Peter Garnry

Peter Garnry

Garnry developed Saxo Bank’s Alpha Picks which is a monthly publication selecting the most attractive stocks across the US, Europe and Asia. He also contributes to the Saxo Bank Quarterly Outlooks and the annual Outrageous Predictions and is a regular commentator on television, including CNBC and Bloomberg TV. 

US Flash, that is to say preliminary, PMI for April came in at a better-than-expected 50.4 versus a downwardly revised 49.2 in March and a forecast 49

Earnings season is near. US financials go first and they're more important than ever

Peter Garnry Peter Garnry 31.03.2023 13:13
Summary:  There is nothing like a heavily concentrated equity market. March brought on a banking crisis and tighter credit conditions which will be felt in the months to come, but these events also triggered lower bond yields and a market pricing the Fed to cut the policy rate by 60 basis points by January 2024. These moves in bonds coupled with excitement over GPT 4 have ignited a speculative fever and buy-the-dip dynamics across technology stocks pushing the overall equity market into gains for the months. Technology stocks save equities in March The first quarter is coming to an end with a volatile March driven by a banking crisis and emerging cracks in the real estate sector. Despite worries over the longer term impact of the banking crisis and the emerging signs of a recession this year, equities have managed to rebound ending March higher. To no surprise, the weakest industry groups this month have been banks, diversified financial, insurance and real estate as the these sectors have reflected higher funding costs for banks and the tighter credit conditions. In an ironic twist, these concerns have pushed the market to price the Fed Funds Rate 60 basis points lower in January 2024 from the current level. The uncertainty around bank deposits and the overall banking crisis have pushed bond yields lower as investors have engaged in hedging activities and safe haven trades. This in turn has lifted technology stocks with semiconductor stocks rising 11% in March followed by strong performance among industry groups such as media & entertainment, technology hardware, and software. The excitement over GPT 4 has also helped on risk sentiment in technology stocks. How do we square leading indicators with valuations? If we exclude the data points during the worst months of the pandemic, then US leading indicators y/y are the worst since February 2008 lower than the December 2007 rate of change which marked the beginning of the recession back then. How do we reconcile the outlook of a recession with the MSCI World Index valued at 0.5 standard deviations above its long-term average? One explanation is that, US leading indicators are not a good fit for describing the timing of the next recession. The US leading indicators are fitted on past recessions, so if the next recession is triggered by an unique sequence of events or variables then it cannot be captured by this index. Another possible explanation is that the equity market is in fever mode driven by retail investors that are back engaging in strong buy-the-dip dynamics. It is quite telling that if you add up the gains for the S&P 500 outside the top 15 on market cap then we are actually observing a small decline in equities this year instead of a gain. In other words, the breadth in equity markets is quite small. Q1 earnings are around the corner Next week’s earnings calendar is light we no important earnings releases scheduled. Instead the market will be waiting a couple of weeks before the Q1 earnings season kicks off with US financials. This time, US financials are more important than ever as they will provide fresh insights into balance sheets and credit provisions at major US banks. Two other important themes to track during the upcoming earnings season are the ongoing margin pressure and strong operating earnings growth in Europe. We had expected the margin pressure to be more severe in the general corporate sector, but for now the pressure has been concentrated in the technology sector. This might reflect a considerable lag coupled with high industry concentration, but in any case, with profit margins coming off their highs it will cause a significant headwind on earnings growth going forward, especially for US companies. Read next: S&P 500 futures gained 0.6% yesterday. Tesla to build a battery plant in the US?| FXMAG.COM European companies have enjoyed an earnings tailwind not seen in two decades as the physical world has staged an impressive comeback with bottlenecks and high prices on many physical assets from energy, metals to industrial components. Source: Q1 earnings valuation and positive March despite banking crisis | Saxo Group (
Nasdaq 100 posted a new one year high. S&P 500 ended the day unchanged

Peter Garnry (Saxo) draws attention to the recession which he believes to be the main risk to equities

Peter Garnry Peter Garnry 16.02.2023 16:52
Summary:  Economists and consensus were looking for an incoming recession back in the fourth quarter of last year with even big investors such as Warren Buffett holding tight despite global equities down 20%. Instead the economy has rebounded releasing animal spirits and a rally in growth stocks. Recently equities have absorbed higher bond yields suggesting that the interest rate sensitivity has mostly disappeared. The path from here will be dictated by whether the economy can continue to rebound or recession fears come back. A flying start to the year During October last year the interest rate shock reached its maximum impact on global equities and consensus shifting towards an incoming recession and that inflationary uncertainty combined with lower economic activity would increase the equity risk premium causing equities to fall. The fact that Berkshire Hathaway did not materially buy anything in the equity market during the fourth quarter suggests that the experienced investors of Warren Buffett and Charlie Munger were betting on the same thing. A recession in 2023 providing a backdrop of fear on which to capitalise with a new big bet. Things did not turn out that way. Instead equity markets slowly recovered as long-term bond yields and inflation expectations came down. The new narrative was not a one-way street with a setback in December unfolding with increased nervousness around Tesla and cryptocurrencies. Those worries were put aside this year with the MSCI World Index up 8.3% and bubble stocks rallying 27%. Other growth segments such as energy storage, which we will do a longer equity note on next week, semiconductors, and e-commerce have also rallied 20% or more. With such a strong start to the year it begs the question whether technology is now back in town for longer or it is short-term trade as bearish positions in technology stocks have been squeezed? Our playbook as described in our Q1 Equity Outlook: A painful phase transition is still that the physical world will continue to outperform the intangible world as our global economy is transitioning away from unconstrained globalisation to a regionalisation, a conflict between two value systems (authoritarian vs liberal democracy states), and rebuilding our physical infrastructure which was neglected for 10 years during the raging bull market in technology. The 1-year momentum across our theme baskets reflects this as the best performing baskets over the past year are defence, renewable energy, commodities, nuclear power, logistics, construction, and transportation infrastructure. Interest rate sensitivity is no longer a focus A question that we have been debating at Saxo is the interest rate sensitivity which was a big theme last year. One question that has been raised is why are equities trading at the current levels with the US 10-year yield back at 3.8% when the MSCI World Index was trading around 9% lower at the same interest rate level back in late September? Read next: Kim Cramer Larsson takes a technical look at Bitcoin and Ethereum| FXMAG.COM There are several factors that can explain this. One of them is that the interest rate sensitivity on equities has fallen because equity valuations have come down from very elevated levels to just above the historical average. Equities have also priced out the probability of a recession and thus increased growth expectations, and finally animal spirits have been released reflected in private investor surveys on their bullishness and bearishness which we highlighted in our equity note The equity market in four charts which have decreased the equity risk premium. Finally, the Q4 earnings season was better than feared when it comes to the margin pressure. So where is the real risk in equities? US 10-year yield | Source: Bloomberg MSCI World Index | Source: Bloomberg It is all about a recession or not The main risk to equities is whether we get a recession or not. As we have been writing many times the past couple of months the leading indicators in the US suggest that a recession is incoming and the Bloomberg US recession model has flashed 100% probability of a recession within the next 12 months since October last year. But economic data remains positive and are actually pointing towards a reacceleration in growth rather than a recession with the US economy experiencing a credit boom and improved construction activity as Caterpillar said on their recent earnings call. Now, a reacceleration in the economy combined with China reopening are likely to underpin inflationary pressures which might push long-term bond yields higher from current levels, but that is not something that will take equities down 15%-20% unless we see a significant profit margin deterioration in 2023. Equities are right now priced for perfection with the assumption that the world economy is reaccelerating, inflation will ease down to 2.5% annualised, China will get back on the growth track, geopolitical risks will not worsen, and the energy crisis will slowly be solved. All those things can be true at the same time, so something has to give at one point, but for now equities are in an uptrend. One key market to monitor here, as it is right now not agreeing with the reacceleration narrative, is the commodity market. The Bloomberg Commodity Index is down 4% this year and has not responded positively to the Chinese reopening. Bloomberg US Recession Probability Model | Source: Bloomberg Bloomberg Commodity Index | Source: Bloomberg Source: The equity conundrum It is all about a recession or not | Saxo Group (
Past bubbles and AI. "It turns out that almost every time historically there has been a technology that has revolutionised reality, it has been over-invested in"

Tesla shares are up 41% in January. Microsoft is another top traded stock

Peter Garnry Peter Garnry 01.02.2023 16:37
Peter Garnry, Head of Equity Strategy at Saxo, talks the most popular stocks among bank's clients. The year has started on a strong note extending the momentum from the last quarter of 2022 which was fueled by China pivoting away from its zero Covid policy adding a positive impulse into the global economy. Besides the Chinese reopening adding to sentiment the market is increasingly betting on a shallow recession if any recession in the US economy, and a European and Chinese economy that will increase economic activity throughout the year. In addition, the market is pricing in inflation continuing to come down and central banks moving closer into a pause phase on policy rates avoiding tighter financial conditions. The combination of all these things have caused technology stocks to rally significantly in first month of trading with interest jumping massively in Tesla shares being the most traded stock. Tesla shares have generally enjoyed the positive sentiment in equities, but their aggressive price cut across several key EV models earlier this year is seen as a bold move and a sign of strength. Tesla shares are up 41% in January. Microsoft is another top traded stock and while the company reported a muted outlook for year as enterprise technology spending is coming down due to a cost focus among its customers the news that it has invested $10bn in OpenAI, which is behind the famous ChatGPT, has created a lot of attention by investors and Saxo clients. Read next: I believe BP’s upcoming quarterly figures are set to surpass expectations | FXMAG.COM Top Stocks (Shares) 1. Tesla Inc. 2. ASML Holding NV 3. Inc. 4. Microsoft Corp. 5. Apple Inc.  
FX Daily: Hawkish Powell lends his wings to the dollar

Lawsuit against Alphabet isn't that crucial right now. Investors are worried by something else

Peter Garnry Peter Garnry 26.01.2023 14:28
Let's see what Peter Garnry, Head of Equity at Saxo Bank, said about trends in AI investement in 2023 and Google stock expectations amid US Justice Department second antitrust lawsuit against the company. What are the trends in AI investment in 2023? Any specific industry investors are seeking?  AI as a technology has many different branches. The self-driving branch of AI has seen much lower investments over the past year as the technology has been slowing down remaining far from Level 5 autonomy driving. Other branches of AI like the large language models such as the newly released ChatGPT are seeing massive investments and Microsoft's $10bn investment underscores this.   Read next: GBP/USD Pair Is Struggling To Extend Previous Highs, EUR/USD Pair Continued Its Gains| FXMAG.COM The talk about ChatGPT and its potential threat to Google's search engine business is real and has increased the investment risk for Alphabet, but Alphabet's AI unit DeepMind has already proclaimed that it will release this year its competing product to ChatGPT. The technology is in itself revolutionary, but it is patent protected and large language models (LLM) can be copied, which is what DeepMind is pursuing. The real challenge is the engineering part in order to scale fast queries and responses on top of the huge costs of training the LLM. The jury will be out for a long time whether Microsoft overpaid for this technology. What are the expectations on the Google stocks moving forward, in the context of the U.S. Justice Department second antitrust lawsuit against it? Alphabet is still a strong business that has doubled its revenue and profits since 2018. Antitrust lawsuits are generally part of the operating environment for large US technology companies and as such it is not something that worries investors. What worries investors about Alphabet is the general slowdown in the economy that will hit the online advertising business with lower prices, and then ChatGPT from OpenAI which has the potential to uproot Google's search engine business. Microsoft's recent $10bn investment into OpenAI and its ChatGPT technology is seen as an offense move against Alphabet and its Google business. However, Alphabet's AI unit DeepMind has already proclaimed that it will release its competitor to ChatGPT so the impact from ChatGPT on Alphabet's businesses might be limited, but the risks have definitely gone up for investors in Alphabet.
Lagarde's Dilemma: Balancing Eurozone's Slowdown and Inflation Pressure

Microsoft earnings: The world's largest software maker reports FY23 Q2 earnings (ending 31 December) tomorrow after the market close with analysts expecting revenue growth slowing to 2.3% y/y

Peter Garnry Peter Garnry 23.01.2023 22:22
It's definitely an action-packed week. Major US tech stocks publish they earnings reports. Peter Garnry, Head of Equity Strategy, talks Microsoft report. Microsoft's share price is down 29% from its peak and the equity valuation has fallen to a 3.6% free cash flow yield which is slightly above the US 10-year yield Microsoft sees margin pressure: The world's largest software maker reports FY23 Q2 earnings (ending 31 December) tomorrow after the market close with analysts expecting revenue growth slowing to 2.3% y/y down from 20.1% y/y one year ago and down from 10.6% y/y revenue growth in the previous quarter. While the strong USD is obviously impacting foreign income the macroeconomic headwinds are also impacting customer activity. We expect the macro headwinds to impact the Windows and cloud businesses driven by lower PC sales and a slowdown in enterprise software spending. In addition to slowing revenue growth increased energy costs to its data centers and wage pressures will continue to put Microsoft's operating margin under pressure. EBITDA margin is expected to decline to 45.6% in FY23 Q2 down from 49.8% in the previous quarter and 50.7% a year ago. Analysts expect EPS of $2.30 down 6% y/y. Microsoft's share price is down 29% from its peak and the equity valuation has fallen to a 3.6% free cash flow yield which is slightly above the US 10-year yield with the difference being that these free cash flows are not fixed unlike those coupons on government bonds. Read next: Saxo's Market Strategist: Australia's ASX200 could likely to take out a new all-time high. However CPI is a focus this week| FXMAG.COM
Markets under Pressure: Rising Yields, Strong Dollar, and Political Headwinds Weigh on Stocks"

2023 Predictions: Peter Garnry - Our target for S&P 500 is still around the 3,200 level sometime during the year leading to an overall drawdown of around 33% from the peak in early 2022

Peter Garnry Peter Garnry 03.01.2023 12:25
2023 has begun, and we're here to deliver you with insightful predictions for the year which comes after a turbulent 2022. FXMAG.COM asked analysts how the value of the S&P 500 and Nasdaq will change in 2023 and to justify the indication of a bullish/sideways/bearish trend. Additionaly we questioned experts whether we will see greater positive dynamics of price changes in the sector of small, medium or large companies and which sectors and industries are worth focusing on in 2023 and why? This time, we're pleased to share thoughts of Peter Garnry, Head of Equity Strategy at Saxo Bank. Peter Garnry (Saxo Bank): We remain negative on equities as this year will prove to be difficult in terms of earnings growth due to increasing margin pressures coming from commodities and wage growth. Last year equities got repriced due to significantly higher interest rates. This year the repricing will be all about potentially lower earnings. The decline in equities last year was actually quite benign relative to the interest rate move and the current equity valuation reflects a much lower equity risk premium. Read next: New Record For Electric Car Manufacturer - Tesla Deliveries Increased By 40% Year-On-Year| FXMAG.COM This sets equities up for a troubling 2023 as both lower earnings and a higher equity risk premium could lead to a new sizeable adjustment of equity prices. Our target for S&P 500 is still around the 3,200 level sometime during the year leading to an overall drawdown of around 33% from the peak in early 2022. The risk to our view is China as a successful reopening after Covid and success in kickstarting the economy could offset the expected weakness in growth. We are still positive on commodities, power generation (nuclear and renewables), defence, logistics, and India Our thesis about margin compression could also turn out to be wrong if commodities prices come down and wage pressures ease. We favour large companies over small companies this year but as the deglobalisation theme intensifies over the years small caps could do much better as large multinational companies will face increasing costs to realign their large global supply chains. In terms of equity themes we are still positive on commodities, power generation (nuclear and renewables), defence, logistics, and India.
The Japanese Yen Retreats as USD/JPY Gains Momentum

After MSFT's and Google's earnings, it's over to you, Meta (FB)

Peter Garnry Peter Garnry 26.10.2022 14:43
Summary:  Microsoft and Alphabet did little to help the Q3 earnings season improve on the clear trend of margin pressure. Rising wage pressures, energy costs, lower advertising prices, slowing PC sales and too much hiring impacted operating income and the outlook against estimates. Later tonight Meta is on stage delivering Q3 earnings and given the signals from Snap and Alphabet on the global advertising market we expect significant pressure on Meta's business. Zuckerberg has only one option to please investors and that is by dialing down his efforts on Metaverse which is burning cash on an unprecedented scale. Margin compression is indeed a theme for technology companies Apple recently raised its prices on various of its services offerings from music to TV, and Spotify is also considering raising its prices. The culprit is rising wage pressures and higher energy costs that are hitting energy hungry applications running in the cloud. Microsoft gave the best hint of this saying that it expects $800mn more in energy costs in the current fiscal year which is approximately 1% of its current operating income. As the net profit margin chart below shows, US technology companies are right now facing the biggest margin compression since the Great Financial Crisis. Microsoft and Alphabet disappoint investors The two technology giants, Microsoft and Alphabet, delivered a weaker than estimated outlook. Microsoft’s Q3 revenue and earnings per share were slightly above estimates, but its guidance on growth was lower than estimated. Higher energy costs, wage pressures, slowing PC sales, slowing ad sales and a strong USD are contributing to the expected hit to the operating margin. In order to mitigate some of the cost headwinds and slowing growth the software maker has more or less introduced a hiring freeze. Alphabet was hinted to be weak as Snap last week reported weak advertising sales, but investors did not take the hint adjusting their expectations lower as Alphabet has previously been decoupled from Snap’s performance. But this time investors should have listened to Snap as Alphabet reported a miss on both revenue and operating income with revenue at $69.1bn vs est. $70.8bn and operating income at $17.1bn vs est. $19.7bn. The company added 10,000 new employees in Q3 which is an aggressive increase given the slowdown in the economy but it says that hiring will be significantly lower going forward. Alphabet’s EBIT margin was declining in the 10 years leading into the pandemic which then turbocharged ads pricing because of the high growth in the online economy, but the past year has been a different story with the operating margin declining from 32.3% to 24.8% in Q3 this year. Zuckerberg has one mission tonight Meta is one other Silicon Valley company that is following Alphabet’s hiring bonanza and its bet on the Metaverse, which seems to have hit critical road blocks in terms of user adoption, is burning cash on an unprecedented scale. In Q2, Meta’s operating margin fell to 29% from 42.5% a year before as advertising prices were coming down hard after Apple’s new data privacy rules are making it more difficult for Meta to serve targeted ads. Given the earnings reports from Alphabet and Snap we expect Meta to show margin compression and revenue pressure in Q3 and in our view the pressure is significantly increasing on CEO Mark Zuckerberg to rein in operating expenses. This includes a hiring freeze, or maybe even cuts, and a drastically less ambitious target for Metaverse, and if Zuckerberg dares to admit failure on Metaverse then investors might reward the company with a much higher valuation. European earnings are a bright spot It is still early days on Q3 earnings, but the initial indications suggest that European earnings are doing better than US and Chinese earnings with the strong USD of course creating a tailwind for profits outside Europe. Given relatively better earnings dynamics, lower equity valuations, and a lower discount rate there is a good case to be made for being more positive on European equities rather than US equities. Source: Microsoft and Alphabet Q3 results disappoint Meta on tap tonight | Saxo Group (  
The Japanese Yen Retreats as USD/JPY Gains Momentum

Chinese indices - Hang Seng and CSI 300 lost a lot, Q3 earnings season is underway with Coca-Cola, Apple and others publishing their earnings this week!

