Head of Equity Strategy
Summary: Expectations for Chinese stimulus have been driving Chinese equities higher in June but PBoC disappointed the market today cutting the policy rates by 10 basis points against the consensus estimate of 15 basis points underscoring that Chinese stimulus is not happen as fast and big as the market wants. FedEx earnings tonight is the next release on our earnings watch and analysts have low expectations for revenue growth so investors will be focusing on the company cost cutting execution which is key for improving profitability while volume growth remains challenged.
Chinese equities have rallied in June based on rising expectations that the Chinese government will soon do a lot more stimulus to backstop demand and ensure higher economic activity. However, PBoC’s 10 basis points rate cuts across its key benchmark rates were lower than the 15 basis points expected sending Chinese equities lower and denting general risk sentiment across equity and commodity markets.
Since the peak of the weakest technology segments in February 2021, the larger and more mature part of the technology sector peaked later in November 2021, Chinese equities have underperformed countries such as Mexico, South Korea, India, Malaysia, Japan, Indonesia, and Vietnam. These countries are those we find gain the most from fragmenting supply chains and de-risking of Chinese manufacturing. De-risking of supply chains, more strict Covid-19 policies, clampdown on the private sector, and a real estate sector in distress are all factors behind the Chinese underperformance. The fragmentation game that we described in our Q2 Quarterly Outlook is a long-term trend that will continue to play out in favour of those countries mentioned above.
Our view is that China’s debt overleveraged economy has created constraints on the government’s ability to easily reignite economic growth and that the country will go through a prolonged adjustment reducing debt leverage and reducing reliance on exports to drive the economy.
FedEx is the next major earnings release to watch scheduled tonight after the US market close. Analysts expect revenue in FY23 Q4 (ending 31 May) of $90.9bn down 3% y/y and EBITDA of $9.5bn down from $10.2bn as the logistics company is hit by lower volume. Cost cutting execution is a key parameter for investors going into the earnings release as FedEx must improve profitability. Early signs that management’s cost cutting is working were sign back in March when the company raised its FY23 EPS guidance to $14.60-15.20 from previously $13-14.
Volume growth is expected to remain negative in FY24 Q1 (ending 31 August) and FY24 revenue estimates are at $91.2bn up only 0.3%, and even worse the current FY24 revenue estimates are down more than 10% compared to where they were back in April 2022. The honeymoon for logistics firms during the pandemic with strong pricing power on top of higher volume is over and the emphasis is now on cutting costs. FedEx is aiming to reduce costs by $6bn by FY27 and part of this plan is to increase rail transportation to 15% from 8% as rail costs are lower than trucking.
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
