Head of Equity Strategy
Summary: In today's equity update we discuss Chinese earnings including the positive earnings surprise from Pinduoduo before the US market open. We also touch on Nike's earnings later tonight which are expected to decline 21% from a year ago on input cost pressures and more competition in China from competitors such as Anta Sports that reports earnings tomorrow. Finally we talk earnings dynamics during inflation and what types of companies and themes will do well during inflation.
Earnings surprise from Pinduoduo and other Chinese earnings
The earnings season in the US and Europe is running out of fuel but this week is interesting for those that follow the Chinese equity market. Several important Chinese technology and consumer companies are reporting earnings.
Chinese Pinduoduo, which is an agriculture-focused technology platform connecting farmers with consumers, has surprised ahead of the market open in the US with Q4 adjusted earnings of CNY 5.88 vs est. CNY 2.02 despite worse than expected number of active buyers and Q4 revenue of CNY 27.2bn vs est. CNY 30bn. Shares are up almost 5% in pre-market trading.
Later tonight after the US market close, Nike will report FY22 Q3 earnings (ending 28 February) with analysts expecting a meager revenue growth of just 2.4% y/y and adj. EPS growth of -21% y/y as rising input costs are impacting the operating margin and Chinese nationalism is causing headwinds in the Chinese revenue segment; Nike’s big Chinese competitor is Anta Sports which reports tomorrow.
The next week’s most important earnings are list below with the names in bold being those that can either move market sentiment or an entire cluster of equities:
Monday: HK & China Gas, Nike, Pinduoduo
Tuesday: Xiaomi, Anta Sports, Foxconn, Wuxi Biologics, Partners Group, Adobe
Wednesday: Tencent, China Mobile, WuXi AppTec, IHS Markit, Yihai Kerry Arawana, Cintas, General Mills
Thursday: China Life Insurance, Industrial Bank, Foshan Haitian Flavoruing, China CITIC Bank, NIO
Friday: China Shenhua Energy, CNOOC, Bank of Communications, Anhui Conch Cement, Longfor Group, People’s Insurance, China Everbright Bank, Meituan
Earnings and equity markets during inflation
With the Fed finally acknowledging that inflation is becoming entrenched given their more hawkish rate decision last week the question for investors are what does inflation mean for equity returns and earnings growth. The lesson from the 1970s is that US companies actually grew earnings above the long-term trend growth which is maybe not that surprising given nominal growth was high relative to the subsequent decades. While earnings growth was strong from the lows in 1973 the equity returns were bad in nominal terms and a catastrophe in real terms as the inflation caused a massive contraction in the earnings multiple investors were willing to pay.
10-year inflation swaps are currently priced at 3.1% and if the inflation outlook deteriorates investors will be forced to think about the relationship between multiple contraction, earnings growth and starting valuation. In our upcoming Quarterly Outlook we focus on productivity, innovation and pricing power as the three ingredients that will become important in filtering out good investments during an inflationary environment. Our stance on which themes to overweight for now has not changed and the themes are cyber security, logistics, commodity sector and defence. We have also decided to include the green transformation and batteries into this group as Europe’s massive investments in the green transformation will create a massive boost for these companies going forward. 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