Peter Garnry Peter Garnry 24.10.2022 23:34
Summary:  Chinese equities are significantly lower today following the country's leadership shuffle over the weekend as investors are increasingly readjusting lower their views on longer term growth in private sector profits. Chinese equities are selling at a historical discount to US equities in a sign of a rising equity risk premium on Chinese equities. This rising equity risk premium comes also with risk for the US equity market as many US companies have large revenue exposure to China. We also take a look at the Q3 earnings season and the upcoming earnings this week which will determine the short-term sentiment and reaction. Will international investors reconsider their exposure to China? There are bad days in the equity market when everything is on sale with liquidity effects driving all stocks over the cliff, and then there are days when an isolated equity market plunges even when most other equity markets are on the rise. The latter happened in today’s trading session when the Hang Seng Index declined by 6% and the CSI 300 (mainland Chinese index) fell 3% as investors decided to sell first and ask questions later upon witnessing the shuffle in Chinese leadership presented over the weekend. The weekend’s events in China are arguably the culmination of a long journey, in which China has been placing ever more emphasis on the importance of the public sector over the private sector, as encapsulated in the Chinese policy of “Common Prosperity”. The price action in Chinese equities speaks volumes when we see the tumbling Hang Seng Price Index trading at levels not seen since the global financial crisis in 2009, even if the total return index is less gloomy and only at a level last seen in 2013. More importantly, the spread in equity valuation between the Hang Seng Composite Index and S&P 500 has dropped to very low levels (60% below S&P 500) with the Hang Seng Composite Index now valued at a mere 6.8 times earnings. The rising Chinese equity risk premium The valuation differential reflects the growing political risk premium and lower confidence in those underlying Chinese earnings as Common Prosperity is likely a drag on private sector earnings growth longer term. At times in recent years, Chinese technology companies often traded at higher equity valuations than their Silicon Valley peers, but since Common Prosperity was adopted, the situation has changed dramatically with lower earnings and revenue growth among Chinese technology companies, leading to massive losses for investors. We maintain an underweight view on Chinese equities as a precautionary measure. As we have noted in previous equity notes countries such as India, Vietnam, and Indonesia are the big winners of the current realignment of global supply chains and thus considering for Asian exposure. A growing equity risk premium on Chinese equities naturally leads to the question of whether the US equity market could suddenly be jolted by a repricing of its China exposure. Is a dollar of free cash flow in China worth the same as a dollar of free cash flow from the US or Europe? Arguably not, and while this has been reflected in the revaluation of many semiconductor companies (also partly due to the US CHIPS Act) it has not been fully reflected in more consumer-oriented stocks like Apple and Tesla. With around 20% of its revenue coming from China, Apple’s risk profile could be rising on the risk of a sudden repricing due of a Chinese equity risk premium. Tesla gets 25% of its revenue in China and thus also has significant China exposure that is currently not reflected in its equity valuation. As we have stated in our previous equity notes, Apple and Tesla shares are key for broader equity sentiment and any downside risk dynamics in these two stocks could quickly jeopardize the wider equity market. Investor flows into Chinese equities and companies with high China exposure While price action tells one story on China, investor flows in ETFs tracking MSCI China A shares are telling a slightly different story. The number of outstanding shares (essentially how much capital that is deployed in an underlying index) has been growing steadily over the years as China’s capital markets have opened up. The has led to more inclusion in EM- and global benchmark indices of equities and bonds. While we have seen significant outflows out of ETFs tracking CNY bonds, until very recently at least, we have observed the opposite in Chinese equities. Falling equity prices in China have prompted rising investor flows into a “China is cheap” narrative. But sometimes, things are cheap for a reason (the equity risk premium discussion above). Over the last couple of months, this trend has shifted: in August, the largest UCITS ETF, which tracks MSCI China A shares, has begun seeing declining outstanding shares. As of Friday the current drawdown was -12%. This could be an early sign that investor appetite is on the decline. MSCI, the leading global equity index provider, has created an index called the MSCI World with China Exposure Index (USD) It covers 51 companies with the greatest revenue exposure to China. This index is a good starting point for any investor who would like to break down portfolio exposure to China. The 10 largest companies in the MSCI World with China Exposure Index (USD) are listed below. Qualcomm BHP Group Texas Instruments Broadcom Rio Tinto Applied Materials Woodside Energy Lam Research Fortescue Metals Group Marvell Technology As noted above, in addition to this list we would argue companies such as Apple and Tesla have considerable revenue exposure to China and thus have downside risks to their equity valuation. Q3 earnings so far show margin compression The numbers so far show that earnings are down q/q across all the major equity indices after a strong Q2. With revenue growth remaining strong due to inflation, profit margins on the other hand are under pressure. The technology-heavy Nasdaq 100 index in particular is showing severe margin compression with the profit margin down 2.8%-points since Q2 2021 and narrowing its spread to the MSCI World. This reduction in profit margin relative to the MSCI World is another way of expressing how higher interest rates and inflation are driving the comeback of the physical world over profits driven by intangibles. The list below shows a condensed version of the more than 400 earnings releases this week among the companies that are included in our earnings coverage. The most important earnings releases for market sentiment in US equities are Microsoft, Alphabet, Visa, UPS, General Electric, Meta, Apple, Amazon, Mastercard, Intel, Caterpillar, Exxon Mobil, and Chevron. In Europe, investors will focus on DSV, SAP, HSBC, Mercedes-Benz, BASF, TotalEnergies, EDF, Shell, Credit Suisse, Sanofi, Airbus, and Volkswagen. Today: Nidec, Philips, Cadence Design Systems Tuesday: First Quantum Minerals, Canadian National Railway, DSV, UPM-Kymmene, SAP, HSBC, ASM International, Norsk Hydro, Novartis, UBS, Kuhne + Nagel, Microsoft, Alphabet, Visa, Coca-Cola, Texas Instruments, UPS, Raytheon Technologies, General Electric, 3M, General Motors, Valero Energy, Biogen, Enphase Energy, Halliburton, Spotify Technology Wednesday: Dassault Systemes, Mercedes-Benz, BASF, Deutsche Bank, PingAn Insurance, CGN Power, UniCredit, Canon, Barclays, Standard Chartered, Heineken, Aker BP, Iberdrola, Banco Santander, SEB, Meta Platforms, Thermo Fisher Scientific, Bristol-Myers Squibb, ADP, Boeing, ServiceNow, Ford Motor, Twitter Thursday: ANZ, Anheuser-Busch InBev, Argenx, Shopify, Teck Resources, Neste, Kone, TotalEnergies, EDF, STMicroelectronics, PetroChina, China Life Insurance, CNOOC, Oriental Land, Shin-Etsu Chemical, Takeda Pharmaceuticals, Hoya, FANUC, Shell, Lloyds Banking Group, Universal Music Group, Repsol, Ferrovial, Hexagon, Evolution, Credit Suisse, Apple, Amazon, Mastercard, Merck & Co, McDonald’s, Linde, Intel, Honeywell, Caterpillar, Gilead Sciences, Pioneer Natural Resources, Friday: Macquarie Group, OMV, ICBC, China Merchants Bank, LONGi Green Energy Technology, Midea Group, Imperial Oil, Danske Bank, Sanofi, Airbus, Volkswagen, China Construction Bank, Agricultural Bank of China, Bank of China, BYD, China Shenhua Energy, Eni, Keyence, Hitachi, Denso, Equinor, CaixaBank, Wilmar International, Swiss Re, Exxon Mobil, Chevron, AbbVie, NextEra Energy, Colgate-Palmolive, Royal Caribbean Cruises Source: Chinas risk premium on the rise critical earnings week ahead | Saxo Group (
📈 Tech Giants Soar, 💵 Dollar Plummets! Disney-Charter Truce, Wall Street's AI Warning!

Netflix, Tesla (TSLA) And ASML Kick Off The Earnings Season

Peter Garnry Peter Garnry 18.10.2022 23:11
Summary:  The Q3 earnings season will not get much help from the financials, energy, and technology sectors as all three sectors are facing headwinds and US financial earnings last week and Bank of America yesterday have proven this hypothesis. Tonight Netflix will kick of the earnings season for the technology and media segment of the market with focus on input costs and its upcoming ad-tiered business model. Tomorrow, two giants from Europe and the US will report earnings in the form of ASML and Tesla with the latter being extremely important for US equity sentiment among technology and growth stocks. Q3 earnings will get no help from financials and energy The earnings season is slowly kicking into gear this week. Major US financials have already reported Q3 earnings with Bank of America surprising yesterday against estimates and delivering better results compared to a year ago against its peers. As we have written many times, we expect the Q3 earnings season to show margin compression and that earnings will be under pressure. The chart below shows the quarterly EPS for the S&P 500 financials sector showing that earnings are down 2% q/q and 9% y/y, and with weak earnings q/q from the energy and technology sectors it will be difficult to lift aggregate earnings in Q3. Netflix headwinds persists The video streaming giant Netflix reports earnings tonight after the US market close and analysts expect revenue growth of 5% y/y and EPS of $2.22 down 23% y/y as rising input costs are pressuring Netflix’s business. The strong demand during the pandemic has disappeared, competition has increased significantly, and content production has been weak running at higher costs than estimated. The key upside factor for Netflix is the new ad-tiered business model which will enable a new revenue stream and reduce the risk of subscribers cancelling their subscriptions due to the cost-of-living crisis. The semiconductor party is coming to an end for ASML ASML, the world’s largest and most important semiconductor equipment manufacturer, reports Q3 earnings tomorrow morning before European trading opens. Revenue growth is expected to decline to just 1.6% y/y from 35% y/y in Q2. While we believe ASML will meet expectations for operating income and revenue we are more worried about orders as the ongoing tensions between the US and China over semiconductors are negatively impacting the industry. The US has imposed several export restrictions on semiconductors and equipment to China and the full-speed realignment of semiconductors will hit industry growth in the short-term. We have recent seen negative outlook on semiconductors from Samsung and Micron Technology. As the ninth largest European publicly listed company this earnings release will be important for sentiment in European equities. ASML share price | Source: Saxo Tesla is confronted with lithium issues and high electricity prices There is probably not a more important stock than Tesla when it comes to sentiment in the technology and growth segments of the equity market. The EV-maker reports Q3 earnings tomorrow night after the US market close. Estimates are looking for revenue growth of 61% y/y and EPS of $1.02 up 106% y/y as EV adoption has accelerated this year despite supply constraints, price hikes on EVs and high electricity prices. Tesla recently missed estimates on Q3 deliveries and the main focus will be on lithium supply and prices, and to what extent it is impacting Tesla’s margins. We are also curious to see Tesla outlook given the high electricity prices. Car sales has recently stabilised in the US and Europe, and in China growth is coming back. However, the news flow from Chinese EV-makers has recently been negative and that might be a warning sign on the outlook. Tesla has moved from being a premium brand to an average brand when judged on average selling price as Tesla is now firmly in at the same average price as Ford and GM in the US. Its gross margin when factoring out R&D costs of cost of goods sold for other carmakers is also only the 11th best. The question remains whether Tesla can continue to command a high equity valuation, but as the fifth largest publicly listed company in the US this earnings release is the most important earnings release this week. Tesla share price | Source: Saxo Source: Earnings Watch Netflix ASML and Tesla | Saxo Group (
Copper Spreads Widen as Demand Pressures Continue Amidst Industrial Slowdown

Investors Are Exposing Themselves To Global Energy Crisis!

Peter Garnry Peter Garnry 30.08.2022 11:47
Summary:  Consumer discretionary stocks were part of the winners since the Great Financial Crisis, but with rising interest rates and soaring energy costs the consumer is getting taxed on credit and available income for discretionary consumption. These dynamics will intensify and worsen over the winter period in Europe and several sell-side firms are already cutting price targets on many consumer discretionary stocks. We identify the 10 largest global and European discretionary stocks so investors can understand their exposure to global energy crisis. Soaring energy costs are a massive tax on consumption In our recent equity note The tangible world is fighting back we highlighted how intangibles-driven industry groups had outperformed significantly since April 2008 until October 2020. Consumer discretionary stocks was part of this mega trend, but the global energy crisis and especially here in Europe is going be negative for consumer stocks going forward. Primary energy costs in percentage of global GDP has rising to 14% up from 6.5% in 2021 according to Thunder Said Energy. This is equivalent to 7.5%-points tax on GDP which must be offset by households by cutting down on other things. The most vulnerable parts of the economy are the activities that sits at the very top of the Maslow pyramid, so things such as media & entertainment and consumer discretionary. Global consumer discretionary stocks are down 13% after being down as much 20% in June this year relative to global equities since the peak in November 2021 when the Fed announced its pivot on monetary policy in the recognition that inflation was more sticky than initially thought. The initial underperformance was interest rate driven as the higher interest rates caused equity valuations to decline. Higher interest rates also impacts consumption through consumer loans etc., but the critical point to understand is that the energy crisis has not been fully priced into consumer discretionary stocks.  Consumer discretionary stocks have been one of the big winners since the Great Financial Crisis but with households under pressure we expect demand to cool dramatically and several sell-side firms have drastically cut their price targets on many European consumer discretionary companies. MSCI Consumer Discretionary / MSCI World | Source: Bloomberg Watch out for French luxury and the car industry When talk about which consumer discretionary companies that could be in trouble the European luxury industry is probably going to be the hardest hit industry. Next after is the global car industry where the big open question is whether the EV adoption is strong enough to shield Tesla from the demand destruction. The energy tax is bad for consumer stocks but good for global energy companies, so we have also highlighted the 10 largest energy companies in the lists below. The 10 largest global consumer discretionary stocks Amazon Tesla LVMH Home Depot Alibaba Toyota McDonald’s Nike Meituan Hermes International The 10 largest European consumer discretionary stocks LVMH Hermes International Christian Dior Volkswagen Inditex EssilorLuxottica Richemont Kering Mercedes-Benz BMW The 10 largest global energy stocks Exxon Mobil Chevron Reliance Industries Shell ConocoPhillips TotalEnergies PetroChina Equinor BP Petrobras   Source: Consumer stocks to be hit by historically high energy costs
Chinese Earnings After Covid-19 Were In Hell And Back

Chinese Earnings After Covid-19 Were In Hell And Back

Peter Garnry Peter Garnry 26.08.2022 13:29
Summary:  Chinese earnings were less impacted than the rest of the world in the initial phase of the pandemic, but since then China has moved into crisis mode due to a housing crisis and energy constraints lately being intensified due to severe drought. We also take a look at Lululemon earnings next Thursday where expectations are high for revenue growth and a significant margin rebound. Underweight Chinese equities as growth has stalled China came through the early phase of the pandemic with less scars on the economy due to the country’s effective lockdown. The impact on corporate earnings were less than that in the rest of the world (see chart), but the subsequent phase during the reopening has been much more challenging. China is currently facing a real estate crisis, rising unemployment, energy shortages that have recently been worsened by severe droughts, and general slowdown of the economy. In many ways it looks like the Chinese economy will go through some painful years of readjustment away from being heavily dependent on heavy investments in housing and exports. Earnings in Q2 have been better than expected but Chinese earnings growth since Q3 2019 has lacked behind the rest of the world. A lot of new regulation in the private sector has lowered profit growth and investor flows into China has slowed down as well. Following the war in Ukraine investors have further cut exposure to China and our take is still underweight Chinese equities at this point. Is Lululemon still attracting the consumer amid worsening inflation outlook? While big Chinese earnings are scheduled for next week it will not have the market’s attention. From a macro perspective we are much more interested in Lululemon reporting Thursday because the company’s result will be a good barometer on consumer spending and also the outlook. We have recently seen in earnings releases from Dell and Salesforce that both companies are observing a significant change in business spending starting in July. Analysts expect Lululemon to grow revenue in FY23 Q2 (ending 31 July) by 22% y/y with operating margin expanding again from a low level in Q1. Freight rates and global supply chains have eased somewhat over the past three months and Lululemon has had great success with its introduction of footwear. The key downside risk to watch is revenue growth expectations for the current quarter ending in October as analysts expect 20% y/y which might be too optimistic given the current trajectory of the US economy. The list below shows the most important earnings releases next week. Monday: Haier Smart Home, Foshan Haitian Flavouring, Agricultural Bank of China, BYD, Pinduoduo,, DiDi Global, CITIC Securities Tuesday: Woodside Energy, ICBC, China Yangtze Power, Muyuan Foods, SF Holdings, Shaanxi Coal, Midea Group, Tianqi Lithium, Ganfeng Lithium, Bank of Montreal, China Construction Bank, Bank of China, Great Wall Motor, COSCO Shipping, Partners Group, Baidu, Crowdstrike, HP Wednesday: MongoDB, Brown-Forman, Veeva Systems Thursday: Pernod Ricard, Broadcom, Lululemon Athletica, Hormel Foods Friday: BNP Paribas Fortis   Source: Chinese earnings are playing catch-up
Nuclear Power Emerges as Top Theme for 2023, Bubble Stocks Under Pressure

Green Transformation Being Inflationary In The Years To Come

Peter Garnry Peter Garnry 25.08.2022 13:44
Summary:  Central banks have been very late to the inflation game as the they have underestimated the effects from the stimulus during the pandemic. Supply chains and generally the supply side of the economy were expected to normalise much faster than what has been the case and our main thesis now is that if central banks focus too much on the core inflation a big mistake might be the outcome. Food and energy will be at the center of our crisis years with climate change and the green transformation being inflationary in the years to come. Investors should increasingly invest in the tangible world to offset these inflationary risks. The energy crisis will drive everything Around 30 central banks around the world have adopted inflation targeting using the headline inflation indices which in the US is the US Personal Consumption Expenditures Index and was officially announced in January 2012. The official targeting is the headline inflation indices, but many central banks and economist are often putting more weight on the core inflation indices. These indices remove energy and food from the price index. This practice is likely what made central banks react to slowly to current inflation impulse; remember, at Jackson Hole one year ago Jerome Powell said: “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis”. At that point US CPI and core CPI stood at 5.4% y/y and 4.3% y/y respectively. Core inflation indices remove the energy and food items because they are seen as volatile and mainly not driven by the trend change in overall prices, and the key assumption is also that they have temporary factors behind that will reverse later on (see quote below from Federal Reserve Bank of San Francisco). This argument was the same for our disrupted supply chains although in reality it has taken much longer than expected. “However, although the prices of those goods may frequently increase or decrease at rapid rates, the price disturbances may not be related to a trend change in the economy’s overall price level. Instead, changes in food and energy prices often are more likely related to temporary factors that may reverse themselves later.” Food and energy will add to inflation going forward Our team has written a lot about the physical world and lately we introduced indices of tangibles- vs intangibles-driven industry groups. We have shown many times how the world underinvested in the global energy and mining industry, and why this will haunt the world for years. Food and energy are also intertwined and connected which we have seen today with Yara International reducing its ammonia production in Europe to just 35% of potential production due to elevated natural gas prices. Lower ammonia production will lead to less fertilizer for farmers and thus lower food production, which again can lead to higher food prices. It should be clear by now, that ignore food and energy could be a grave mistake by central banks. Climate change will make global food production more volatile and push up prices, and the green transformation will for years keep energy prices elevated. Our main thesis is that the coming decade will in many ways be a replay of the 1970s as politicians will intervene in the economy to mitigate the pain from higher prices, but these decisions will only keep the nominal economy growing fast and thus keeping inflation and the readjustments going for longer. The Fed’s core inflation measure is currently at 0.4% m/m measured over six months suggesting a core inflation rate annualized at around 5% which means that short-term interest rates must be set much higher to tame inflation. The headline inflation is currently twice as high as the core inflation. PCE core CPI m/m | Source: Bloomberg Nominal wages will underpin inflation for a lot longer In this ECB paper from August 2002, the authors conclude that central banks should give substantial weight to the growth in nominal wages when monitoring inflation. If we look at nominal wage growth in the US the chart below shows the three-staged acceleration we have observed in the US economy since 2009. The first phase during 2009-2015 saw only 2% annualized wage growth as the economy was suffering from low demand in the subsequent years after the Great Financial Crisis. The second phase was the period 2015 to early 2020 where years of loose monetary policy and slowly healing economies lifted US nominal wage growth to 2.9% annualized. The third phase is the period from early 2020 until today and is driven by the extraordinary monetary and fiscal stimulus that were put in place after the global Covid pandemic broke out. The combined stimulus was on par with the post-WWII years and were unleashed into a global economy that in hindsight was much closer to a hard physical supply limit than understood at the time. Subsequently demand has been running much stronger than trend growth and as a result nominal wages have accelerated to 5.2% annualized growth rate. Indeed, it seems we have a serious problem on our hands where inflation become unanchored from 2%. US hourly earnings index | Source: Bloomberg Invest in the tangible world In an inflationary environment the tangible world must increase dramatically, so investors should invest in the tangible world to offset the inflation risk in order to preserve wealth in real terms. In our note from yesterday about the Tangible world is fighting back we highlight the industry groups that are part of the tangible world, but our theme basket performance overview also show which tangible parts are doing well which this year has been commodities, defence, renewable energy, logistics, and energy storage. Saxo clients can find the companies in each of these theme baskets on our trading platforms. Source: Core inflation is unofficially dead
Switch Splatoon 3 Broke All Previous Sales Records, The Closer To Winter The More Visible Crisis

Tech Stocks Market: Nvidia May Release Its Growth Rate. People Are Not Interested In Playing Games Anymore?

Peter Garnry Peter Garnry 23.08.2022 14:17
Summary:  Nvidia, Salesforce, and Snowflake report earnings tomorrow providing more clarity on technology spending and the outlook for the overall technology sector. Nvidia is expected to report a big drop in its growth rate due to weakening demand in gaming and more importantly crypto mining. Salesforce is expected to show solid growth and here investors will focus on the Slack integration and what it means for growth ahead. Snowflake's growth rate is coming down and thus investors will demand improvements in the operating income. Nvidia: turbulence to continue Earlier this month Nvidia cut its outlook, which we covered in an equity update, driving by excess inventory of GPUs leading to price pressures in GPUs. Lower demand for GPUs, which we believe is mainly driven by less favourable dynamics for crypto mining, is forcing Nvidia to lower its sales outlook, cutting prices, and writing down its existing inventory. Nvidia has gone to great length explaining off the weakness as due to a slowdown in gaming, but the companies in gaming are not showing the decline in demand consistent with the slowdown Nvidia is experiencing. Because Nvidia does not know very well the end-use cases of their GPUs it is difficult for them to segment revenue, but in our view the economics of crypto mining tied to the Bitcoin price is the best explanation for the historical variance in revenue. Nvidia’s slowdown is tied to cryptocurrencies and thus higher interest rates is not only a key risk to Nvidia’s equity valuation, but it is also a risk to their demand as higher interest rates could lower cryptocurrency prices substantially from current levels. Nvidia is expected on Wednesday to report only 3% y/y revenue growth in FY23 Q2 (ending 31 July) down from 46% y/y in FY23 Q1 (ending 1 May) which is an abrupt slowdown in growth. It also highlights Nvidia’s biggest business risk. The chipmaker does not fully understand its demand function which can lead to a mismatch in supply and demand. The key question for investors is to what extent Nvidia expects growth to come back but more importantly whether they will change their outlook for operating margins. Nvidia financials | Source: Bloomberg Salesforce: can Slack sustain the growth? Salesforce is reporting FY23 Q2 (ending 31 July) results on Wednesday with analysts estimating revenue growth of 21% y/y which is in line with the long-term growth rate the company has enjoyed for 10 years. The Slack acquisition which has now been fully integrated is one of the key drivers for future growth and an acquisition that has expanded the company’s addressable market and market position in cloud business application software. Salesforce is competing against Microsoft, Oracle, and SAP, and has shown over the years that it gain market share plowing back a lot of its profits back into growth. With rising interest rates the pressure is on Salesforce to lift its operating margin and investors are likely demanding a surprise on operating margin rather than revenue in tomorrow’s earnings release. Salesforce financials | Source: Bloomberg Snowflake: consumption model vs economic uncertainty It is rare for Berkshire Hathaway to engage in technology companies let alone IPOs, but that is exactly what the investment firm did with Snowflake back in 2020. The company sits in the data analytics and cloud intersection providing a novel approach to data warehousing on the cloud at a low costs. The company has grown revenue from $97mn in 2018 to around $1.2bn in 2021 and revenue growth is expected at 72% y/y in FY23 Q2 (ending 31 July) but down from 104% y/y a year ago, but this should be expected as all high growth companies always see their growth rate coming down. The question is to what degree the growth rate is decaying over time. The company has recently disappointed analysts and there might be a downside risk to Snowflake’s results as the business model is centered around consumption which means that if technology spending is slowing down then it will hit Snowflake’s growth rate immediately. Secondly, the company’s high equity valuation relative to revenue means that investors will want to see a big improvement in operating income. Snowflake financials | Source: Bloomberg Source: Earnings preview: Nvidia, Salesforce, and Snowflake
What Should We Expect Before Winter? Will Energy Crisis Come?

What Should We Expect Before Winter? Will Energy Crisis Come?

