 MW up from 79% and the backlog has increased 79% to 755MW. Demand is increasing in Europe for large scale electrolysis projects to achieve net-zero targets.
ITM Power was one of the ultimate pandemic darlings in the market as the wave of new investors plunged into every technology company with a green profile. Since the peak in January 2021 ITM Power has seen its shares decline by 83% hitting levels in today’s trading seen just before the pandemic started.
Long-term we remain bullish on the energy storage theme as the technologies within energy storage are critical for the green transformation and energy systems in the future.
Saxo's energy storage theme basket| Name | Technology | Mkt Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) | 5yr return |
| Samsung SDI Co Ltd | Battery & energy storage | 30,360 | 27.0 | 45.1 | NM | 177.4 |
| Ganfeng Lithium Co Ltd | Lithium | 22,756 | 199.1 | 722.0 | 43.9 | 100.7 |
| Zhejiang Huayou Cobalt Co Ltd | Cobalt | 17,508 | 96.9 | 105.1 | NM | 112.6 |
| Plug Power Inc | Fuel cells & hydrogen | 16,730 | NA | 35.8 | 30.6 | 1,184.9 |
| Pilbara Minerals Ltd | Lithium | 9,223 | 576.6 | NA | NM | 787.8 |
| Gotion High-tech Co Ltd | Battery and storage | 8,712 | 96.6 | 9.2 | NM | 16.8 |
| Chengxin Lithium Group Co Ltd | Lithium | 6,874 | 209.1 | 78149.3 | 22.8 | 199.9 |
| Sunwoda Electronic Co Ltd | Batteries | 6,441 | 28.1 | 1.5 | NM | 112.2 |
| Livent Corp | Lithium | 6,013 | 68.8 | NA | NM | NA |
| Bloom Energy Corp | Fuel cells & hydrogen | 4,893 | 14.0 | -65.1 | 22.4 | NA |
| QuantumScape Corp | Battery & energy storage | 4,807 | NA | NA | NM | NA |
| Fluence Energy Inc | Battery & energy storage | 3,166 | 21.3 | 76.6 | 30.3 | NA |
| Varta AG | Batteries (consumer and cars) | 2,553 | 0.7 | -17.7 | NM | NA |
| Stem Inc | Energy storage | 2,522 | 220.7 | NA | NM | NA |
| Alfen Beheer BV | Battery & energy storage | 2,414 | 58.8 | 128.9 | 14.6 | NA |
| Ballard Power Systems Inc | Fuel cells & hydrogen | 2,263 | 7.5 | -151.0 | 55.0 | 71.3 |
| NEL ASA | Fuel cells & hydrogen | 2,037 | 33.2 | NA | 12.1 | 431.7 |
| FuelCell Energy Inc | Fuel cells & hydrogen | 1,671 | 44.8 | 3.4 | 5.2 | -77.0 |
| GS Yuasa Corp | Energy storage | 1,388 | 10.5 | -27.6 | NM | -4.2 |
| ITM Power PLC | Fuel cells & hydrogen | 800 | 31.6 | -55.8 | 251.8 | 136.7 |
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