Peter Garnry Peter Garnry 22.08.2022 18:44
Summary:  Financial conditions loosening over the past six weeks were a natural evolution of the US economy improving in July, but the Fed is poised to hike potentially 75 basis points at the September meeting to tighten financial conditions even more as the nominal economy is still running too hot to get inflation meaningfully lower. The most likely scenario is weaker equities as winter approaching as the energy crisis will hurt. Financial conditions will soon begin tightening again S&P 500 futures are trading 3.4% lower from their high last week touching the 200-day moving average before rolling over again. Sentiment has shifted as the market is slowly pricing less rate cuts for next year with Fed Funds futures curve on Friday (the blue line) has shifted lower compared to a week ago (the purple line) as inflationary pressures are expected to ease as much as betted on by the market over the past month. Fed member Bullard recently said that he was leaning towards 75 basis points rate cut at the September FOMC meeting to cool the economy further. If the Fed goes with 75 basis points while the real economy is seeing lower activity it will mean that financial conditions will begin tightening more relative to the economic backdrop. Financial conditions have been loosening since June but expectation is that we will see another leg of tightening to levels eclipsing the prior high and with that US equities will likely roll over. S&P 500 futures are now well below the 4,200 level and currently in the congestion zone from before the last leg higher. The next gravitational point to the downside is the 4,100 and below that just above 4,000. December put options on the S&P 500 are currently bid around $208 which roughly a 5% premium for getting three-month downside protection at-the-money. S&P 500 futures | Source: Saxo Group   Fed Funds futures forward curve | Source: Bloomberg   US financial conditions | Source: Bloomberg The US is headed for a recession, but when? US financial conditions eased in July lifting equities and with good reasons we can see. The Chicago Fed National Activity Index (the broadest measure of economic activity) rose to 0.27 in July from -0.25 in June suggesting a significant rebound in economic activity. The rebound was broad-based across all the four major sub categories in the index with the production index rising the most. The three-month average is still -0.09 with -0.7 being the statistical threshold for when this indicator suggests that the US economy is in a recession. The probability is therefore still elevated for a recession but the slowdown in the US economy has eased which is positive factor for US equity markets. Predicting the economy is difficult but our thesis going into the winter months on the Northern hemisphere is that it is very difficult to avoid a recession, at least in real terms, when the economy is facing an energy crisis. The most likely scenario is that the US economy will slide into a nominal recession but continue at a fast clip in nominal terms.          China is facing a 2008-style rescue of its real estate sector We have written earlier this year about the downfall of Evergrande and the other Chinese real estate developers. The stress in China’s real estate sector was a big theme earlier this year but has since faded, but recently the Chinese central bank has eased rates and today the government is planning a $29bn rescue package of special loans for troubled developers. Tensions in Chinese real estate are weighing down on the economy through lower consumer confidence and investors are increasingly reducing exposure to China has we have highlighted in our daily podcast. The PBoC (central bank) is urging banks to maintain steady growth of lending, but with the market value of banks relative to assets having declined for many years the market is no longer viewing the credit extension as driven by sound credit analysis, but more as an extended policy tool of the government with unknown but likely less good credit quality.   Source: Equities are rolling over as conditions are set to tighten
Copper Spreads Widen as Demand Pressures Continue Amidst Industrial Slowdown

Covid Vaccine Caused The World Of Business To Come Back From The Dead, The History Repeats Itself

Peter Garnry Peter Garnry 19.08.2022 16:42
 Summary:  The world and the global equity market can be divided into two parts; the tangible and the intangible. Since 2008 the tangibles driven industry groups have severely underperformed the intangibles driven industry groups due falling interest rates and an explosion in profits by companies utilising a lot of intangibles in their business model. However, since the Covid vaccine was announced the world came roaring back causing demand to outstrip supply and thus fueling inflation. The lack of supply of physical goods in the world and deglobalisation will be a theme going forward and our bet is that the tangible world will stage a comeback against the intangible world. The Great Financial Crisis proved to be the end of the tangible world The SaxoStrats team has been talking a lot about how intangibles took over the world and now the time has come for the tangible world to win back some terrain as years of underinvestment has created enormous supply deficits in energy, food, metals, construction materials etc. We have finally created two indices capturing the market performance of intangibles and tangibles driven industry groups. These indices will make it easier to observe performance in these two parts of the economy and will enable us to quantify whether our “tangibles are coming back” thesis is correct. When we look at intangibles vs tangibles over the period 1998-2022 it is clear we two distinct periods. From 1998-2008 the tangible part of the economy delivered the best total return to investors driven by a booming financial sector, rising real estate prices, and a commodities super cycle. Since 2008, the separation of the two parts of the economy becomes very clear. Lower and lower interest rates are inflating equity valuations of growth assets and intangibles driven industry groups are seeing an unprecedented acceleration in profits due to software business models maturing and e-commerce penetrating all consumer markets fueling the outperformance. If we look at the relative performance the tangible world peaked in April 2008 and was more or less in a continuous decline relative to the intangible world until October 2020. In November 2020, the revelation of the Covid vaccine reopened the economy so fast that demand come roaring back to a degree in which the physical supply of goods could not keep up. Prices began to accelerate causing the current run-away inflation and headache for central banks. The tangible world has since done better relative to intangibles and if we are right in our main theme of an ongoing energy and food crisis combined a multi-decade long deglobalisation then tangibles should continue to do well. Intangibles are still ahead despite rising interest and the current energy crisis During the pandemic the intangibles driven industry groups did better than the physical world because the whole world went into lockdown. Intangibles driven industries were suddenly necessary for making the world go around when we could not operate in the physical world. Government stimulated the economy in extraordinary amounts across monetary and fiscal measures and the demand outcome from this stimulus has caused global demand to outstrip available supply and especially of things in the physical world. The outcome of this has been inflation and also a comeback to the tangible world, but the tangibles driven industry groups are still behind the intangibles measured from the starting point of December 2019. It is our expectations that as interest rates are lifted to cool demand and inflation in the short-term the tangible world will gain more relative to intangibles. What has been the best performing industry group since 1998? One thing is to look at the aggregated indices of the tangibles and intangibles driven industry group, but another interesting observation is to look at the best performing industry. There were three close industry groups, but by a small amount the performing industry group has actually been the retailing industry. The industry group was not creating a lot of shareholder value until after the Great Financial Crisis when the e-commerce, automation, and digitalization combined with expansion of manufacturing in China lifted profitability and market value of retailing companies. The largest retailing companies in the industry group today are, Home Depot, Alibaba, Lowe’s, Meituan, and Our definition of tangible and intangible industry groups Tangible assets are loosely defined as physical assets one can touch and feel, and which can be collateralised for loans. This definition is too broad and not meaningful, because in the consumer services industry group, which we have defined as driven by intangibles, you find companies such as Starbucks and McDonald’s which both employ a lot of physical assets in their business. The way we have defined intangibles and tangibles driven industry groups was going back to 1998 and calculate the market value to assets for all the active companies at that point in time. We need calculated the average ratio for each of the 24 industry groups. All the industry groups with a ratio above the average of all groups we put into the intangibles. If the market value is substantially above the book value of assets on the balance sheet it must mean that the market is putting a value on something that is not there, or at least in accounting terms, and this is clearly the intangibles. So for McDonald’s they do employ a lot of physical assets but it is the branding, store network, product etc. that derives the meaningful value creation and thus the market is valuing the company way above the book value of its assets. One could argue that McDonald’s is a hybrid company but for our purposes we define it as being mostly intangibles driven. The full list is presented below. Banks are interesting because many think they are driven by intangibles because it employs a lot of people, but the thing is that banks are essentially deriving their profits from the spread between loans and deposits. The majority of bank loans are tied to physical assets and thus banks are tightly connected to the physical world. Tangibles driven industry groups Automobiles & Components Banks Capital Goods Commercial & Professional Services Consumer Durables & Apparel Diversified Financials Energy Food & Staples Retailing Insurance Materials Real Estate Telecommunication Services Transportation Utilities Intangibles driven industry groups Consumer Services Food, Beverage & Tobacco Health Care Equipment & Services Household & Personal Products Media & Entertainment Pharmaceuticals, Biotechnology & Life Sciences Retailing Semiconductors & Semiconductor Equipment Software & Services Technology Hardware & Equipment Source: The tangible world is fighting back
Nuclear Power Emerges as Top Theme for 2023, Bubble Stocks Under Pressure

We Need To Build Our Green Energy Future. Here Is Why

Peter Garnry Peter Garnry 17.08.2022 16:26
Summary:  We are used to not think about the energy sector, but the galloping global energy crisis has illuminated our deficits in primary energy due to years of underinvestment in fossil fuels and renewable energy sources inability to scale fast enough with the green transformation and electrification of our economy. It seems more likely now that the non-renewable and the renewable energy sector will both provide attractive returns as we will need both to overcome our short-term energy crisis and long-term aspirations of a greener energy future. The energy crisis keeps getting worse Electricity prices in Europe are nine times higher than the historical average since 2007 as lack of investments and cutting the ties to Russia’s energy supplies are severely constraining available energy in society. Since before the pandemic we have written many equity notes on the green transformation which involves building out renewable energy sources and electrifying everything in the economy to reduce the carbon emissions involved with our current living standard. Switching a large part of the transportation sector to electricity or green fuels, switching the heating source from natural gas to renewable energy through electrification (air-to-water heat pumps) etc. is very difficult as our rising wealth (measured by GDP) is finely mapped to carbon emissions over the past 300 years. We described this in our note The inconvenient truth on energy and GDP. Decoupling our wealth generating function from that of carbon emissions is probably the greatest task humans has ever set out to do. German baseload electricity 1 year forward | Source: Bloomberg There is not ‘one solution’ that fixes our energy crisis As BP’s 2022 Statistical Review of World Energy pictures primary energy demand in 2021 eclipsed 2019 suggesting the world’s demand for energy is now higher than before the pandemic and the usage of fossil fuels (82%) is only slightly down compared to five years ago (85%). We very much still live in a fossil fuel based economy. Things will change over time and the share of fossil fuels will likely decline, but the idea that the world can do the green transformation by electrifying everything based on renewable energy sources is naïve. Investors should also remember that the change in primary energy demand is mostly driven by the non-OECD countries. Renewable energy does not scale fast enough for a complete transition due to the speed on electrification and recently the CEOs of Orsted and Vestas complained about bureaucracy related to get new offshore wind power projects approved. The recent Climate & Tax Bill is acknowledging that we will need oil and gas for longer than expected just three years ago and thus our current energy crisis will allow both renewable energy and fossil fuel energy to be good investments in parallel. Renewable energy is the third best theme basket this year while the commodities basket (which includes oil & gas and mining companies) is the best performer. Our view of the future of energy is that there is no ‘one solution’ to our energy problem. We must move to a mindset of energy diversification. We will need many different sources of energy and never rely too much on one source. Germany’s reliance on natural gas for its economic model has proved fragile. Even France’s concentrated bet on nuclear power has proved to be fragile due to corrosion and now too hot rivers. The world must invest in all types of energy and thus our view is that investors mut get broad exposure to energy going forward. The non-renewable energy sector at a glance In this equity note we will focus on the non-renewable energy because this is the part of the energy sector which has changed the most relative to market pricing and expectations and where there is more room for valuations changing. Despite high oil and gas prices the energy sector is still relatively cheap as we described already back in May in our note Global energy stocks are the cheapest in 27 years where we measured valuation on the free cash flow yield. The high oil and gas prices have also led to record profits for refiners and recently the highest quarterly profit ever recorded in the global energy sector which we described in our note Earnings hit new all-time high as inflation lifts all boats. The global energy sector (defined by GICS and being the non-renewable energy sector) is still cheap relative to the global equity market with the 12-month EV/EBITDA being two standard deviations below the average valuation spread since 2005. In terms of total return the global energy sector has delivered a higher return than the global equity market since 1995 (see chart). It is also worth noting that measured on the 12-month forward EV/EBITDA the renewable energy sector has twice the valuation level compared to the non-renewable energy sector reflecting the different in expectations for the future priced in the market. As we described in our Q1 Outlook the current dividend yield and expected dividend growth suggest that the global energy sector has an expected long-term return of 10% annualised subject of course to a large degree of uncertainty related to equity valuation compression in the industry or lower dividend growth in the future than expected today. Global energy vs global equities | Source: Bloomberg The easiest way to invest in the energy sector is through ETFs tracking the sector and most investors should do that. A different approach is investing in specific parts of the non-renewable energy sector. The tables below show the top five company on market value in each of the GICS industries in the GICS energy sector. As the five-year total returns in USD column show, the industries related only to drilling and providing equipment for drilling activities have done the worst because the decline in capital expenditures since 2015 has dried up activity for this industry. The integrated oil and gas majors have done better due to refining and trading businesses. Over the past five years, the best performing industries in the energy sector have been refining and marketing due to the crack spreads (the difference between crude oil and refined products) have expanded during the pandemic. The global coal industry has also done very well which in terms of climate change and reducing carbon emissions is a sad observation but we should be aware of that the primary fuel source for power generation globally is still coal. GICS industries in the energy sector | Source: Bloomberg and Saxo Group Source: How to invest in energy and the unfolding energy crisis?
Canadian Dollar Falters as USD/CAD Tests Key Support Amidst Rising Oil Prices and Economic Data

Zantac: $40bn Scandal Meets The Market! S&P 500 Has Troubles?

Peter Garnry Peter Garnry 12.08.2022 14:52
Summary:  The easing inflation narrative has been building strength for six weeks now and the short-term vindication in the US CPI release on Wednesday has bolstered the bulls. However, the structural issues in the supply-side of the economy have been resolved and wages combined with rents will add more pressure on inflation going forward. We also highlight the unfolding scandal around the heartburn drug Zantac as it has erased $40bn in market value from Sanofi and GSK. Finally, we take a look at next week's earnings. It is too early to call inflation is tamed The US July CPI release on Wednesday has bolstered the soft-landing and easing inflation trade catapulting high duration assets higher. S&P 500 futures are attempting to push higher and the 200-day moving average sitting around the 4,325 level is suddenly not an outrageous gravitational point for US equities in the near-term. While the equity market is buying the all good scenario on inflation we would emphasise that it is too early to call. The Fed will like to see the 6-month average on the US CPI core m/m to go back to 0.2% before easing policy and that is simply not possible until at least the end of Q1 next year. Many of the structural issues except maybe for logistics, and this pain could come back again this winter if China gets another big Covid outbreak, are still not solved as capital expenditures in real terms are still not coming up in the global mining and energy industry. Labour markets remain tight with especially the US being the worst hit having lost around 1.5%-point of its labour force due to the pandemic and these people are likely never coming back. Rent dynamics are also heating up in both the US and Europe, and this winter will test the strength of the European population as the energy crisis could get much worse. We encourage investors to watch the US 10-year yield as a break above 3% again should cause a negative reaction in global equities. S&P 500 continuous futures | Source: Saxo Group US CPI core m/m | Source: Bloomberg Potential gigantic Zantac liabilities hit Sanofi, GSK, and Pfizer Health care is typically associated with stability, high valuations, and high predictability in the underlying cash flows, but the industry is being rocked by increasing concerns over the heartburn drug Zantac. Sanofi, GSK, and Pfizer have lost combined market value of $40bn and analysts are estimating that damage liabilities could reach $10-45bn. Zantac was removed from the market in 2019 by the FDA as the drug appears to be producing unacceptably high levels of a cancer-causing chemical. There is case coming up in Illinois on 22 August which will give the first indications of where this is going. There will continue to be short-term headwinds for both Sanofi and GSK where Pfizer seems to have been selling the drug for a much more reduced period than the two others. Weekly share prices of Sanofi, GSK, and Pfizer | Source: Bloomberg Earnings to watch next week The Q2 earnings season is slowly coming to end and what a quarter it has been with earnings jumping to a new all-time high (see chart) driven by a significant increase in profits in the energy sector. The technology sector measure by the Nasdaq 100 had another bad quarter with earnings declining reinforcing the need to cut costs of many of these previously fast growing technology companies. Next week’s most important earnings are highlighted below with the names in bold being those that can move market or industry sentiment. Meituan on Monday is important for gauging consumer spending and behaviour in China. BHP Group is must watch on Monday as the Australian miner is tapped into China’s growth and demand for iron ore. On Tuesday, earnings from Walmart and Home Depot can provide an updated picture on global supply chains and price pressures across a wide range of consumer products. Tencent reports on Wednesday and is an important earnings release for investors watching Chinese technology stocks as the recent amendment to China’s anti-monopoly laws is adding more pressure on the big technology platform companies. In the payments industry, Adyen’s result on Thursday will be highly watched as Adyen is really challenging PayPal on growth and dominance in the industry. Monday: China Construction Bank, Agricultural Bank of China, Meituan, China Life Insurance, China Shenhua Energy, China Petroleum & Chemical, BHP Group, COSCO Shipping, Li Auto, Group, DiDi Global Tuesday: China Telecom, Walmart, Agilent Technologies, Home Depot, Sea Ltd Wednesday: Tencent, Hong Kong Exchanges & Clearing, Analog Devices, Cisco Systems, Synopsys, Lowe’s, CSL, Target, TJX, Coloplast, Carlsberg, Wolfspeed Thursday: Applied Materials, Estee Lauder, NetEase, Adyen, Nibe Industrier, Geberit Friday: China Merchants Bank, CNOOC, Shenzhen Mindray, Xiaomi, Deere Source: The soft-landing and inflation easing narrative is thriving
Russia-Ukraine War - October 10th: Russian Air Strikes

Risk, Uncertainty And Invasion Of Ukraine. Is Risk Unavoidable Nowadays?

Peter Garnry Peter Garnry 10.08.2022 10:00
Summary:  Concentrated equity portfolios are common for many retail investors leading to very high risk. We show that by blending a 5-stock portfolio 50/50 with an ETF that tracks the broader equity market the risk is brought down considerably without sacrificing the long-term expected return. If an investor is willing to lower return expectations a bit then the ETF tracking the equity market can be switched to track an asset allocation and reduce risk even more. Finally, we highlight the risk to real wealth from inflation and what can potentially offset some of that risk. Risk is...? What should you know about it? Last year I wrote about my personal approach to managing my own capital which we got a lot of positive feedback from. Given equities would peak a few months later the note was quite timely. With equities significantly lower from their recent peak and the recent bounce in equities, we are taking a slightly different angle to risk management. We are laying out what risk is and what the typical retail equity investor can do to avoid having too much risk should equities begin falling again. First we need to distinguish between risk and uncertainty. Risk can formally be described as process that is quantifiable with a certain confidence bound related to the sampling size; in other words, a process in which can have statistics. Uncertainty is defined as unquantifiable such as the invasion of Ukraine, because the event is unique and thus has no meaningful prior. If we look broader at risk it all starts with the ultimate definition of risk which is avoidance of ruin. While being an important concept and something that can be avoided if an investor refrain from using leverage, ruin can also be losing 98% of wealth; it is just not complete ruin. But it is ruin enough that you need a 4900% gain to get back illuminating the asymmetry between gains and losses. The most normal definition of risk is the variance of some underlying process (for instance a stock) which is a statistically measure of how much a process varies around its mean value. The higher the variance the higher probability of big moves in either direction. Since most retail investors are equity investors, and thus long-only investors, we should care more about the downside risk than the upside risk (gains) as I want as much variance if its lower bound is above zero return. Focusing on downside risk/returns leads to a concept called semi-variance which only focuses on the returns below a certain threshold, often zero, and describes the downside risk. The problem with this approach is that the underlying assumption is a well-behaved distribution of negative returns. Now, we know financial markets and equities are fat-tailed meaning that we observe many more big moves (both gains and losses) than what the normal distribution would indicated. This means that the semi-variance will underestimate the true risk because of the asymmetry in returns. These observations have lead to concepts such as conditional value-at-risk which is a fancy word for calculating the average return of the say 1% or 5% worst returns. This measure has many wonderful statistical properties with one of them being that it is less sensitive to the assumptions of the underlying distribution of returns. A somewhat related concept which is easier to understand is maximum drawdown which is defined as the decline in portfolio value from the maximum value to the lowest value over the entire investment period. Because of the asymmetry of gains and losses, traders focus a lot on this measure and cut losses to avoid big drawdowns or large single period losses (daily, weekly, monthly). How to reduce risk? 5-stock rule The typical return investor has limited capital and thus often end up with portfolios holding only 3-5 stocks as minimum commission otherwise would equates to high transaction costs. The first plot shows the returns of a 5-stock portfolio in European equities in which we select randomly five stocks in January 2010 and let them run through time. If one stock is delisted or bought we just place the weight in cash. We do this 1,000 times to the intrinsic variance in outcomes of such portfolios. A considerable percentage of these 1,000 portfolio end up with a negative return over this 12,5 year period which in itself is remarkable, but the number of portfolios that end with extremely high total returns is also surprisingly high. In other words, a 5-stock portfolio is a lottery ticket with an extreme variance in outcome. The blue line and area represent the median total return path and its variance if these random 5-stock portfolios are blended 50/50 with a the STOXX 600 Index. The striking result is that the median expected return is not changed but total risk (both gains and losses) is reduced considerably. The sharpe ratio, which measures the annualised return relative to the annualised volatility, improves 20% on average by adding an equity market component. So most retail investors can drastically improve their risk-adjusted returns by adding an ETF that tracks the overall equity market without sacrificing the expected return. Source: Bloomberg and Saxo Group If move on to the maximum drawdown concept we see on the first plot how much the maximum drawdown is reduced by adding the equity market to the 5-stock portfolio. All retail equity investors that have a small concentrated equity portfolio should seriously move to a portfolio where the 5 stocks are kept but reduced to 50% of the portfolio with the freed up cash invested in an ETF that tracks the overall equity market. If an investor is willing to lower expectations for long-term returns, then the ETF tracking the equity market can be substituted with an ETF holding a balanced basket of many different asset classes including government bonds, credit and different types of equities. We use the Xtrackers Portfolio UCITS ETF as an example and should not be viewed as a recommendation but one example of a diversified asset allocation. As the second plot shows the expected distribution of maximum drawdowns from combining 5 stocks with an ETF tracking multiple asset classes is better compared to the other solution combining only with the equity market. The risk-adjusted return is now 43% better than the simple 5-stock portfolio. Source: Bloomberg and Saxo Group Source: Bloomberg and Saxo Group Given equities have bounced back in July and so far also in August retail investors have an unique opportunity to bolster portfolios in the case we get another setback in equity markets. Our view is still that inflation will continue to surprise to the upside and that financial conditions will continue to tighten further adding headwinds for equities. At the same time deglobalisation is accelerating adding unpredictable sources of risk to the overall system. Inflation always says its' word These classical approaches to reduce equity risk mentioned above hold for normal environments but if we get into trouble with a prolonged inflationary period such as in the 1970s or a deflation of equity valuation among technology and health care stocks then we could get prolonged period of negative real rate returns. We have two periods in US equity market history since 1969 in which it took 13 and 14 years to get back to a new high in real terms. Our overall theme in our latest Quarterly Outlook was about the tangible world and our bet is that tangible assets will continue to be repriced higher against intangible assets and if we are right investors should consider commodities to offset the risk to real wealth from inflation. Source: Bloomberg Source:
Australian CPI Expected to Rise to 5.2%: Impact on AUD/USD and RBA's Rate Hike Dilemma

US Tech Stocks: Reduced Bitcoin Mining May Be One Of Reasons Why Nvidia Stock Price May Be Fluctuates

Peter Garnry Peter Garnry 09.08.2022 10:42
Summary:  Nvidia has see a dramatic reduction in demand for its GPUs related to its gaming segment. While there might be some weakening of demand in gaming the real driver is most likely Bitcoin mining which has seen a plunge in profitability forcing many Bitcoin miners to end operations and flood the market with used GPUs causing prices to tumble. The lower GPU prices are forcing Nvidia to write down its inventory by $1.3bn. Shares opened 8% lower but have recovered half the losses as the company says the long-term gross margin profile is intact. What happened to the gross margin? A little more than two months ago Nvidia announced FY23 Q1 results showing record revenue, but today the graphics card maker is pre-announcing Q2 results cutting its gross margin (GAAP) guidance for the Q2 quarter (ending 31 July) from 65.1% to 43.7% and expected revenue of $6.7bn compared to previously announced $8.1bn. The shortfall in revenue is driven by its gaming segment which Nvidia is saying is impacted by the macroeconomic backdrop. The fall in demand in its gaming segment has also meant that Nvidia has too much inventory and has been forced to adjust prices. The company is therefore booking a $1.3bn inventory write-down. It is a well-known fact that Nvidia’s GPUs are heavily used in Bitcoin mining despite the graphics card maker has never officially linked its business to the industry. Because Nvidia does not know precisely the end use case of their GPUs, revenue related to Bitcoin mining likely ends up in both its datacenter and gaming segments. The falling demand for Nvidia’s GPUs has nothing to do with the gaming industry but instead the profitability of the Bitcoin mining industry. As the chart below shows, the profitability of Bitcoin mining has shrunk from being massively profitable in late 2021 to almost loss-making today. This naturally drives lower demand for additional GPUs used in Bitcoin mining and it also forces miners out of business which subsequently floods the market with old GPUs. This increase in available GPUs through secondary sales has caused GPU prices to fall dramatically as revealed by Gizmodo back in June. Nvidia says long-term outlook is unchanged The last time Nvidia saw a dramatic decline in its share price was back in late 2018 as Bitcoin mining profitability went negative following Bitcoin’s massive speculative rally in late 2017 drumming up demand for GPUs for mining. This time is no different. Long-term Nvidia is riding many of the most important technology vectors, but a key risk of course is the growing tensions between the US and China which could alter its supply chains and market opportunity. Nvidia has 102 partners in China which is roughly 12% of its total number of partners. Despite the significant guidance being cut investors are bidding up shares after being down 8% on the open. Nvidia shares have corrected half of the initial decline down only 4%. The reason is likely that the company states that it believes that its long-term gross margin profile is intact. Nvidia weekly share price | Source: Saxo Group Bitcoin mining profitability | Source: Source: Nvidia shares down 4 on guidance cut | Saxo Group (
Turbulent Times Ahead: USD Smile and JPY's Future - Q3 2023 Analysis

What Is AlphaFold And Why It May Shock The World!?

Peter Garnry Peter Garnry 04.08.2022 14:50
Summary:  DeepMind's AlphaFold algorithm for predicting the 3D shape of protein folding is one of the biggest scientific breakthroughs in biology the last 50 years and solves a long standing problem. The breakthrough will likely lead to the Nobel Prize in chemistry and advance drug discovery on a scale we could only dream of a decade ago. AlphaFold underpin why our NextGen Medicine basket is such an important theme for investors to be exposed to long-term as biotechnology companies could end up being the big winners over the next couple of decades. DeepMind’s gift to humanity will unleash massive innovation in medicine In the midst of a global pandemic the world experienced two major breakthroughs in medicine and biochemistry in November 2020. First, Pfizer with its partner BioNTech announced a highly effective vaccine against Covid-19 using mRNA technology for the first time ever in history; it became the fastest developed vaccine in the world. Later during the month Nature announced a ground-breaking scientific discovery from Google’s AI unit DeepMind in which the company’s deep learning algorithm called AlphaFold is able to predict the 3D shape of proteins. Scientists agreed that “It will change everything” and DeepMind chose to make their AlphaFold Protein Structure Database available for free to all scientists. Around 20 months later DeepMind went a step further announcing that it has, in collaboration with the European Bioinformatics Institute, catalogued nearly all protein known in the universe expanding the database of protein structures from 1 to 200 million structures. Before AlphaFold experimental work had unveiled around 190,000 protein structures. This new database gifted to humanity will advance our understanding of biology and potentially lead to quantum leaps in drug discovery. DeepMind’s scientific breakthrough solves the 50-year problem of protein folding and will most likely lead to the Nobel Prize in Chemistry. Investors must have exposure to “biology” in their long-term portfolios The 21st century has often been labelled the century of biology in which computational biology and breakthroughs such as AlphaFold will deliver better and faster drugs to combat diseases. Our NextGen Medicine basket consists of 30 companies representing the long tail of innovation inside the biotechnology industry which today is dominated by a group of very large and successful companies such Amgen, Gilead Sciences, and Vertex Pharmaceuticals etc. Our focus has been on some of the newer technologies within biotechnology such as mRNA, gene therapy, gene editing etc. The world’s leading biotechnology index which tracks the largest and most liquid biotechnology companies is called NASDAQ Biotechnology Index and it has returned 9.7% annualised since late 2003 compared to 8.1% for MSCI World Index generating 1.6% annualised alpha. The amount of alpha has shrunk considerably the past year as rising interest rates has pushed down equity valuations of high duration assets (companies with high valuation or no earnings) and made financing more difficult. With the type of drug discovery that might derive from AlphaFold and increased understanding of proteins will make biotechnology as massive and very profitable trend over the coming decades. Microsoft and the computer industry have generated 5-10% annualised alpha since the late 1980s and we believe biotechnology will ultimately do the same catapulting some of these companies into the top ranks of equity indices in terms of market value. One can invest in the stocks in our theme basket but requires decent amount of due diligence and it comes with the risks of not choosing the winners. An alternative is ETFs such as the iShares Nasdaq Biotechnology UCITS ETF (2B70:xetr) tracking the main benchmark index within biotechnology or the Global X Genomics & Biotechnology UCITS ETF (GNOM:xmil) which closer mimics our NextGen Medicine basket. Name Mkt Cap (USD mn.) Sales growth (%) R&D in % of mkt cap Diff to PT (%) 5yr return Moderna Inc 72,955 227.6 3.3 6.1 NA BioNTech SE 43,313 831.0 2.4 33.9 NA Illumina Inc 35,049 34.0 3.7 35.0 14.7 Seagen Inc 32,274 -25.4 4.2 4.6 256.0 Genmab A/S 23,386 -16.5 19.2 2.7 87.0 Argenx SE 20,279 -74.4 1.9 9.5 1,930.3 Exact Sciences Corp 8,422 13.3 4.4 49.7 23.0 Grifols SA 8,336 0.1 4.3 58.4 -38.5 Swedish Orphan Biovitrum AB 6,751 21.0 32.9 12.6 84.7 CRISPR Therapeutics AG 6,087 83,039.3 7.7 45.1 327.1 Ionis Pharmaceuticals Inc 5,817 18.9 11.4 18.7 -21.7 Intellia Therapeutics Inc 5,439 -26.5 6.0 78.5 345.3 10X Genomics Inc 4,807 50.0 4.9 79.8 NA Natera Inc 4,718 48.5 6.5 63.1 491.0 Arrowhead Pharmaceuticals Inc 4,690 195.6 5.7 72.8 2,310.9 Beam Therapeutics Inc 4,428 251,025.0 5.9 46.4 NA Denali Therapeutics Inc 4,083 -75.6 7.1 105.9 NA Mirati Therapeutics Inc 3,992 495.3 13.3 61.7 1,395.4 Ultragenyx Pharmaceutical Inc 3,754 -7.0 14.2 109.0 -15.3 Abcam PLC 3,573 20.3 0.9 17.7 27.4 Galapagos NV 3,486 3.6 13.2 20.7 -19.2 PTC Therapeutics Inc 3,411 32.3 16.0 4.3 142.1 Fate Therapeutics Inc 3,183 42.2 8.7 129.9 1,016.0 Twist Bioscience Corp 2,589 44.3 3.6 -9.8 NA Sage Therapeutics Inc 2,140 -99.4 14.7 64.4 -58.6 Allogene Therapeutics Inc 1,956 -99.5 11.5 98.2 NA Iovance Biotherapeutics Inc 1,892 NA 14.9 126.2 115.0 CareDx Inc 1,304 39.4 6.3 102.7 1,601.4 Pacific Biosciences of California Inc 1,169 31.9 14.8 127.1 29.9 Invitae Corp 456 50.6 101.7 181.4 -80.8 Aggregate / median 323,738 31.9 6.8 54.0 87.0 Source: Bloomberg and Saxo Group   Why is the protein folding problem so important? In a recent podcast interview with Lex Friedman, Demis Hassabis (co-founder of DeepMind) describes why protein folding is such an important problem to solve. Proteins are the building blocks of life and our bodies and are responsible for most of what happens inside cells. Drugs for curing a disease attach to certain proteins and therefore you have to know their 3D shape to design the drug properly. With AlphaFold biologists can now look up the same of a protein in the database instead of using eight years on average, in some cases scientists have given up on finding certain protein structures, to determine the structure. It will turbocharge drug discovery and protein design. The graphics below show how much better AlphaFold is relative to the competition in predicting protein structures with a score above 90 being on par with experimentally determined structures. Source: NextGen Medicine basket and the protein folding problem | Saxo Group (
Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Q2 earnings preview, biotechnology breakout

Peter Garnry Peter Garnry 08.07.2022 15:54
Summary:  The Q2 earnings season starts next week and will run at full speed during the rest of July and first half of August. We focus on the most important earnings releases over the coming three weeks and explain what to watch in each report. One thing is certain, companies with margin power will be rewarded by the market. Finally, we put a perspective on the recent 25% rally in our NextGen Medicine theme basket highlighting that the industry is fragile as long as financial conditions continue to tighten. Q2 earnings are all about margin power or not The Q2 earnings season starts next week and we recently wrote an earnings preview focusing on rosy expectations ahead of Q2 earnings and that the energy sector would continue to shine. The overall theme this season is margin pressure (see chart) and companies that can surprise to the upside on operating margin will be rewarded by the market. In our view the outlook from companies will be so uncertain that it will be difficult for Q2 earnings to materially lift the equity market as the FOMC rate hike in July and tighter financial conditions will likely overshadow earnings. In any case, companies with margin power are the winners of the market during the Q2 earnings season. The equity desk will be running low in July due to holiday but of all the major earnings expected over the next three weeks the following ones are the most important one to watch. JPMorgan Chase: US banks have not reacted positively on rising US interest rates since November last year as the market is expecting a muted increase in the net interest margin, which is likely offset by falling activity from the consumer across mortgages and card spending. Higher credit provisions are also likely given the tighter financial conditions. Lockheed Martin: US defence stocks have not moved much compared to their European competitors since the war in Ukraine broke out. While Europe will prioritise their own defence industry the increased spending will also flow to US defence companies and Lockheed Martin’s Q2 earnings release will give the first hint if that is indeed the case. Netflix: the world’s largest online streaming service is seeing a user decline, increased competition, increased costs for content production, and customers are generally hit by the cost-of-living crisis. Investors will focus on whether the company will announce a new ads-based tiering model to lower entry costs for streaming for those households hit the hardest by inflation. Halliburton: the oil and gas industry is still reluctant about investing too much in new oil and gas fields due to the political pressures against fossil fuels. Halliburton is a big oil services company and will see the pick up in capital expenditures in the oil industry. Tesla: Covid lockdowns in China have severely constrained the EV-maker in Q2 with deliveries falling q/q for the first time in more than two years. At the same time, the EV-maker has production difficulties at its factories in Texas and Germany, and competition is heating up from most notably Volkswagen and BYD. ASML: several semiconductor manufacturers such as Micron and Samsung have recently issued gloomy outlooks and these forecasts could also dent the outlook of ASML which delivers semiconductor equipment. The company has also recently been pressured by the US to halt sales to China of certain equipment. ABB: with the galloping energy crisis in Europe industrials are under pressure as industrial activity is difficult at punitive electricity prices. A general slowdown in the global economy could also negatively impact the outlook. Alphabet: since Q1 earnings Snap has been out cutting its revenue growth guidance on weaker advertising demand, but Alphabet has not done this. However, there is a lot of evidence that businesses are cutting down on marketing expenses to offset the pressure on operating margin. Outside the advertising business we expect the cloud computing division to still doing well. Microsoft: steady as a ship as the company is still running a near monopoly globally in computer operating systems and its cloud business is winning market share. Business spending has not taken a hit yet but Samsung said yesterday that they are beginning to see that so this might be a risk factor going into Microsoft earnings. Meta: same story as Alphabet, but with a caveat. Meta is spending $3bn per quarter on its new Metaverse bet and investors might be running out of patience with Mark Zuckerberg’s ambitions to create a new computing platform for the future. Especially, if the advertising business continues to lose momentum over the data privacy change that Apple made on its iPhones making it more difficult for Meta to deliver efficient ads. Apple: being a high-end consumer electronics maker Apple could be faced with bigger headwinds from inflation than what the market is currently betting on. Samsung’s outlook was ignored by Apple investors but that might come back and haunt them when Apple releases earnings. Supply chain constraints are also a critical issue for Apple which could lead to a negative revenue growth surprise. Amazon: the ‘everything store’ overspent during the pandemic and is being pressured on operating margins from higher fulfillment and logistics costs. In its cloud computing division Microsoft and Google are also adding more pressure. There is a lot of pressure on the new CEO to restore operating margin in its e-commerce business. The most important earnings releases the next three weeks are listed below. Please note that some of these earnings dates might be moved after this publication. Tuesday 12 July: Tryg, DNB Bank, PepsiCo Wednesday 13 July: Fastenal, Delta Air Lines Thursday 14 July: Fast Retailing, Ericsson, SEB, EQT, JPMorgan Chase, Morgan Stanley, Cintas Friday 15 July: Investor, Sandvik, EMS-Chemie, UnitedHealth, Wells Fargo, Charles Schwab, BlackRock, Citigroup, Progressive, US Bancorp, PNC Financial Services Monday 18 July: Bank of America, IBM, Goldman Sachs, Nordea Tuesday 19 July: Johnson & Johnson, Novartis, Lockheed Martin, Netflix, Atlas Copco, Volvo, Halliburton, Assa Abloy, Hasbro, Yara International Wednesday 20 July: Tesla, Abbott Laboratories, ASML, CSX, Nidex, Biogen, Baker Hughes, Kone, Volvo Car, Aker, Dassault Aviation, United Airlines, ASM International, Alfa Laval Thursday 21 July: Roche, Danaher, AT&T, Blackstone, SAP, Intuitive Surgical, ABB, Freeport-McMoRan, Kinder Morgan, Nucor, DR Horton, Nokia, Essity, Seagate Technology, MarketAxess Friday 22 July: Verizon, NextEra Energy, American Express, Schlumberger, Twitter, Danske Bank, Norsk Hydro Monday 25 July: NXP Semiconductors, Kuehne + Nagel, Philips, Ryanair Tuesday 26 July: Alphabet, Visa, LVMH, Coca-Cola, McDonald’s, UPS, Texas Instruments, Raytheon Technologies, Unilever, Christian Dior, General Electric, UBS Group, General Motors, Archer-Daniels-Midland, Southern Copper, DSV, UniCredit Wednesday 27 July: Microsoft, Meta, Bristol-Myers Squibb, Qualcomm, AMD, Equinor, GSK, ServiceNow, Rio Tinto, Mondelez, Boeing, Airbus, 3M, Kering, Humana, Mercedes-Benz, Ford Motor, Kraft Heinz, Shopify, BASF, Danone, Fanucm Enphase Energy, Spotify, Garmin Thursday 28 July: Apple, Nestle, Pfizer, Merck, L’Oreal, Shell, Comcast, Intel, Linde, TotalEnergies, Sanofi, Honeywell, Anheuser-Busch InBev, Keyence, Volkswagen, Air Liquide, Schneider Electric, Banco Santander, Valero Energy, Stellantis, Neste, BAE Systems, Arcelor Mittal Friday 29 July: Amazon, Exxon Mobil, P&G, Mastercard, Chevron, AbbVie, AstraZeneca, Sony, Caterpillar, Colgate-Palmolive, BNP Paribas, Twilio, Pinterest Biotechnology rebound rally at odds with financial conditions Our NextGen Medicine basket which is reflecting a large part of the innovative biotechnology industry is up 25% from the recent lows rallying on a combination of easing inflation and interest rates expectations, and potentially short covering. This part of the equity market has the absolute highest duration (sensitivity to interest rates) as many of these companies are many years from break-even because many of them have high equity valuations and are most research-driven companies. While biotechnology stocks have rebounded recently we remain cautious on the industry over the next six months as financial conditions continue to tighten (see chart) and the current levels and direction will continue to negatively impact financing for these companies which is a necessary feature of the industry to fund their drug research activities. NextGen Medicine basket vs MSCI World Index | Source: Bloomberg US financial conditions | Source: Bloomberg Source: Q2 earnings preview biotechnology breakout | Saxo Group (
USD/JPY Tops Majors in Past Month; Strong Verbal Intervention from Japan's Ministry of Finance as Resistance Nears

Stocks: What Do We Learn From Samsung's Q2 Data?

Peter Garnry Peter Garnry 07.07.2022 14:24
Summary:  Semiconductors have fallen from the pink skies as rising interest rates have compressed equity valuations making semiconductor stocks the fifth worst theme basket in our universe of themes. However, Samsung showed this morning in its Q2 results that things are maybe a bit less bad than feared, but the outlook comes with dark clouds and massive uncertainty. It does feel like it will get worse because it gets better for semiconductor. We still remain very bullish on semiconductors long-term due to the ongoing digitalization. A horrible year Semiconductors were a hot theme going into 2022 and one of our preferred equity themes based on long-term growth drivers such as electric vehicles adoption (EVs use 5x more semiconductors than normal gasoline cars), more datacenters, Internet of Things, and continued growth in consumer electronics. However, these rosy assumptions faced stiff headwinds this year from rallying bond yields compressing equity valuations in semiconductor stocks causing our semiconductor theme basket to decline 34% this year making it the fifth worst basket this year. Samsung has reported preliminary Q2 results this morning and South Korean electronics maker reported KRW 77trn in Q2 revenue up 21% y/y and a 1% decline q/q from Q1. This was a bit better than expected, but operating income was KRW 14trn up 11% but lower than estimates of KRW 14.6trn suggesting cost pressures are larger than expected. While the market has rewarded Samsung for its Q2 results management sounded uncertain on the earnings call warning investors of immense challenges over its outlook due to inflation and the war in Ukraine. Samsung also said that consumers and enterprises are reducing their spending due higher interest rates and inflation are hitting disposable income. Samsung’s results show that the industry is still growing but that considerable downside risks exist and that it could get worse for semiconductors before its gets better. Long-term we remain very positive on the semiconductors industry as it is a pivotal industry for the continued digitalization of the world, which is a trend that will continue at full speed the next decade. Saxo Semiconductor theme basket vs MSCI World | Source: Bloomberg Samsung share price (London listing) | Source: Saxo Group Source: Can Samsung Q2 results stop the bleeding in semiconductors | Saxo Group (
Market Update: UK Inflation Softens, US Stocks Rally, Bank Earnings, and AI Dominate Headlines

What Did Change Of (USD) US Dollar Strength And Decreasing Prices Of Commodities Trigger?

Peter Garnry Peter Garnry 06.07.2022 15:06
Summary:  Yesterday was a major reversal session with the best performing assets tanking while junk pockets in equities such as bubble stocks rallied hard into the close. A combination of breakout in the USD and commodities plunging 5% due to increased recession fears over punitive energy prices in Europe ignited a massive technical reversal in equities with long-short value and momentum style factors declining 5% during the session. In today's equity update, we also take a look at Amazon's partnership with Grubhub in the US sending Just Eat shares 20% higher. A weird session As we have said recently on our podcast and in equity notes the market has turned into a binary state of inflation and recession trades with latter dominated flows recently as commodities have come down together with inflation expectations. Yesterday’s session was wild with a significant breakout in USD which coupled with galloping energy prices in Europe suddenly got all commodities to flip on fears of recession with the Bloomberg Commodity Index falling 5% reaching levels from early February removing the entire extension higher following the war in Ukraine and sanctions on Russia. Bond yields followed commodities lower and in equities flows intensified throughout the session in the direction of reversing the value and momentum trades. Value and momentum stocks have a significant overlap these days and Bloomberg’s long-short versions of these two style factors declined 4.5% and 5% respectively yesterday which is a lot for long-short style factor. In our own theme baskets the momentum reversal was revealed by the best performing baskets this year declining while the worst performing baskets such as bubble stocks shot higher. In other words, increased recession fear takes inflation and interest rates down and thus the junk pockets have to be bought. Before anyone thinks that this is the winning strategy the next six months we would like to emphasise that the nominal economy in the US is still growing +10% y/y and the underlying structural issues on the supply side of the economy have not been fixed. July is a low liquidity month and as such we recommend investors to not put too much weight on yesterday’s move. Bloomberg Commodity Index | Source: Bloomberg Amazon is warming up for food delivery The everything store wants apparently to become the everything machine running the consumer economy. Amazon has announced this morning that it will receive a 2% option (warrants) in the US based food delivery company Grubhub, which is owned by Just Eat in Europe, in exchange for Amazon’s US Prime members getting a 1-year membership for the food delivery service. Depending on the performance of this partnership Amazon can increase its stake to 15% of Grubhub. Shares in Just Eat, the parent company of Grubhub, are up 20% today as the market is betting that these type of partnership can reignite growth for Just Eat which is seeing increased competition. Just Eat revenue is expected to grow 32% in 2022 down from 120% in 2021 reaching €5.9bn, but the business is still not generating a positive operating income and as a result its shares have been punished during the interest rate rally. For Amazon the economic engine is getting more and more convoluted and we do not see the big upside for Amazon in this deal. If anything it just makes the business more muddy and we still prefer that Amazon spins out its cloud business in a separately publicly listed company. Amazon and Just Eat share price | Source: Bloomberg Source: Junk rally on recession fears Amazon partnering with Grubhub | Saxo Group (
Declines At The Close Of The New York Stock Exchange, The Drop Leaders Were Nike Inc Shares

S&P 500: What's The Forecast For One Of The Most Popular Indices?

Peter Garnry Peter Garnry 06.07.2022 11:28
Summary:  The past six months have seen the biggest shift in market sentiment in a lifetime catapulting financial markets and the economy into a state few investor, if any (maybe except for Warren Buffet and Charlie Munger), have ever experienced. The V-shaped recovery is dead this time  The past six months have seen the biggest shift in market sentiment in a lifetime catapulting financial markets and the economy into a state few investors, if any (maybe except for Warren Buffet and Charlie Munger), have ever experienced. That in itself calls for humility and caution as we all sit on a runaway train that will probably derail into a difficult situation.  Unfortunately, the memory of today’s investors has been shaped by the relentless bull market of the past 10 years, and especially the last five. This has resulted in few investors being really prepared for what might happen as we deal with the consequences of the physical limit that the world has arguably hit. Central banks and businesses were used to a flexible and ever-expanding supply function. However, the supply function of the world economy has for good reasons become inelastic, which means that any demand push goes straight into inflation. Despite a galloping energy and food crisis, runaway inflation and a historic move higher in interest rates globally, the MSCI World Index was still valued above its historical average by the end of May. Given the current outlook and interest rates level, the equity valuation on MSCI World should be below average. Earnings for global companies are already down 10 percent from their peak in Q2 2021 and the outlook is not looking rosy. However, this is not holding analysts back from giving a 12-month earnings per share (EPS) estimate on the S&P 500 that is 18 percent above the earnings levels. A relentless bull market over 12 years, only punctuated once in a while by short-term V-shaped recoveries, has reinforced a buy-the-dip mentality and more risk taking. Investors are simply slow at updating their views, and we observe no material change in behaviour among retail investors, which is also why this equity market has more room to fall.  The S&P 500 Total Return Index is down 23 percent as of 16 June, which means that US equities are officially in a bear market. The big question is: Where and when is the bottom in the current drawdown? Our best guess is that the dynamics that best describe the current drawdown are the ones during the dotcom bubble and the 1973–74 energy crisis drawdowns because of the current commodity crisis and bursting of technology stocks. Based on the information picture we have today, our best guess is that the S&P 500 will correct around 35 percent from its peak, and it could take somewhere between 12 and 18 months to hit the trough, which means sometime later this year or in the first half of 2023.  As Sequoia Capital put in their 52-page presentation on 16 May 2022 to the founders and the companies they have invested in: “This is a crucible moment. . . .[I]t will be a longer recovery. . . .[C]apital was free, now it’s expensive. . . .[G]rowth at all costs is no longer being rewarded.” The most important takeaway from Sequoia Capital’s views is that companies will no longer be rewarded for revenue growth but improvements in return on invested capital and free cash flow. The V-shape recovery will not happen this time and the bear market will likely not exhaust itself until the new generation of investors that went all-in on speculative growth stocks, Ark Invest funds, Tesla and cryptocurrencies have fully capitulated. The rebirth of energy could cause an ESG crisis  In our Q1 outlook, we wrote that the energy sector represented the best expected return in the global equity market. This prediction has turned out to be true. The energy sector is the only one that’s gone up this year, driven by surging oil and gas prices due to lack of supply, which in turn is a result of a result of years of underinvestment. There’s also the more recent removal of a significant amount of the world’s supply stemming from the sanctions against Russia. The S&P 500 energy sector is up 42 percent year-to-date as of 16 June, while the S&P 500 is down 23 percent over the same period. The energy sector went from being one of the largest during the peak of oil prices in 2008 with a weight of 13.5 percent to being the smallest sector in October 2020 at 2.4 percent weight in the MSCI World Index. Since the mRNA vaccine rollouts, demand has come roaring back, pushing oil prices to the highest ever in EUR and revealing the inelasticity of crude oil supply and refinery capacity due to the low investment levels. The energy sector is seeing its profits and market value soar, pushing the sector weight to 5.2 percent in May 2022.  Since the financial crisis, technology stocks have enjoyed ever-lower interest rates, inflows from ESG funds overweight technology stocks and expanding margins, while energy stocks suffered from low returns on invested capital. Long technology stocks and short oil and gas were the perfect trade over a 14-year period, reinforcing the mindset of investors. Note the inverse performance of the energy sector and the Ark Innovation ETF. Now things are reversing as the world realises that it still runs on diesel and gasoline, and that our growing wealth is inconveniently linked to rising carbon emissions. For every percentage point that the energy sector is getting relative to the other sectors, ESG will be under more pressure on performance, and the resurgence of fossil fuels could cause a crisis for ESG funds suffering from outflows over poor performance and lack of exposure to natural resources amid the new age of inflation.   Tangible assets are winning Looking at the year-to-date performance as of 16 June 2022 across our theme baskets, it is clear what stands out. Commodities, the principal driver of the current supply side inflation, and defence stocks, being at the receiving end of Europe’s increase in military spending due to the war in Ukraine, are the only theme baskets that are up. The two best theme baskets among all the losing baskets are logistics and renewable energy. We expect these themes to continue doing well until equities hit bottom in the current drawdown. The worst-performing themes this year are crypto and blockchain, e-commerce, bubble stocks, nextgen medicine and payments. The red thread is that tangible assets are generally outperforming intangible assets as a function of the higher cost of capital-compressing equity valuations of intangibles from insanely high levels, as supply constraints in the physical world push up the prices of physical capital goods and components. The only exception to tangible assets winning is real estate. This is the part of the physical world that was sucked into the there-is-no-alternative (TINA) trade. This led to excessive valuation levels on residential homes and capitalization rates (across all segments) as low as 5.4 percent in the US in the second half of 2021, according to CBRE, down from 6.4 percent just before the pandemic. Low interest rates combined with tight supply in many urban areas in the US and Europe have pushed real estate into a position where it is quite vulnerable to rising interest rates in the short term. If we look at the 1970s home prices in the US, tracked inflation translated into real rate returns of zero—preserving purchasing power—which was a much better performance than equities that failed to keep up with inflation during that period. In a normal inflation cycle, we would be positive on real estate for preserving purchasing power. However, when you start from very low interest rates and historically high real estate valuations, and couple those with a significant change in interest rates, it becomes difficult to be positive on real estate, despite it being a tangible asset. Explore equities at Saxo Source: Tangible assets and profitable growth are the winners – Outlook Q3 | Saxo Group (
Central Banks' Rates Outlook: Fed Treads Cautiously, ECB Prepares for Hike

Uniper's Request And Reduced Gazprom's Gas Supplies. Airlines This Summer, SAS In Trouble | Saxo Bank

Peter Garnry Peter Garnry 05.07.2022 16:20
Summary:  In today's equity update we focus on Europe's utility sector which is running into profitability issues over Europe's gas crisis with the German utility Uniper asking for a bailout of EUR 9bn due to higher costs for gas as Gazprom has cut its gas supplies to Europe. In the travel sector, European airliners are experiencing a horrible summer with labour shortages and SAS has recently failed to strike a deal with around 1,000 pilots pushing the airliner into Chapter 11 to negotiate a restructuring in order to get better unit costs. Bailouts are back in Europe. Uniper and potential nationalisations of the utility sector Europe’s gas situation was already deteriorating rapidly before Russia’s invasion of Ukraine but after the war it has gone from bad to worse. The 1-month forward natural gas future has galloped to 170 EUR/MWh zooming in on the highs from when the war broke out. These punitive natural gas prices are having a demand destruction in Europe already with emergency plans being enacted in many countries in our to ration gas supplies for the industry if the gas supply from Russia is cut even further. Many industrial stocks in Europe are down recently as the outlook is gloomy. Gas storage in Europe is still trending well within the past 10 years seasonality pattern suggesting that despite lower supply of gas storage is still rebuilding at the same pace suggesting demand is lower at these high prices. Another recent casualty of Europe’s gas crisis is the German utility company Uniper, which is 75% owned by Finnish Fortum, which is no longer receiving the gas volume from Gazprom that it has contracted (only 40% of its previous gas volume) and as a result the utility is forced to acquire the gap in the spot market at punitively high prices. Uniper has recent issued a profit warning and cancelled its outlook while seeking a government bailout of as much as €9bn to cover the extra costs. Both E.ON and RWE have less exposure to Russian gas than Uniper but other utilities in Europe could face same issues as Uniper and thus more government bailouts could be on the table in Europe’s utility sector. To preserve gas for its industry, Germany has declared gas emergency level 2 (out of 3) and will allow extending coal fired electricity generation to lower gas intake in its electricity generation. European utilities vs Uniper | Source: Bloomberg Europe Gas Storage seasonality plot | Source: Bloomberg 1-month forward natural gas futures | Source: Bloomberg The pandemic is catching up with the travel sector SAS failed yesterday to strike a deal with around 1,000 pilots to cut costs and as a consequence the airliner has filed for Chapter 11 bankruptcy in the US which allow SAS to continue to operate while it discusses with its creditors a plan to restructure the business. The European airlines industry was already underperforming before the pandemic, but from an operations point of view SAS had actually got its house in order. In its fiscal year before the pandemic that ended in October 2019 the airliner generated SEK 3.1bn in operating income down from SEK 4bn the year before and had only SEK 2bn in net debt while modernizing its fleet. The pandemic hit the travel sector hard and SAS went from SEK 46bn in revenue in fiscal year before the pandemic to SEK 20.5bn in the fiscal year ending October 2020 and down to only SEK 14bn in the fiscal year ending October 2021. SAS is expected to generate SEK 32.1bn in revenue in the fiscal year ending October 2022. While this is an impressive rebound relative to other airliners such as Norwegian it is still a shortfall of SEK 14bn in revenue and as a result the airliners economics of scale have been lowered requiring lower operating costs on a unit basis. In addition the increased net debt is reducing overall cash flow generation allowing less cash for investments to upgrade its fleet to make the company more cost competitive. SAS has only one way out of the dark and that is to drastically cut costs, convert a large part of its debt to equity wiping out existing shareholders, and then raise additional equity with the help of the Scandinavian governments to reduce the net debt situation and invest in newer planes to reduce unit costs. Overall, the SAS story is the story of the European airliner industry that is structurally unhealthy and does not deliver return on invested capital above the cost of capital. With many airports having reached a physical limit, Schiphol in Amsterdam will cut its capacity next year to reduce noise pollution and NOx emissions, and interest rates going higher we expect ticket prices to continue to go up in Europe and many the airport capacity constraint is exactly what the industry needs to become more profitable going forward. SAS, MSCI Europe Airliners Index, STOXX 600 | Source: Bloomberg Source: Governments bailouts are coming to Europe | Saxo Group (
USD/JPY: Japanese Authorities Signal Intervention Amid Rapid Currency Appreciation

What Can We Expect From Q2 Earnings Season? What Do We Learn From (MU) Micron Technology's Earnings?

Peter Garnry Peter Garnry 01.07.2022 13:09
Summary:  Global earnings are down 10% from the peak and we expect more weakness during the Q2 earnings season as companies are still under margin pressure from higher energy prices, rising wages, supply chain disruptions, and high logistics costs. Our key focus during the earnings season is the energy sector which still enjoying big earnings growth due to rapidly rising energy prices. In today's equity not we are also zooming in Micron Technology's disappointing outlook and what it means for the technology sector. Earnings expectations are not reflecting reality The Q2 earnings season starts in two weeks and will likely be dramatic following the worst first half of a year in US equities since 1970. Earnings in the MSCI World Index are down 10.8% since the peak in Q2 2021 and we expect earnings to continue lower in Q2 2022 as the main theme remains margin pressure driven by higher energy prices, elevated logistics costs, wage gains, disrupted supply chains driving up inventory levels, and an economic slowdown due to lower consumer confidence. EPS expectations are still too high with MSCI World EPS estimate 12-month forward being $176.31 which is 14% higher than the current earnings. With margin pressure coming no matter whether the world slips into a recession or inflationary pressures persist due to commodity prices and wages it seems unlikely that these estimates can be met by companies. Equity valuations have come down but are still above their long-term average which is still out of touch with where financial conditions are and thus underscoring that expectations remain too elevated. This increases the downside risks going into the Q2 earnings season. We expect sectors such as communication services, information technology, consumer discretionary, industrials, utilities, and real estate to be the hardest hit sectors while we expect strong results from the materials, energy, consumer staples, and health care sector. Financials are likely mixed due to a mix of factors such as economic slowdown and widening credit spreads, while on the positive side interest rates are coming up and thus also net interest margin. The energy sector is our key focus during the earnings as energy prices and Chinese equities have been the best two pockets in financial markets in Q2. Earnings in the global energy sector have come back to the levels before the energy sector crisis of 2015 and despite special taxes being applied on the sector in various countries, we expect profitability to rise in Q2 and attract more inflows as the global energy sector remains very cheap relative to cash flows and dividends. Earnings in MSCI World Earnings in the MSCI World Energy Index Equity valuation Micron sends a warning signal for investors Micron, the memory chip manufacturer, put out a disappointing outlook last night with Q4 revenue guidance (ending 31 August) of $6.8-7.6bn vs est. €9.1bn expected driven by material weakness in the global smartphone and PC market. Micron is expecting 130mn less smartphone units this year than previously estimated and the company also expects the PC market to decline by 10% this year. Shares were down 2% in extended trading reflecting that the market had already anticipated the majority of the weakness in the guidance underscoring that it is sell-side analysts that are way behind relative to reality. Micron’s outlook is also reflecting that the technology sector has now moved on to cut capital expenditures. The sector started cutting down on marketing expenses and then went on to lay off people, with layoffs accelerating in the past three months, before moving on to R&D and now also capital expenditures. The weak outlook is also well aligned with the low consumer confidence figures we are observing which are feeding through to consumer demand. Micron Technology weekly share price | Source: Saxo Group Source: Q2 earnings preview rosy expectations and energy focus | Saxo Group (
Only Ugly US Data Could Reverse Sentiment | Gilt Yields In UK Were Steady To Lower

An unusual drawdown is the perfect ending to an unusual bull market

Peter Garnry Peter Garnry 29.06.2022 14:48
Summary:  The current drawdown is soon six months old in the S&P 500 and one of the deeper ones over the past 100 years, but it also one of the more strange drawdowns as the selloff has so far been orderly without panic days. The VIX Index and especially the VIX forward curve have deviated a lot from past observations relative to selloff in 2022. Intraday momentum strategies and a change in investor preference on option protection are two hypotheses behind what we observe. Our argument is that we have not seen the trough yet in S&P 500 and that we need to see the VIX forward curve to invert before we can call it a bottom. The VIX is stubbornly low relative to selloff The VIX closed at 28.36 yesterday despite a rather big selloff in the S&P 500. While the average level in the VIX Index has been quite elevated during the entire pandemic it has not reached alarming levels during the drawdown in 2022. We have highlighted it before in our daily Saxo Market Call podcasts and recent equity notes, that the selloff this year has been unusually calm and orderly relative to what we have observed historically. The VIX forward curve typically inverts (the VIX Index spiking relative to the 2nd VIX futures contract) during market stress or panic, but this time we have not seen that behaviour. Compared to some of the daily moves and the current drawdown depth we have not seen the inversion in VIX which speaks loudly of the unusualness of this drawdown. JPMorgan strategists have recently written about this odd behaviour in the VIX and they argue that the “new structure” has formed over the past two years due to potentially a crowding in intraday momentum trading strategies and a potential shift in option gamma dynamics, with the latter being a function of investors preferring spreads for protection instead of outright puts. It is ironic that the golden period of 2012-2021, with its brief declines followed by subsequently new and stronger highs due to extraordinary declines in interest rates and higher risk tolerance by investors, is now coming to an end in an unusual way. The market dynamics are very difficult and when combined with the most complex macro environment since the 1970s, many traders and investors have difficulties navigating the market. Our core thesis is still that inflation will remain higher than consensus and for longer, and that the global economy will eventually slip into a recession. Under higher inflation and interest rates, equities will not come back to its lofty expectations and equity valuations, and thus valuation multiples will continue to act as headwinds on equity returns. We still prefer themes such as commodities, renewable energy, logistics, semiconductors, defence and cyber security. VIX Index | Source: Bloomberg VIX forward curve in % VIX forward curve vs S&P 500 daily returns VIX forward curve vs S&P 500 drawdowns Source: An unusual drawdown is the perfect ending to an unusual bull market | Saxo Group (
Happy CPI-Day, with love, OPEC: S&P500 Slips, Oracle Plummets, and Oil Hits a 10-Month High

Nike’s cautious outlook shows the consumer is hit by inflation

Peter Garnry Peter Garnry 29.06.2022 09:22
Summary:  Nike shares are down 6% on a weaker than estimated outlook for revenue growth suggesting just flat to slightly higher revenue in constant currency terms over the next year. The outlook also comes with a cautious outlook on China which has been a negative factor in the previous quarter. Costs are still impacted from logistics and commodities used in footwear and apparel production, and disrupted supply chains are pushing inventories higher because more goods are in-transit. Overall, Nike's result shows that the consumer is hurt by inflation and in China Covid lockdowns are making it difficult for consumer companies. Nike hit by China and cost pressures Despite shares have come down 37% from the peak back in November lowering expectations (see chart on forward valuation), Nike’s earnings outlook disappointed investors sending its shares down 6% in the main session. FY22 Q4 (ending 31 May) revenue was down 1% from a year ago led by weakness in its Greater China segment where revenue was down 20% and North America down 5% in constant currency terms. The bright spots were EMEA and NIKE Direct (its direct e-commerce channel) showing gains of 20% and 15% in constant currency terms respectively. Nike’s inventory was $8.4bn at the end of the quarter up 23% y/y driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions; the company says demand remains strong relative to inventory levels and thus the elevated inventory will likely not lead to major discounts going forward. On the earnings call Nike said that it will likely see gross margin down by up to 50 basis points over the coming fiscal year ending 31 May 2023 and currency neutral revenue growth to be flat to slightly up. Given the inflationary pressures this translates into a slowdown in volume over the coming year. Nike also sounded cautious on China indicating that more lockdowns and disruptions cannot be ruled out. Overall, the outlook from Nike is further evidence of the consumer feeling the heat from inflation and today’s worse than expected consumer confidence and expectations indices together with another ugly regional Fed manufacturing activity index (Richmond Fed) have pulled US equities sharply lower. Source: Saxo Group Source: Nikes cautious outlook shows the consumer is hit by inflation | Saxo Group (
Expectations of decent sales during holiday season have let Best Buy gain

Zalando in shock guidance cut, equities are lifted from yield plunge

Peter Garnry Peter Garnry 24.06.2022 12:08
Summary:  Zalando shares are down 13% today hitting levels not seen since 2014 as revenue growth is taking a massive hit as the European consumer is hurting from elevated energy and food prices. High logistics costs are also still hurting margins and because Zalando is not controlling the entire value chain they are squeezed as a retailer. Our e-commerce theme basket is down 65% over the past year only marginally surpassed by our crypto & blockchain basket. We also take a look at the historic move in the German 2-year yield yesterday which is helping equities to rebound further. The never ending pain in e-commerce We recently wrote about the guidance cut from Asos driven by the cost of living crisis causing higher recall rates than normal. Yesterday after the market close, Zalando issued a guidance cut indicating that Q2 revenue growth would be significantly below analyst estimates and that revenue growth for the fiscal year is now expected to be 0-3% down from previously 12-19% suggesting an unanticipated decline in consumer activity driven by weakening macroeconomic conditions also reflected in consumer confidence. Zalando is also revising down its fiscal year EBIT guidance range to €180-260mn significantly below estimates of €361mn. Zalando shares are down 13% in today’s trading session hitting the lowest levels since late 2014 just after its IPO. In its first quarter, Zalando swung back into negative free cash flow on a 12-month trailing basis. E-commerce is hit hard from elevated logistics costs and higher wage pressures from a tight labour market, but being a retailer is also extremely difficult because you are controlling the entire value chain and thus the room for maneuvering is small. If we look across of theme baskets, e-commerce is now close to being the worst theme basket over the past year only marginally surpassed by the crypto & blockchain theme. With expectations being rock-bottom the question is increasingly when we hit the floor in e-commerce stocks. Zalando weekly share price | Source: Saxo Group Saxo's theme basket performance overview When bad is good Yesterday’s session was historic with a massive decline in the German 2-year yield falling 25 basis points, the second largest drop since 2005, and the US 2-year yield was down as much as 18 basis points during the session before rebounding again. Interest rates had already rolled over somewhat responding to the decline in commodities signaling a worsening economic outlook. But yesterday’s unusual move in interest rates was likely caused by safe-haven flows as preliminary PMI figures in the US and Europe suggest a much faster slowdown than anticipated. The US PMI composite index hit 51.2 vs est. 53.0 down from 53.6 in May and Europe’s composite PMI figure in June was 51.9 vs est. 54.0 and down from 54.8. The surprising factor was the services sector which is arguably being hit by weak consumer confidence also reflected in today’s surprise guidance cut from Zalando. Lower interest rates and falling commodity prices are doing two good things to equities. Lower interest rates mean lower cost of capital which is positive for the present value of future free cash flows, and falling commodities are easing the margin pressure which lifts free cash flows or else being equal. So right now, bad figures are good for equities. If we look at forward estimates for earnings consensus is way too optimistic and equities have for the most part only priced in higher than expected inflation and not a recession, which is why we expect a lower leg down in equities when the recession becomes clear to all market participants. 1-day difference in German 2-year yield Source: Zalando cuts guidance dramatically equities are lifted from yield plunge | Saxo Group (
South Korea Hopes To Achieve Carbon Neutrality By 2050

Warning signals are flashing out of South Korea | Saxo Bank

Peter Garnry Peter Garnry 22.06.2022 15:39
Summary:  South Korea is the beacon of the global economy due to its many procyclical industries ranging from semiconductors to shipbuilding and thus when South Korean equities are doing bad investors should take note. The KOSPI 200 Index is down a staggering 12.5% during just the past three weeks suggesting the global economy is cooling fast. There is also a spillover effect from the Terra collapse. Once a while South Korea means a lot Every time we discuss a global recession South Korea comes back into the conversation because its economy is one of the most procyclical economies driven by exports to the world; as a reason South Korea is used as an leading indicator on the global economy. While China has some of the same characteristics, the South Korean financial system is operating more freely and thus has extra benefits in terms of signal value. The KOSPI 200 Index, the leading South Korea equity index, is down 12.5% in the past three weeks and down 30% from the peak in late June 2021, which is another interesting observation in that South Korean equities signaled weakness before the Fed pivot in late 2021 and talks about inflation. The recent weakness in South Korea has also coincided with the collapse of the luna cryptocurrency and its associated terraUSD stablecoin, also called UST, which were run by Terraform Labs from South Korea. The crypto collapse has shaken the country and Terraform Labs employees and former employees are not allowed to leave the country while the country is considering much stricter regulation of the crypto industry. The credit spread in non-financials has also widened to the highest level since 2011 surpassing even the 2020 pandemic high. The warning signals coming out of South Korea are clear and coupled with the first negative 6-month average in the US leading indicators m/m since 2020 (read yesterday’s equity note) are suggesting that global economy is weakening fast. KOSPI 200 Index | source: Bloomberg South Korea credit spread | Source: Bloomberg Source: Warning signals are flashing out of South Korea | Saxo Group (
Declines At The Close Of The New York Stock Exchange, The Drop Leaders Were Nike Inc Shares

Lennar and the US housing market, Tesla’s geopolitical risk is rising

Peter Garnry Peter Garnry 21.06.2022 14:56
Summary:  The US housing market is slowing down with real estate brokers laying off people and mortgage applications hitting some of the lowest levels since 1990. For homebuilders the situation is even worse as the much higher financing costs are not being offset by lower prices on construction materials. We take a look at the US housing market and Lennar's Q2 earnings published in the US pre-market session. In today's equity update, we also take a look at Tesla and the growing geopolitical risk over Elon Musk's decision to deliver Starlink to Ukraine. Can the US housing market avoid a material slowdown? This year’s change in the US 30-year mortgage rate from around 3.3% to recently 6% has a caused a dramatic fall in mortgage applications with the 12-week average now in the 5% percentile since 1990 suggesting housing activity is slowing fast. Several real estate brokers have recently laid off employees in an anticipation of declining activity. Lennar, the second largest US homebuilder, has just reported FY22 Q2 (ending 31 May) earnings with revenue at $8.4bn vs est. $8.1bn as the homebuilder is still enjoying the tailwind from previous orders. More impressively the gross margin improved 340 basis points to 29.5% suggesting good cost management amid cost pressures. New orders increased only 4% reflecting the dynamics explained above while the backlog rose 16% y/y and the backlog dollar value increased 33% to $14.7bn reflecting the inflation in construction materials and thus prices of new homes. Lennar’s new orders guidance for the current quarter is 16-18,000 vs est. 17,750, so demand is coming in weaker than estimated. For homebuilders the situation is situation is even worse with Lennar’s share price down 44% reflecting revenue and profitability slowdown. Higher financing rates for homes while building material costs remain high coupled with a tight labour market are an awful cocktail making it less attractive to build a new home relative to buying an existing home. The 6-month average of US leading indicators has gone into negative in the latest print with the downward move accelerating suggesting the US economy will materially slow down over the coming six months. Whether it turns into a recession, or to what degree, is still uncertain but the probability is definitely rising. Ironically it is the rising recession risk that is now cooling commodity prices and fading the momentum in interest rates reducing the pressure on equities. Historically drawdowns are not a continuous decline to the trough, but instead a stop-and-go sequence, and it is likely that unless adverse developments enter the equation that we could be in for a slightly more positive equity market in the weeks to come. The next leg down in equities to new lows could come from the fact that there is a natural limit to how high the nominal interest rate can go before the Fed will have to halt the tightening and thus allowing inflation to run hotter for longer which will likely cause headwinds for equities longer term. Tesla is now facing two major risks The NHTSA recently elevated its probe into Tesla’s Autopilot increasing the risk of a potential suspension. With rising commodity prices Tesla has been raising prices lately to protect its gross margin, but the majority of the cash flow generation is coming from its software sales of Autopilot. In fact, Tesla has said it themselves that they expect the majority of future free cash flow coming from the Autopilot software. A suspension is a key risk as we have highlighted before. Another risk emerging for Tesla is well described in today’s FT article Elon Musk’s Starlink aid to Ukraine triggers scrutiny in China over US military links in which Elon Musk’s decision to send Starlink receivers to Ukraine is seen as a threat to China’s national security. The Chinese EV market and the Shanghai Gigafactory have been very important factors behind Tesla great success in the past couple of years. The question is whether increasing geopolitical risks and the tensions between China and the US could suddenly become a major issue for Tesla. Tesla’s share price is still priced for perfection execution and we acknowledge the impressive results of the company, but when something is priced for perfection the sensitivity to changes in expectations is so much greater. Tesla weekly share price | Source: Saxo Group Source: Lennar and the US housing market Teslas geopolitical risk is rising | Saxo Group (
Expectations of decent sales during holiday season have let Best Buy gain

Asos cuts outlook confirming the bleeding in e-commerce

Peter Garnry Peter Garnry 17.06.2022 11:48
Summary:  E-commerce stocks are down 66% over the past year having shredded almost all of their gains during the first phase of the pandemic. In hindsight it looks like e-commerce was in a bubble driven by a massive shift in spending from services to goods while interest rates plunged to record lows fueling equity valuations to astronomical levels. The UK-based e-commerce company Asos confirmed today that the outlook is deteriorating for fashion e-commerce due to the worsening cost-of-living crisis. Was e-commerce a bubble? When we look across our theme baskets we observe a sea of losses this year. Crypto is naturally the biggest casualty in “the great reset”, but e-commerce is the second biggest loser down 52% year-to-date and down 66% over the past year. E-commerce was initially hit by the pandemic as everything stopped, but then the world came roaring back causing e-commerce stocks to surge like crazy. In the second phase logistics cost went vertical and supply chains could disrupted to a degree that began to eat into profits of e-commerce businesses which was visible in Q1 with Amazon making an operating loss in its e-commerce business. The next phase hitting e-commerce is the cost-of-living crisis, created by terribly high energy and food inflation, reducing demand for discretionary items. When we look at the performance 2016 in our e-commerce basket it looks as if the entire industry went into a bubble caused by pandemic. Today we got more evidence of these negative dynamics as Asos, a big fashion e-commerce business, is cutting its fiscal year revenue and pre-tax profit outlook driven by higher order returns and cost pressures across logistics and supply chains. The pre-tax profit guidance is now £20-60mn down from previously £100-130mn. Revenue growth is lowered to 4-7% excluding Russia down from 11-13%. If the world economy is slipping into a recession then the cut to its revenue outlook might not be enough. Shares are down 26% today dipping below the lows from during the pandemic low in March 2020. The stock is now down 89% from the peak in March 2018. Saxo theme basket performance overview Asos weekly share price | Source: Saxo Group Saxo's E-commerce basket | Source: Bloomberg and Saxo Group Source: Asos cuts outlook confirming the bleeding in e-commerce | Saxo Group (
Rising U.S. Treasury Bond Yields Have Helped The USD/JPY Bulls

A hidden force could soon be released by BoJ | Saxo Bank

Peter Garnry Peter Garnry 15.06.2022 22:22
Summary:  The equity market is not prepared for a 75 basis points rate hike tonight by the FOMC judging from retail investors behaviour over the past week. The buy-the-dip mentality and hopes of a V-shaped recovery are so ingrained after a decade of relentlessly higher equities interrupted a few times by a quick recovery, that the tightening of financial conditions will come as a shock. Bank of Japan will also be forced to reconsider its yield-curve-control policy and if BoJ pivots then a hidden force might be unleashed as Japanese investors might move into selling mode on its foreign assets. Bank of Japan decision could unleash selling of foreign assets Today at 1800 GMT the FOMC could surprise the majority of economists with a 75 basis points rate hike as between the lines leaked in the Wall Street Journal yesterday (perceived to be the primary source for the Fed to leak information). The market has already priced in a 75 basis points rate hike with a 90% probability so if the FOMC wants to be in line with the market and retain its credibility it must follow through. Despite the Fed Funds Rate futures are pricing in a 75 basis points rate hike the equity market in particularly is not prepared. We still observe a high degree of complacency among retail investors still exhibiting buy-the-dip mentally and that things will soon normalize. They are in for reckoning. One thing is the Fed’s need to move fast but even more importantly other central banks such as BoE, ECB, and BoJ must change cause or else creating a far bigger problem down the road. Maintaining a too loose monetary policy vs the Fed will weaken the GBP, EUR, and JPY against the USD importing even more inflation as the world’s natural ressources are priced in USD. Bank of Japan is probably the central bank with most at stake and Kuroda has fought hard to maintain its yield-curve-control (YCC) with its 25 basis points upper limit on the Japanese 10-year yield. The policy is becoming to costly now for Japan that import too much inflation due to its weaker currency (see chart) and weakening the credibility of BoJ. If BoJ breaks away from its YCC policy then a hidden force will be unleashed. Japan has a large net international investment position (NIIP) which has risen dramatically since 2017 which was introduced in September 2016 reaching 70.7% of GDP by September 2021 up from 59.5% in 2017. These foreign assets represent $3.4trn. If Bank of Japan pivots on its monetary policy we could see a large reversal of the JPY which in theory could increase the propensity of Japanese investors to sell their foreign assets. Japanese investors have recently been the main source of selling in Danish mortgage bonds suggesting some “smart” investors are anticipating the death of the YCC policy. An eventual policy pivot by Bank of Japan could unleash large selling pressure in USD and EUR assets, so Friday’s rate decision in Bank of Japan is crucial to monitor for investors. USDJPY | Source: Saxo Group Is the market even prepared for what is coming? In many ways it feels surreal to observe market behaviour and pricing across certain pockets given the policy trajectory from the Fed and the already now visible cracks the current tightening of financial conditions have already caused. Asking prices on houses are coming down in several countries and companies are freezing hiring. Meanwhile sell-side analysts have a 12-month forward EPS estimate on S&P 500 of $236.84 implying an EPS growth of 18.4% over the next 12 months. It just makes no sense at all. The dividend futures market which prices expected dividends is pricing future profitability and here we observe a 6% decline in S&P 500 dividends in 2023 from the peak last year responding to margin pressure that we observed in the Q1 earnings releases. But is 6% decline in dividends even enough? It reflects of course that energy companies will likely increase dividends to attract capital and investors, but the pricing seems a bit off relative to much tighter financial conditions expected over the coming 12 months. S&P 500 earnings estimate S&P 500 dividend futures Dec23 | Source: Bloomberg Source: A hidden force could soon be released dividend futures live in la-la land | Saxo Group (
Stocks to keep an eye on in the second half of 2023

Terminal rate spook, crypto dissolve, and Netflix credit warning | Saxo Bank

Peter Garnry Peter Garnry 14.06.2022 23:39
Summary:  The past week has been dramatic with the Fed's terminal rate in June 2023 being repriced a full percentage point to 4% suggesting that the FOMC will likely go 75 basis points tomorrow and again next month in order not to get behind the curve. The equity market is responding with a fresh selloff wiping out the gains from the recent bear market rally. Cryptocurrencies are in a state of shock over the fallout in "stablecoins" and now recently a big crypto lender causing spill over effects into equities. Finally, we are talking about high yield and highlighting Netflix as a sign of the tighter financial conditions even for big companies. New market low but still no panic Unlike many of the previous setbacks in global equities since early 2015 this drawdown, that has now officially taken S&P 500 into bear market, has been orderly in the sense that the VIX forward curve has been well-behaved. But yesterday’s price action took the VIX Index 34 which inverted the VIX forward curve the most since the late April selloff. However, the inversion has still not reached levels where suddenly the market snaps and it moves into intense selling driven by illiquidity and volatility hedging. But yesterday’s price action was definitely a warning to investors. Today S&P 500 futures are bouncing back together with crypto with the latter likely being the main source of injecting fresh risk-off sentiment into equities as a large crypto lender suspended withdrawal (see yesterday’s equity note for a discussion) and later during yesterday’s session Binance suddenly temporarily halted withdrawal spooking the market. Like a heat-seeking missile the Bitcoin market was moving towards that $21,000 level that has been highlighted as approximately where MicroStrategy would begin getting margin calls on its massive Bitcoin position which is used as collateral for several bonds. As the market got no news about margin calls despite Bitcoin breaking below the $21,000 level it turned around and positive risk sentiment spilled into equities. The culprit of the latest big moves in risky assets such as equities, real estate, crypto and high yield bonds has undoubtedly been the pricing of the Fed’s terminal rate measured by the expected Fed Funds Rate by June 2023. The market pricing was rather stable during April and May after the initial selloff in Fed Funds Rate futures Jun23 (see chart below) indicating around 3% terminal rate, but the market has moved another 1%-point in just a little over two weeks to 4%. This move and the underlying stickiness in core inflation have caused chills down the spines of Fed members because it is likely pressuring them to go 75 bps. tomorrow and again next month adding considerable pressure to short-term funding rates and potentially also on longer term interest rates adding more pressure to equity valuations. Talking about interest rates it is worth noting some deteriorating signs such as the Netflix April 2028 4.875% bond is now trading as low as 93.345 which is only 3.4% from the lows during the height of the pandemic stress in the market. Not a good sign in the credit market for a big name such as Netflix that is a $30bn recurring revenue business. But Netflix is increasingly using debt to finance its content creation, which by the way has been declining in quality lately, as it is cheaper than equity and it has enabled Netflix to accelerate production that would otherwise have been impossible from its operating cash flows. While we are not overly concerned over the rising rate on Netflix’s bonds as it represents a general move higher in interest rates it is worth keeping an eye on credit market. Global high yield spreads have widened considerably this year to around 424 bps. which is a bit off the around 500 bps. that would set off the alarm bells. Fed Funds Rate futures Jun23 | Source: Bloomberg VIX Index | Source: Bloomberg Netflix April 2028 4.875% bond | Source: Bloomberg Bitcoin | Source: Bloomberg S&P 500 futures | Source: Saxo Group Source: Terminal rate spook crypto dissolve and Netflix credit warning | Saxo Group (
Oil Defies Broader Risk-off Sentiment: Commodities Update

Credit Suisse hits 15-year low and the phoenix of energy | Saxo Bank

Peter Garnry Peter Garnry 09.06.2022 14:56
Summary:  Credit Suisse is the story of a long string of bad decisions but also a structurally weak European banking sector that 14 years after the Great Financial Crisis is still struggling with return on equity being above the cost of equity over an entire economic cycle. While financials in many ways are taking the elevator down, the energy sector is being catapulted back into a proper size of the overall equity market with Exxon Mobil as an example being up 71% this year and now the 11th biggest US publicly listed company on market value. Does Credit Suisse profit warning paves the way for a takeover? It is hard to remember when we were positive on European banks except for rare tactical cases. European banks remain structurally weak and yesterday’s profit warning from Credit Suisse indicating a potential loss in Q2 proves the point. Credit Suisse will likely see its investment bank division delivering a third straight quarterly loss driven by market share losses across all business lines. The Swiss bank has been hit over the years from the spectacular blow-up of the hedge fund Archegos and the collapse of its supply chain finance partner Greensill Capital. The bank came out with a long list of excuses for why the bank was doing badly from geopolitical tensions to abrupt changes to monetary policy. The cold hard facts are that Credit Suisse has relentlessly destroyed shareholder value since the peak in 2007 and has not since late 1992 delivered a positive total return destroying capital a rapid pace when adjusted for inflation. Credit Suisse had some years after the Great Financial Crisis when it was delivering better return on equity (ROE) than the overall European banking sector but since 2011 its performance has continuously deteriorated relative to the industry. The current 12-month forward ROE is now only 3.9% which is well below the cost of equity. Credit Suisse is a symptom on European banks stuck in a prohibitive regulatory environment, low growth economy, and overhang of bad debt. It is difficult to be structurally positive on European banks. Source: Bloomberg Exxon Mobil is close to be back in the top 10 of S&P 500 Exxon Mobil, the biggest oil and gas company in the US, is up 71% this year taking the market value to $440bn as of yesterday’s close. This brings the stock to the 11th place in S&P 500 on market capitalization regaining some of the lost terrain for energy stocks in the S&P 500. Despite the recent rally Exxon Mobil is valued at 12-month free cash flow yield of 9% compared to around 6% for the MSCI World Index. As we recently wrote in a note, energy stocks are the cheapest in 27 years, and they have rallied from just 2.4% of the total market value in the S&P 500 to 5.2% as of May with the long-term average at 7.5%. Under the assumption of an ongoing energy crisis and hangover from low investments over the previous 8 years, energy prices will continue to remain high and deliver high return on invested capital for energy companies. We remain structurally positive on oil and gas stocks. Source: Saxo Group Source: Endless excuses from European banks and the phoenix of energy | Saxo Group (
FX Daily: Testing the easing pushback

REITs and inflation-linked bonds for the age of inflation

Peter Garnry Peter Garnry 07.06.2022 18:59
Summary:  In today's equity update we take a look at REITs and inflation-linked bonds providing the five largest UCITS ETFs in each category as investors should prepare for a longer period of inflation and thus must think about how to shield the portfolio against inflation. REITs have historically performed well during high inflation, but the question is whether high real estate valuations will make it more difficult this time. Inflation-linked bonds did not exist during any meaningful period of inflation so this period will be the first real test. Is the “age of residential inflation” coming? A new economics paper Comparing Past and Present Inflation by Marijn A. Bolhuis et. al. deals with the changes to the US CPI basket over time in order to make the current inflation more comparable to past inflation. The findings are that the current inflation regime is much closer to previous peaks. The main conclusion is that to return to 2% core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker. Also, today’s CPI basket consists of more stickier components compared to the 1970s basket which consisted of many more transitory goods components and thus inflation may be more difficult to get down; especially rents are a bigger part of the CPI basket and Larry Summers calls the new inflation period the “age of residential inflation”. In any case, inflation is here and as we have argued many times over the past 18 months the limits we have hit in the physical world will continue to underpin inflationary pressures. The chart below shows the official CPI Index and an OER (ownership equivalent rent) corrected CPI Index. Source: Bolhuis et. al. REITs and inflation-linked bonds are worth considering during inflation Given that inflation will stay with financial markets for longer investors must address it in their portfolios. We argued for over a year that commodities are a must asset as a lot of the first wave inflation is coming from the supply side of the economy and in particularly commodities. We are also of the view that the world will be in a commodity super cycle during this decade driven by the green transformation, underinvestment in commodities over the past decade, urbanization, and the fallout from the war in Ukraine. Other themes that have done well during the past year’s inflationary regime are renewable energy, defence, logistics, India, and cyber security. All themes are still themes we like with India probably being the biggest short-term risk due to being an emerging market country with high equity valuations. Outside equity themes many market participants talk about REITs (real estate investment trust) and inflation-linked bonds. REITs existed during the 1970s inflation period and were a catastrophe, but the real estate market and REITs have evolved a lot since the 1970s so it might be a stretch to expect something similar. Real estate is attractive during inflation because rents are linked to CPI indices and some rent agreements come with shorter duration which means they can catch up to inflation faster. Real estate valuations have also historically held up well during inflation and then there are no storage costs (but there are maintenance costs) which is used as argument for choosing real estate over gold during inflation; but even choose between the two, why not hold both assets? Bernstein data also show that US REITs have done well, even better than bonds and equities, in inflationary environments with inflation rates above 5% y/y. The key risks to REITs from rising interest rates, which we do expect given higher inflation, are summed up well by S&P Global: Undoubtedly, rising interest rates pose challenges for REITs. All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs. In addition, higher interest rates make the relatively high dividend yields generated by REITs less attractive when compared with lower-risk, fixed income securities, which reduces their appeal to income-seeking investors. Inflation-linked bonds are another instrument available to investors that want some inflation protection components in their portfolio. The US issued their first TIPS (Treasury Inflation-Protected Securities) in 1997 which are designed so that their interest payments rise with higher inflation as the principal of the bonds are adjusted for the CPI Index. Morningstar has a good description of inflation-linked bonds and one thing investors must be aware of is that inflation-linked bonds are often issued with longer maturity than the majority of nominal bonds which means that the interest rate risk is higher in the short-term, but longer term inflation-linked bonds will offer a better return after inflation than nominal bonds if inflation is trending higher. The table below shows the five largest UCITS ETFs within each category. Source: REITs and inflation-linked bonds for the age of inflation | Saxo Group (
At The Close On The New York Stock Exchange Indices Closed Mixed

Tesla Stock Price: Elon Musk Firing Employees!? Can (TSLA) Price Change If Costs Cut Is Introduced? | Saxo Bank

Peter Garnry Peter Garnry 03.06.2022 12:13
Summary:  Technology companies seem to be executing the advice in the latest Sequoia Capital presentation arguing for companies to cut down on costs now and improve profitability or else face a survival mode as the economy and investing landscape have changed. Companies are no longer reward for breath neck revenue growth at all costs. Tesla is the latest company to set its eyes on cost cutting with Musk pausing hiring worldwide and stating that the EV-maker must cut 10% of workforce. Technology companies are executing the Sequoia Capital memo Wednesday night we saw a bunch of earnings releases from Elastic, MongoDB, UiPath and Pure Storage (listen to our 2 June podcast for our earnings stake on these companies) all delivering higher profitability (or narrower loss) than estimated by analysts suggesting cost cutting is widespread in the corporate sector. Effectively, it seems technology companies are reacting to the advice of Sequoia Capital to cut costs now and adapt to survive the coming crisis. Companies are no longer being rewarded for high revenue growth at all costs, but are instead rewarded for increasing return on invested capital and free cash flow generation. Besides these latest positive earnings releases from tier 2 technology companies sentiment has generally been positive and extended yesterday, but this morning Tesla is pouring cold water on the momentum taking the Nasdaq 100 futures lower. Elon Musk, the CEO of Tesla, says that EV-maker needs to cut staff by 10% as he has “super bad feeling” about the economy in an email that Reuters has seen. The email headline says “Pause all hiring worldwide” and follows up on his latest two emails saying all workers must work at designated Tesla offices instead of remote suggesting pressures are increasing for EV-maker as elevated energy and metals prices are eating into gross margins (excluding the sales of its Autopilot software). We do not have a high confidence in Musk’s ability to predict the economy, or anything for that matter, but he is seeing things globally that is warranting this move and as such the decision carries valuable information about the trajectory of the global economy echoing Jamie Dimon, CEO of JPMorgan Chase, saying yesterday that the economy is headed into a “hurricane”. Tesla shares are down 3% in pre-market trading. Source: Saxo Group Source: Saxo Group Source: Saxo Bank
MSFT Stock Price Analysis: Bearish Signals Point to Potential Decline

Drawdown lessons: Look at market dynamics and ignore the economy | Saxo Bank

Peter Garnry Peter Garnry 25.05.2022 14:36
Summary:  The US equity market is in a bear market despite strong economic activity confusing many investors. The reason for this is that the equity market is initially responding to tighter financial conditions causing the cost of capital to go up which then compresses equity valuations. The 1973-1974 drawdown also started with strong economic activity levels for almost a year while the equity market fell until the economy eventually fell into a recession succumbing to inflationary pressures. Could this drawdown cycle be similar to the 1973-1974 drawdown cycle? Is the current drawdown a replay of the 1973-1974 drawdown? This Monday we wrote an equity note on historical drawdowns in the S&P 500 and the importance of putting weight on the right historical samples for guiding investment decisions in the current drawdown. Our conclusion is that the past 12 years drawdown dynamics are the wrong ones to emphasize relative to the dot-com bubble drawdown and the two drawdowns during the early 1970s. Seen in that light, the worst might be ahead of us and the current drawdown could extend much longer than what most market participants are currently expecting. Something we have alluded to in our daily Saxo Market Call podcast this week is that the US economy is still strong, something JPMorgan Chase CEO Jamie Dimon also emphasized yesterday, and that we highlighted in yesterday’s equity note. This might be a confusing element for many investors. Why is the equity market panicking when the economy is so strong relative to past trend growth? The simple answer is that financial conditions have tightening at a record pace and inside that process increased the cost of capital causing equity valuations to compress. If we look at the 10 drawdowns since 1968 with a maximum drawdown of more than 10% then we observe the striking feature that in four of those 10 drawdowns the US economy was actually growing above trend growth in the entire period to the trough of the drawdown cycle. The period with the highest economic growth during a significant period of selloff is the 1983-1984 drawdown of a little more than 10%; here the economy did well, but equities were repriced following a strong 1982-1983 period as financial conditions came down, but around a 300 basis points move in the US 10-year yield from the summer of 1983 to the summer of 1984 changed equity valuations and took equities down. However, the economy was strong enough to absorb these higher interest rates. We have talked a lot about the 1973-1974 drawdown because of the similarity in terms of explosion in inflation from low levels and the similarity of an energy crisis (this time a broad-based commodity crisis). If look at the entire 1973-1974 drawdown to the trough then it was during a time of strong economic growth in the US. As the table below shows, the CFNAIMA3 (3-month average in the Chicago Fed National Activity Index – a Fed measure of economic activity) was positive for 12 months while the S&P 500 was in a drawdown. It was not until one year into the drawdown cycle that the economy finally decelerated and eventually went into a recession. The current drawdown has similar characteristics with the US economy being strong four months into the drawdown, but as we are arguing the tighter financial conditions and the Fed’s inflation battle will kill demand eventually and thus a replay of 1973-74 could likely play out over the next year.Source: Bloomberg and Saxo GroupSource: Bloomberg and Saxo Group
China: Slowdown in Non-Manufacturing Activity Raises GDP Downgrade Concerns

Earnings preview and a new mega deal in semiconductors | Saxo Bank

Peter Garnry Peter Garnry 23.05.2022 14:29
Summary:  The worst earnings season in two years is more or less over, but companies not following the calendar year are still reporting and this week US earnings from Nvidia and Snowflake will take center stage on Wednesday. Both companies are still expected to show strong revenue growth but underneath the growth hype things are deteriorating. For Nvidia it is the crypto mining industry and for Snowflake it is a general slowdown in datacenters. Chinese earnings and outlook have been hit hard by lockdowns and we expect the lockdowns to pour cold water on Alibaba's outlook which it releases on Thursday together with its Q1 earnings. Finally, we take an initial look at Broadcom's acquisition bid for VMware. Worst earnings season since June 2020 is coming to an end The Q1 earnings season is running out of steam with data stacking up to be the worst since the Q2 2020 earnings with EPS in the MSCI World Index down 7.5% q/q and revenue down 0.4% q/q. Given the inflationary pressures in the economy it is quite staggering that revenue growth is down indicating that economic activity in volume terms is slowing down. On a positive note, JPMorgan has just pre-released its outlook ahead of its Q2 earnings in early July saying credit outlook looks positive and FY22 net interest income will reach $56bn vs previously $53bn. Among this week’s earnings we are looking forward to Wednesday where the focus is earnings from Nvidia and Snowflake. Nvidia is expected to deliver FY23 Q1 (ending 30 April) revenue of $8.1bn up 43.1% y/y but with cryptocurrencies declining a lot from the highs we would expect capital expenditures from the crypto mining industry to decline as well just like in 2018. This had a real negative impact on Nvidia’s revenue growth (see chart) and investors must be prepared for the same abrupt change in growth rates. Snowflake is expected to deliver FY23 Q1 revenue (ending 30 April) of $414mn up 81% y/y and its first quarterly positive EBITDA result. Chinese equities have had a tough past year with lockdowns and regulation of its technology sector impacting growth rates and Q1 earnings have been quite mixed with an obvious slowdown among technology companies. Alibaba is expected on Thursday to deliver Q1 revenue figures of CNY 200.6bn up 7% y/y confirming the drastic slowdown of the Chinese economy. The e-commerce company’s future growth is going to come from international operations and its cloud computing unit so in terms of the outlook those two segments are the focus of investors. The full list of the most important earnings releases: Today: Meituan, Sino Biopharmaceutical, Zoom Video, XPeng Tuesday: Kuaishou Technology, Intuit, NetEase, AutoZone, Agilent Technologies Wednesday: Bank of Nova Scotia, Bank of Montreal, SSE, Acciona Energias Renovables, Nvidia, Snowflake, Splunk Thursday: Royal Bank of Canada, Canadian Imperial Bank of Commerce, Lenovo, Alibaba, Costco, Medtronic, Marvell Technology, Baidu, Autodesk, Workday, VMware, Dell Technologies, Dollar Tree, Zscaler, Farfetch Friday: Singapore Telecommunications Another mega deal in semiconductors is seeing the light of day The M&A pipeline is well alive in the US with Musk’s attempt to buy Twitter, Microsoft’s bid for Activision Blizzard, and now with Broadcom’s acquisition bid for VMware which would extend Broadcom into the realm of software. There is a lot of focus on mega deals these years as antitrust regulators are well aware of the increased concentration risks in many industries but predominately in the technology sector. Recently Nvidia’s bid to acquire Arm Holdings was rejected as the company would have gained a stranglehold on the semiconductor industry. This deal by Broadcom might also be seen by regulators to be too limiting for competition. VMware shares are up 21% in pre-market trading. VMware is controlled by Dell founder Michael Dell (40.2%) and private equity firm Silver Lake Group (9.99%).Source: Saxo Group Source: Saxo Bank
The Commodities Feed: First US crude draw this year

Global energy stocks are the cheapest in 27 years | Saxo Bank

Peter Garnry Peter Garnry 18.05.2022 08:11
Summary:  Global energy companies are currently valued at a staggering 10% free cash flow yield with an outlook that is suggesting higher forward prices on oil and gas in the coming years as the world tries to plug the hole after Russian sanctions. Energy companies are massively profitable with 18% return on equity, but in our grotesque capital markets of 2022 investors are mostly talking about buying the dip in technology stocks. As we recently wrote in our note the inconvenient truth about energy and GDP the world will need a lot of oil and gas over the coming decade, so the investor outlook in energy stocks remains very positive. Capital allocation has gone wrong in the age of ESG On the 24 January 2022, we released our Q1 2022 Quarterly Outlook Fueling the Energy crisis in which we stated that the global energy sector had a 10% expected annualized return driven by a 12-month forward dividend yield of 5% and a long-term dividend growth rate of 4.7% annualized in addition to a minor expected valuation expansion. We said “This could turn energy stocks into a secular winner over the coming decade and the implied expected returns are too good to ignore for global investors.” Since the 24 January the global energy sector is up 25% while global equities are down 10% so the global energy sector has proven to be a source of alpha amid weak equity markets and galloping inflation. What is more remarkable is that the free cash flow yield was 10% in April on global energy companies compared to 6% for the MSCI World. Global energy companies are the cheapest in 27 years despite an energy crisis and strong outlook for oil and gas prices due to sanctions against Russia. Global energy companies are delivering return on equity of around 18% at the current oil and gas prices far outperforming the general market. As we alluded to in several notes and on our podcast the ESG agenda has drastically distorted capital allocation in equity markets with many institutional investors moving out of oil and gas and into renewable energy companies. Sentiment in the equity market is right now about which technology stocks to buy following the recent large declines instead of buying the cash flow rich energy companies with the lowest equity valuations in almost 30 years. The world is still very much inverted. While the future is greener we will need oil and gas for much longer than any expected and our energy needs are enormous so we dare to stick to our view that energy stocks will be a massive winner over the next 10 years. Below are some of the largest energy companies in the world measured on market cap and that can be traded on Saxo’s trading systems (not investment recommendation). Exxon Mobil Chevron Reliance Industries Shell TotalEnergies PetroChina ConocoPhillips Equinor BP Petrobras EnbridgeSource: Bloomberg Source: Saxo Bank
EUR: Range-bound Outlook Amid Tightened Swap Rate Gap

The frothiest US technology stocks are still frothy | Saxo Bank

Peter Garnry Peter Garnry 17.05.2022 07:32
Summary:  This year has been brutal for growth and technology stocks in the US, and many investors are asking themselves whether the recent declines are a buying opportunity. The short answer is no. Financial conditions are still tightening and we are in a regime that is typically associated with negative equity returns. The most frothiest parts of the US equity market are also still valued at equity valuations above their pre-pandemic levels suggesting more downside risks. Pre-pandemic valuation levels have not been reached yet With Nasdaq 100 futures down 27% from its late 2021 peak many clients are asking whether it is time to aggressively get into the equity market and especially US technology stocks. Our view on US equities has not changed and thus we remain defensive favouring themes such as commodities, defence, logistics, India, cyber security, semiconductors, and high quality companies. Financial conditions are still tightening and we have entered a level of financial conditions that is typically associated with negative equity returns. India’s export ban on wheat over the weekend due to a failed harvest will continue add inflationary pressures impacting interest rates and equity valuations. It is interesting to note that the 4% most expensive part of the US equity market, which are companies with the 12-month forward EV/Sales ratio above 8x, is still more expensive than its pre-pandemic equity valuation level despite the recent significant declines in US technology stocks. Even if this group of very expensive stocks get back to their pre-pandemic level, which would require another 15% drop, that level would again be twice the equity valuation level from the period late 2013 to late 2016. In other words, if the frothiest part of the US equity market has to come back to those levels the declines in front us will be quite substantial. We recommend investors to begin planning for which technology stocks to buy based on business model analyses and wait for equity valuations to come down further. In our view, there is no time to rush. It is better to get it right than getting there fast. Source: Saxo Group The table below shows the companies in the Russell 1000 Index with a 12-month forward EV/Sales above 8. There are 43 companies that match this criteria after we have removed Liberty Broadband due to erroneous analyst data which corresponds to 4.2% of the total universe size in the index. The median 5-year total return for this group is 271% and the median trailing P/E ratio is 51x which is significantly above the S&P 500 P/E ratio of 20x. Name F12M EV/Sales 5Y total return (%) Market cap (USD mn.) Last price P/E Cloudflare Inc 19.75   21,656 66.38   Snowflake Inc 19.60   49,820 158.36   Datadog Inc 18.12   34,293 108.86   Zscaler Inc 15.46   21,619 153.23   Crowdstrike Holdings Inc 14.80   36,262 156.29   Switch Inc 14.69   8,187 33.47 801.3 MongoDB Inc 14.51   19,326 286.03   Atlassian Corp PLC 14.10 412.76 48,022 188.90   Visa Inc 14.10 122.26 428,313 199.23 33.3 Mastercard Inc 14.06 191.97 323,696 332.80 36.0 Trade Desk Inc/The 13.95 900.39 25,250 51.92 247.2 Aspen Technology Inc 13.90 183.96 11,040 165.75 37.9 Holdings Inc 13.48   12,360 118.54   VeriSign Inc 12.54 85.29 18,087 165.11 23.2 NVIDIA Corp 11.86 460.46 443,361 177.06 45.6 Paycom Software Inc 11.77 343.87 17,387 288.56 75.7 Anaplan Inc 11.68   9,655 64.16   ServiceNow Inc 10.96 367.13 90,738 452.65 380.7 Cadence Design Systems Inc 10.88 333.08 39,279 142.44 50.6 ANSYS Inc 10.56 112.32 22,145 254.57 48.7 Monolithic Power Systems Inc 10.44 374.83 20,134 431.67 73.7 Bentley Systems Inc 10.26   10,192 32.09 84.6 Adobe Inc 10.04 196.29 191,575 405.45 40.3 Manhattan Associates Inc 9.94 169.48 7,686 121.78 65.8 Paycor HCM Inc 9.32   3,934 22.49   Fortinet Inc 9.32 619.71 45,196 281.55 73.8 Wolfspeed Inc 9.32 247.13 9,652 78.07   Enphase Energy Inc 9.25 19014.47 21,306 157.79 134.2 Paylocity Holding Corp 9.25 280.78 9,370 169.98 108.0 Five9 Inc 8.78 363.53 7,055 101.42   Paychex Inc 8.74 143.33 43,210 119.69 32.4 HubSpot Inc 8.69 412.41 17,000 355.87   Microsoft Corp 8.60 309.09 1,952,925 261.12 28.9 Dynatrace Inc 8.46   10,113 35.39 135.7 Autodesk Inc 8.35 106.59 42,868 197.07 82.0 Tyler Technologies Inc 8.30 114.30 14,863 358.36 82.0 Marvell Technology Inc 8.29 287.57 48,974 57.57   Broadcom Inc 8.24 194.09 240,167 588.24 32.6 Black Knight Inc 8.22 77.34 10,815 69.34 20.4 Synopsys Inc 8.14 270.85 42,254 275.99 51.3 nCino Inc 8.11   3,524 32.00   Procore Technologies Inc 8.05   6,397 47.19   Intuit Inc 8.01 205.04 105,138 371.76 47.1 Source: Bloomberg and Saxo Group     Source: Saxo Bank
US Nonfarm Payrolls Disappoint: Impact on Dollar and EUR/USD Analysis

It is painful but peak capitulation has not been reached

Peter Garnry Peter Garnry 12.05.2022 15:49
Summary:  The cryptocurrency market is feeling the shockwaves from "stable coins" being tested to its very core with Tether printing figures just above 0.96 this morning suggesting signs of panic and massive selling pressures. There is a huge overlap of people that invest in both Tesla, Ark Invest funds, and cryptocurrencies and that makes this risk cluster dangerous because it becomes a forceful negative feedback loop on the downside. Unfortunately for investors the VIX forward curve is not suggesting that capitulation has been reached and thus more pain is likely a head. The Tesla-Ark-Crypto risk cluster is sending massive warnings signals As we talk about on today’s podcast the Tesla-Bitcoin-Ark risk cluster is back (we coined the phrase back in February 2021, here and here, before the first wave of interest rate sensitivity selloff started) with vengeance. Cryptocurrencies are the most high beta and pure expression of marginal liquidity in the financial system and with “stable coins” suddenly not being that stable, shock waves are felt across all cryptocurrencies with the biggest “stable coin” Tether being tested this morning going as low as 0.9628. Tesla shares were down 8.3% yesterday and are indicated lower in pre-market trading with the $700 level a major support level to watch. Ark Invest is hemorrhaging across all its funds as the entire technology sector is under siege with the most attention being on its biggest fund the Ark Innovation ETF. This fund is now flirting with levels not seen since the lows during the early pandemic taking the fund back four years in terms of performance. As we have repeatedly on our podcast and our daily QuickTake, Tesla is the key to this risk cluster as it is the most liquid instrument in this risk cluster and thus the one that is sold off the latest. The key dominator across these assets is young people and primarily men which amplifies the moves. Be careful. Source: Bloomberg VIX forward curve suggests more pain ahead While it is painful in equities this year and the only safe-havens have been commodities and cash, markets have unfortunately not reached its capitulation level. The degree of inversion in the VIX forward curve is often a good sign that a short-term bottom has been reached. The chart below shows the difference between the 2nd VIX futures contract and the VIX Index (spot). More negative values mean more inversion or that spot is moving above forward volatility. As the chart also indicates deeply negative values are associated with market meltdowns and severe risk-off. We are not there yet, so another 10% decline in equities is not unimaginable. The energy crisis will get worse One the big themes that will continue to drive inflation and market dynamics is the ongoing energy crisis which has been amplified by the war in Ukraine and the coming ban of Russian oil in the EU. But the biggest problem is that of available crude oil which is driving up refinery margins, see our equity note A new golden age of oil refiners, which is indicating an oil market that is wildly out of balance. Moreover investments are not going up meaningfully despite higher prices. ESG mandates and the 5-year forward on Brent crude at $70/brl are holding back investments so the front-end of the oil market will continue to get more expensive at the cost of economic growth and household purchasing power for other goods and services. IEA’s recent statement (see below) suggests that things are extraordinary and that the energy crisis will continue to add to inflation.
Stocks to keep an eye on in the second half of 2023

US Stocks: Earnings - (DIS) Disney earnings and fallen angels | Saxo Bank

Peter Garnry Peter Garnry 12.05.2022 09:13
Summary:  Disney has been through some tough years and over the past year the stock price has fallen significantly as investors are waking up to higher interest rates and a more negative outlook for video streaming. We take a look at Disney and what to expect tonight. The entertainment company has joined a group of fallen angels, which are companies that have experienced a significant drawdown and have negative total return over the past three years. Things will continue to be ugly for equities as long as inflation remains hot and financial conditions tighten. Disney is back to square It has been some turbulent years for Walt Disney reporting FY22 Q2 earnings (ending 31 March) tonight after the US market close. It announced its Disney+ video streaming service in April 2019 pushing the company’s valuation much over the subsequent 9 months as investors were expecting a new distribution channel that could fuel growth. Then came the pandemic and Disney’s physical assets went into a tailspin, but things improved for Disney driven by low interest rates (increasing equity valuations), and later the vaccine which sped up the reopening of society. Meanwhile the pandemic had turbocharged its subscribers for Disney+ delighting investors. Sentiment got supersized to the point where investors were willing to pay a little more than 70 times next year’s earnings. Read next: Tech Stocks Plunging!? Trade Desk Earnings Announcement Pushes Tech Giant Stock Down, Russian Ruble Strengthening and Ford Motor Co. With financial conditions tightening significantly and video streaming being challenged (read our equity note on Netflix earnings outlook) Disney’s equity valuation has come down to earth as a function of the stock price down 46.7% from its March 2021 peak. Tonight investors are expecting revenue of $20.2bn up 29% y/y as Disney is still gaining from base effects related to the reopening of societies, but the q/q growth is expected to by -7.8%. EBITDA is expected to be $4.1bn up from $2.7bn a year ago as the operating margin is expanding back to pre-pandemic levels. Given the recent outlook from technology and entertainment companies, Disney could surprise negatively tonight.Source: Saxo Group Almost 10% of S&P 500 is down over the past three years Yesterday we looked at technology companies with large setbacks, but it got us to go deeper and the equity destruction is quite big when you broaden the lens. In the S&P 500 there are now 43 companies with a drawdown larger than 30% over the past 200 days and that are down on a total return basis over the past three years. As the table below shows there are some quite big names on that list such as Walt Disney, Comcast, Citigroup, PayPal, Starbucks, General Electric, Netflix, Boeing, Ecolab, and Illumina. Read next: (BTC) Bitcoin’s Price Tanks Along With Equities. U.S. Stock Market Awaits CPI Report, Poor Performance From The FTSE 100.  As long as financial conditions and interest rates move higher we remain defensive on equities and will continue to argue that investors need commodities to balance their portfolios. We have described in several equity notes that the period 1968-1982 was very bad for equities in real terms due to inflation. Time will tell whether we get an equally long period with zero real rate returns for equities, given the factors such as urbanization, green transformation (ESG), decade of underinvestment in the physical world, and deglobalization of supply chains to pandemic and lately Chinese Covid-lockdowns, inflation will remain high (3-5%). Forces the cost of capital higher and thus equity valuations down. While US equities have still delivered 40% real return since early 2019 the real returns are eroding fast at these inflation levels. Today’s core CPI m/m print at 0.6% is suggesting inflation will remain elevated for quite some time eating into returns. For bonds the situation looks even more grim (see chart below) and investors are basically losing out on everything except for cash and commodities.Source: Bloomberg Source: Saxo Bank
Euro Area Final CPI Ahead of ECB's Interest Rate Decision on Thursday

Saxo Bank: "Technology sentiment, Palantir earnings, and discount rates"

Peter Garnry Peter Garnry 09.05.2022 16:18
Summary:  Technology sentiment is as dark as when the dot-com bubble burst with many companies seeing their stocks decline by 50-90%. We take a look at some of these names, but which are also profitable, because it is during these periods when some of these companies can be bought at good risk-reward levels. We also take a look at Palantir's Q1 earnings release which disappointed on its Q2 revenue outlook sending the shares down in pre-market trading. Finally, we show how equity valuations are impacted from higher interest rates without any change to the underlying business. Sentiment in technology stocks is plummeting The tweet last Wednesday by David Sacks that “Investor sentiment in Silicon Valley is the most negative since the dot-com crash” tells you everything you need to know. The decline in high growth non-profitable companies, which we call bubble stocks, has been -69% since the peak in February 2021. Our bubble stocks basket has basically come back to the levels from before the pandemic. For some stocks it has been brutal such as Zoom, Teladoc, PayPal, and Pinterest, and we have seen that crypto related instruments are a high beta expression of liquidity preference and technology sentiment. The higher discount rate on cash flows are not only compressing equity valuations but also changing investors’ time preference demanding break-even faster than before. Not all technology stocks are created equally with some of these fallen technology stocks actually being profitable. The list below is a list of US-listed stocks which are down more than 50% since 14 February 2021 and have a positive free cash flow yield; the list below is not meant as investment recommendations but highlighting companies with positive free cash flows yields that have been beaten down heavily. While many investors are suffering it is often during these periods of stress where investors can find very attractive long-term opportunities. Teladoc Health (Return: -88.6%, FCF yld: 4.95%) Zoom Video (Return: -77.8%, FCF yld: 5.2%) Pinterest (Return: -73%, FCF yld: 4.6%) PayPal (Return: -72.6%, FCF yld: 5.2%) DocuSign (Return: -71.7%, FCF yld: 3.0%) Bumble (Return: -71%, FCF yld: 3.3%) Alibaba (Return: -66.4%, FCF yld: 8%) Etsy (Return: -63.1%, FCF yld: 4.8%) Baidu (Return: -62.7%, FCF yld: 3.4%) Rackspace (Return: -60.6%, FCF yld: 12.9%)   The list below shows that current constituents in our bubble basket. Name Mkt Cap (USD mn.) 12M Fwd EPS 12M Fwd EV/Sales Diff to PT (%) 5yr return (%) YTD return (%) Lucid Group Inc 30,271 -1.09 13.2 97.0 NA -52.3 Cellnex Telecom SA 29,281 -0.15 12.4 57.4 228.2 -20.3 Rivian Automotive Inc 25,929 -6.04 2.7 155.0 NA -72.2 NU Holdings Ltd/Cayman Islands 24,248 0.01 6.0 96.6 NA -44.2 Seagen Inc 22,722 -2.58 10.3 30.2 97.4 -20.2 MongoDB Inc 20,250 -0.18 15.3 55.4 NA -43.4 SenseTime Group Inc 20,062 -0.07 16.1 39.7 NA -14.5 Unity Software Inc 16,971 -0.09 10.3 130.6 NA -59.9 BeiGene Ltd 16,673 -10.48 6.0 116.9 288.1 -45.6 Argenx SE 16,369 -17.60 51.7 15.2 1,650.9 -8.4 Alnylam Pharmaceuticals Inc 16,280 -4.49 11.6 51.8 141.9 -20.5 Okta Inc 16,054 -1.06 8.0 112.0 336.9 -54.3 Brookfield Renewable Corp 13,005 0.20 9.9 8.3 NA 0.7 Shanghai Junshi Biosciences Co Ltd 12,664 -1.09 26.6 34.1 NA 1.3 Holdings Inc 12,616 -0.37 13.9 98.9 NA -51.4 Grab Holdings Ltd 11,532 -0.37 3.3 85.6 NA -57.8 Plug Power Inc 11,221 -0.42 7.4 112.6 804.9 -31.2 Qualtrics International Inc 10,464 0.03 6.4 101.4 NA -49.2 Wolfspeed Inc 10,000 -0.02 9.7 45.7 254.9 -27.6 Robinhood Markets Inc 8,823 -1.07 8.2 45.2 NA -43.0 Novocure Ltd 7,653 -0.54 12.9 40.6 494.9 -2.5 SentinelOne Inc 7,253 -0.71 13.0 89.9 NA -48.3 Affirm Holdings Inc 7,097 -1.82 3.7 143.7 NA -75.2 Avalara Inc 6,890 0.02 6.8 57.6 NA -39.3 Procore Technologies Inc 6,777 -0.70 8.6 61.0 NA -37.5 Kingdee International Software Group Co Ltd 6,700 -0.05 7.4 60.7 365.1 -36.9 Confluent Inc 6,605 -0.69 9.1 101.2 NA -68.9 Guidewire Software Inc 6,450 -0.16 7.1 44.6 26.5 -32.0 Biohaven Pharmaceutical Holding Co Ltd 6,365 -6.39 6.2 74.8 312.7 -34.5 Gitlab Inc 6,254 -0.91 12.4 73.3 NA -51.3 Elastic NV 6,092 -0.25 5.4 90.8 NA -47.0 10X Genomics Inc 5,804 -0.79 7.8 85.6 NA -65.6 Smartsheet Inc 5,625 -0.59 6.4 52.8 NA -43.6 Samsara Inc 5,625 -0.24 7.8 148.9 NA -60.7 Ltd 5,550 -2.85 8.7 87.8 NA -60.0 Ginkgo Bioworks Holdings Inc 4,810 -0.20 9.3 243.2 NA -67.4 Asana Inc 4,752 -1.24 8.1 112.7 NA -66.5 Ascendis Pharma A/S 4,730 -7.71 41.5 114.1 200.0 -38.2 Guardant Health Inc 4,008 -4.56 7.3 211.2 NA -60.7 Intellia Therapeutics Inc 3,608 -5.79 56.5 187.3 234.5 -59.8 Aggregate / median 464,083   8.7 86.7 271.5 -44.9 Palantir down 11% on outlook miss Palantir is another very popular technology and growth stock that was IPO’ed in late 2020 which has seen it share price collapse to below $10 last Friday from as high as $45 in January 2021. The big data analytics company with prominent US government contracts reported Q1 results that were in line with estimates growing revenue 31% y/y in Q1 and still delivering an operating loss. However, it was the Q2 revenue guidance of $470mn vs est. $487mn that caused investors to sell shares in pre-market taking the shares down by 11%. The operating margin is improving but judging from the market reaction investors want to see it improving faster per our discussion of equity valuation dynamics related to discount rates (see section below). Source: Saxo Group Discount dynamics on equity valuation The venture capital investor Bill Gurley said in late April that entire generation of entrepreneurs and technology investors will learn equity valuation the hard way and that the “unlearning” process could be painful, surprising and unsettling to many, and that he anticipates denial. Equity valuations like interest rates have had one direction only culminating in late 2020 and early 2021. But with rising interest rates and inflation the entire equity valuation game is changing and investors will demand business models that can break-even faster than before. To get a sense of what the US interest rate move is doing to equity valuations let us look at a very simplified example. We have a company (no debt and no non-operating assets), growing revenue at 20% p.a. for 10 years with a NOPAT (net operating profit after tax) margin of 20% with a reinvestment rate of 10% per incremental revenue. The equity risk premium is 5% and in the first period the risk-free rate is 0.5% (equivalent to the US 10-year yield in 2020). The present value of those future free cash flows including the terminal value (the present value of continuing value) is $1,359 equating to a 1-year forward free cash flow yield of 1.6%. What happens to this company if everything is unchanged except for the risk-free rate moving from 0.5% to 3.2%? The value of those future cash flows drop to $831 and the equity valuation (1-year free cash flow yield) goes to 2.6%. The drop in equity value is equivalent to 39% for a 2.7%-points move in the risk-free rate which equates to an equity duration of 14x. Anyone that knows equity valuation dynamics understand the importance of continuing value (terminal value). The dynamic that is amplifying the moves in equity valuation when you have a large correction in technology stocks is that technology investors are beginning to cut their expectations for the long-term outlook for margins and reinvestment rate etc. so the upward move in interest rates are amplified through several factors in the modelling of the present value of future cash flows.Source: Saxo GroupSource: Saxo Group Source: Saxo Bank
Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Apple (APPL) And Caterpillar (CAT) To Shape Chinese Market? Amazon (AMZN) Has To Deal With Difficulties - Saxo Bank

Peter Garnry Peter Garnry 29.04.2022 14:18
Summary:  Amazon's e-commerce business is under massive pressure from rising input costs and overinvestment during the pandemic. Amazon's two segments North America and International posted operating losses that will only get worse in Q2 according to the guidance. This outlook could weigh on equity sentiment today. Apple and Caterpillar results were strong yesterday, but Apple hinted of $4-8bn revenue risk from Chinese lockdowns and Caterpillar said Chinese demand for construction equipment was weaker than in 2019. Finally, we highlight the main conclusions from the Q1 earnings season and the most important earnings next week. Amazon is under massive pressure from input costs and overinvestment As we wrote yesterday, Meta’s revenue growth will likely go negative in Q2, and Amazon’s growth was slowing to the lowest levels in 20 years as we wrote in February in relation to their Q4 earnings. In our equity note on Amazon in early February we highlighted that the company had overinvested and that turned out to be the ghost haunting the company in Q1 on top of all the rising input costs. Amazon delivered revenue of $116.4bn, in line with estimates, up 7.3% y/y and based on its guidance for revenue in Q2 revenue growth will slow to 4.8% y/y. The growth stocks of the world are seeing their growth grinding to halt while the value stocks (energy, mining, financials etc.) are beginning to see their revenue and profits growing faster with Exxon Mobil expecting 47% y/y revenue growth in Q2. What really spooked investors was Amazon’s massive miss on operating profits in Q1 of $3.7bn vs est. $5.4bn and the guidance of $-1bn to $3bn vs est. $6.8bn. How can equity sell-side analysts be so wrong on the underlying business, it is embarrassing. The EBIT margin has already rolled over for Amazon and is now below the pre-pandemic levels. It is also quite amusing to see Amazon saying that demand is not softening when in fact their revenue growth is declining and below many other retailers; in fact it cannot keep up with inflation. The scary story about Amazon is that it generated operating income of $6.5bn in AWS while losing $1.6bn and $1.3bn in its North America and International business segments. Apple and Caterpillar comments are not good signs on China Apple earnings for the previous fiscal quarter were as expected with no hiccups, but the outlook for the current fiscal quarter was more uncertain with a potential revenue hit of $4-8bn from Chinese lockdowns impacting supply and potentially also demand in its Chinese market which generated around $18bn in revenue for the previous quarter. Caterpillar, the world’s largest maker of construction equipment, delivered strong Q1 results beating on both the top and bottom line, but the company is still not providing any guidance which is a legacy from the pandemic, but also something it plans for change going forward. However, in its earnings call with analysts the company said Chinese construction activity weakened in Q1 and that China demand is slightly lower than in 2019. A louder echo of Caterpillar’s concerns in China was seen in an article in the FT in which private equity firm PAG founder Weijian Shan said that China’s zero-covid policy has resulted in a deep economic crisis saying it is in its worst shape over the past 30 years saying sentiment on Chinese equities is very weak. In the interview he says that China in 2022 feels a bit like Europe and the US in 2008. The chart below showing market to total assets of large banks in the US and China has long been one of our favourite charts to point out the weakening credit cycle in China. Chinese banks continue to extend a lot of credit (increasing assets), but market values continue to grow at a slower pace indicating that investors are worried about credit quality. Another major week ahead for Q1 earnings Around a quarter of S&P 500 market value is reporting next week with around 300 companies in our reporting universe on the line. Earnings are down q/q in Q1 while revenue growth is flat based on the data we have now suggesting a real impact from inflation. It is unlikely that next week’s earnings will change that and the outlook for Q2 has so far been mixed to negative from many companies. The key risk for earnings in Q2 is China and to what extent China imposes further lockdowns impacting global supply chains even more. The most important earnings releases are highlighted below: Monday: Nutrien, Moody’s, NXP Semiconductors, Global Payments, Devon Energy Tuesday: Thomson Reuters, BNP Paribas, Deutsche Post, BP, Universal Music Group, Pfizer, AMD, S&P Global, Airbnb, Estee Lauder, Starbucks, Marathon Petroleum Wednesday: ANZB, Barrick Gold, A.P. Moller – Maersk, Vestas Wind Systems, Pandora, Sampo, Airbus, EDF, Volkswagen, Siemens Healthineers, Enel, Equinor, CVS Health, Booking, Regeneron Pharmaceuticals, Uber, Marriott International, Moderna, Fortinet, Ferrari, eBay, Albemarle Thursday: National Bank of Australia, Anheuser-Busch InBev, Shopify, BCE, Coloplast, Credit Agricole, Societe Generale, BMW, Zalando, UniCredit, Shell, ArcelorMittal, ConocoPhillips, Zoetis, EOG Resources, Block, MercadoLibre, Illumina, Lucid Group Friday: Macquarie Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, ING Groep, Cigna
Industrial Metals Outlook: Assessing the Impact of China's Stimulus Measures

Saxo Bank: "Technology meltdown and mixed Alphabet earnings"

Peter Garnry Peter Garnry 27.04.2022 14:10
Summary:  Risk-off was intense in US technology stocks yesterday with severe carnage outside the Nasdaq 100 index as investors are reevaluating portfolio amid inflation and lockdowns in China. This week is all about whether technology companies can defy inflation and preliminary data suggest that technology companies are doing better than the average company. We also take a look at last night's earnings releases from Microsoft, Alphabet, and Visa. It is getting serious in equities We have flagged for over a week on our daily podcast that things were crumbling underneath equities with massive moves in currencies across USD, JPY, and CNY responding to the worsening situation out of China with its Covid lockdowns. DSV’s CEO said this morning in relation to Q1 earnings that the logistics company had never seen anything like what they are seeing in China with around 500 container ships waiting for docking in Shanghai ports. The war in Ukraine and Russia cutting gas to Poland and Bulgaria are raising the stakes in Europe which is already under pressure from an unprecedented cost of living crisis which is increasing the risks of recession in Europe. At the same time the market is pricing in a more aggressive Fed as more and more signs are suggesting that inflation is not transitory but stickier at a higher level than imagined. The full effect of all of the above was channeled into US equities in yesterday’s session with Nasdaq 100 futures declining as much as 5.5% dropping below the 13,000 level before bouncing back and close above 13,000 and the rebound trade is extending in early European trading hours. Some of the broader equity indices are masking the carnage that is happening below the tier 1 companies (high quality and high margin businesses) with 37 stocks with a market value above $5bn being down more than 50% this year. Many of the names are recognized as the winners during the pandemic but frothy expectations are being prices out completely in these stocks reminding us of the collapse after the dot-com bubble. Our theme basket performance this year is also showing the long tail of losses in growth segments of the equity market. It is a good opportunity to remind investors what works during inflation which are real estate, commodities, gold, defence, cyber security etc. Source: Saxo Group Source: Bloomberg Technology earnings a mixed bag with Alphabet disappointing On Monday we wrote that US technology earnings this week would be a major test of the equity market and basically decide whether US large cap technology stocks would get the label inflation hedge. In order to get this label they must demonstrate minimal impact from inflation on margins and growth. It is too early to conclude anything but the preliminary earnings data suggest that technology stocks are doing better than the general company (see below). In Q4 technology companies grew earnings faster than the MSCI World and S&P 500 and the pattern seems to be repeating in Q1 with MSCI World actually down 5% q/q based on current Q1 figures as rising input costs are eating the profitability of companies. The three most important earnings yesterday were from and below are our takes on those earnings releases. Microsoft: Solid results across all business segments while growing revenue by 18% y/y and all segments hit earnings and revenue consensus estimates. Xbox was a little better than feared due to more supply but the lockdowns in China is a key risk going forward for PC sales and Xbox supply. Alphabet: The first reaction was that it was a very bad earnings release due to a big miss on YouTube relative to expectations (8% miss) indicating advertising weakness and more competition from TikTok and something also observed last week in Snap’s earnings. But the rest of the Alphabet business looks solid on revenue vs expectations although it is disappointing to see the operating loss widen in the cloud segment. Despite talk of a weak earnings release revenue was up 23% y/y. Visa: Significant beat on revenue and EPS as cross-border volumes in constant currency were up 38% suggesting travelling is coming back fast from pandemic lows and the company is guiding revenue growth of 15-20%.
The British Pound Faces Further Breakdown Amidst Dollar Strength and Government Shutdown Risks

Awaiting (APPL) Apple Earnings, (MSFT) Microsoft, Alphabet (GOOG), Meta (FB) Very Tempting Time On Stock Market! It's Earning Season With Many Reports Yet To Come!

Peter Garnry Peter Garnry 22.04.2022 15:56
Equities 2022-04-22 15:10 6 minutes to read Summary:  The Q1 earnings season is getting serious next week with earnings from Apple, Amazon, Microsoft, Alphabet, and Meta which not only be important for the overall equity market, but especially sentiment on technology stocks as preliminary data suggest that technology companies are seeing a less impact on margins compared to MSCI World. On Friday we get important earnings from Exxon Mobil and Chevron were hopefully both oil majors will increase their capex for 2022. Can Nasdaq 100 solidify its minimal impact on margins? The Q1 earnings season kicks into its highest gear next week with earnings releases from the major US technology/consumer companies with the heavyweights such as Microsoft, Alphabet, Visa, Meta, Apple and Amazon stealing the show. Outside the technology and consumer sectors, the Friday’s earnings releases from Exxon Mobil and Chevron are important for tracking capex plans for 2022 because the world economy desperately needs more investments in energy. The preliminary data on Q1 earnings show that net profit margins are rolling over in the S&P 500 and MSCI World while holding up for the Nasdaq 100. This is a key thing to watch next week when the major US technology companies are reporting earnings, because profit margin insulation for technology amid galloping inflation could be a game changer for sentiment on the US technology sector. EPS growth in Q1 q/q is also only positive right now for Nasdaq 100 while down for the MSCI World and S&P 500. While profit margin insulation for technology companies could become the new hot topic and what drives a comeback for technology stocks, the opposite force at play are rapidly tightening financial conditions and discount rate on cash flows. One thing is for sure, we are in for a very exciting next week as there are also mounting pressures coming from the strengthening USD and more bottlenecks in our global supply chain due to lockdowns in China. The list below shows the most important earnings releases out of the almost 600 earnings releases next week in the earnings universe we cover. Monday: Deutsche Boerse, Philips, Coca-Cola, Activision Blizzard, Cadence Tuesday: Kweichow Moutai, Ganfeng Lithium, First Quantum Minerals, Tryg, FANUC, Canon, HSBC, Banco Santander, Iberdrola, Atlas Copco, Novartis, UBS Group, Kuehne + Nagel, Microsoft, Alphabet, Visa, PepsiCo, UPS, Texas Instruments, Raytheon Technologies, General Electric, Mondelez, Chubb, 3M Wednesday: LONGi Green Energy, Teck Resources, DSV, Novozymes, Kone, Dassault Systemes, STMicroelectronics, Deutsche Bank, BYD, China Shenhua Energy, China Petroleum & Chemical, UniCredit, Keyence, GlaxoSmithKline, Lloyds Banking Group, Yara International, Iberdrola, Assa Abloy, SEB, Credit Suisse, Meta, Qualcomm, Amgen, Boeing, PayPal, ServiceNow, Ford, Southern Copper Thursday: Nokia, Sanofi, TotalEnergies, Denso, Hitachi, Barclays, Nordea, Apple, Amazon, Mastercard, Eli Lilly, Thermo Fisher, Merck, Comcast, Intel, McDonald’s, Linde, Caterpillar, Hershey, Twitter Friday: ICBC, China Yangtze Power, Midea Group, WuXi AppTec, TC Energy, Imperial Oil, Orsted, Neste Danske Bank, BASF, China Construction Bank, Agricultural Bank of China, Ping An Insurance, COSCO Shipping, Eni, AstraZeneca, BBVA, Hexagon, Exxon Mobil, Chevron, AbbVie, Bristol-Myers, Honeywell, Colgate-Palmolive
Equities Of Europe Are Under Pressure

Equities Of Europe Are Under Pressure

Peter Garnry Peter Garnry 07.03.2022 15:17
Equities 2022-03-07 14:45 7 minutes to read Summary:  In today's equity note we show how European equities are being pushed to new lows relative to US equities as the maximum uncertainty in Europe is driving down equity valuation through the precautionary principle. Equities are about the future of cash flow and if the future has become totally unpredictable then investors must lower valuations on European equities driving up the equity risk premium. European equities are now valued at a 30% discount to US equities but it is still difficult to argue that this is a buying opportunity in European equities. We also cover the agriculture chemicals industry where especially American and Canadian fertilizer producers are reaping massive tailwinds from lower natural gas prices compared to competitors in Europe. Can you model the future amid the war in Ukraine? Global equities are only down 11% as of Friday’s close prices despite galloping commodity markets and large scale war on European soil. The probability of a recession has gone and the range of outcomes in the Ukraine war is almost infinite. It is the true definition of maximum uncertainty, which is a huge liability for equity valuations as equities are discounting growth and future cash flows. In its essence the war in Ukraine is the collapse of the future because the future has become so uncertain that under the precautionary principle of risks equity valuations have no other way than to go lower pushing up the equity risk premium. The war in Ukraine has pushed European equities to a new relative low against US equities measured in EUR total return terms since 1999. It really has been 15 years of hardship for European companies in terms of performance against the US and at one point investors will consider the opposite trade, but in the short-term European equities are too uncertain. In today’s session we were much lower in European before news came that Russia would cease its war on Ukraine if the Ukraine would make a change to its constitution to ensure neutrality (not entering any blocs such as NATO or EU), acknowledge Crimea as Russian territory, and recognize Luhansk and Donetsk as independent states. These demands are essentially the same as previously communicated by Russia, but the market is relieved sending equities higher because it is being interpreted as an opening for potential peace in Ukraine. Intraday volatility today shows that short-term sentiment is driving everything because “the future cannot be priced”.Source: BloombergSource: Bloomberg European equities are now valued at a 30% discount to US equities on a 12-month forward EV/EBITDA which of course reflects that the US economy is better shielded against the fallout from the war in Ukraine. The US has less risks in terms of energy and food security. One thing to note when seeing these European vs US equity valuation spreads is that the US equity market has a much larger share of technology stocks and which has increased over time. The best comparison is to take an entire sector. If we compare European industrials vs their peers in the US we see that the market was pricing European industrials higher throughout the pandemic indicating that things were improving relatively better for European industrials compared to US industrials. The trade reversed the summer 2021 as the energy crisis in Europe accelerated and the war in Ukraine has blown out the discount to almost 20% again and a new record low. Is it time to buy European equities? Given the maximum uncertainty regarding the outcomes of the war in Ukraine and sanctions against Russia we believe the most prudent thing is to be overweight US equities vs European equities. However, there are pockets in the European equity market that will do well such as green energy, defense, and mining companies. Agriculture chemical companies are a hedge amid food crisis As we have pointed out in several of our latest equity notes, the commodity sector, logistics, cyber security and defense stocks are the themes investors are rotating into. Inside the commodity trade and the energy crisis in Europe, an opaque industry such as agriculture chemicals is doing well. Or the US companies are doing well. Fertilizer prices have exploded higher over the past year due to the higher natural gas prices which is a key input in making fertilizer. However, the increasing spread between natural gas prices in the US and Europe, have given US and Canadian fertilizer producers an advantage over their European competitors which can also be seen in their relative performance. As long as the Ukraine war continues and we have upward price pressure on agriculture crops then this is trade that investors will continue to make. The jump higher in food prices has the unfortunate unintended consequence of potentially creating a humanitarian crisis around food security and this mobilize political forces to end the war in Ukraine as food security is a serious game for any country. The table below shows the companies in the agriculture chemicals industry with a market value above $5bnSource: Bloomberg
Bubble stocks...

Bubble stocks...

Peter Garnry Peter Garnry 09.02.2022 14:39
Equities 2022-02-09 13:40 8 minutes to read Summary:  By sheer coincidence we launched our current bubble stocks basket on the 12 February 2021 which happened to be the exact day when the Ark Innovation ETF peaked on close prices. Since then our bubble stocks basket is down 55.2% in what has been a bloodbath among these speculative growth stocks as interest rates have charged higher on rising inflationary pressures. The plunge in bubble stocks has caused a dramatic cleanup of the basket as former bubble stocks are no longer meeting the criteria with 26 out 40 stocks leaving the basket. Echo from the past Our bubble stocks basket was a high-flying basket in the beginning of last year, but the gradually higher interest rates and inflation pressures driven by higher energy prices forced investors to rethink equity portfolios. As a result a rotation process was set in motion which led to bubble stocks (speculative growth stocks) to be shredded in masse while commodity and value related stocks were increased in portfolios. This rotation is very clear when you look at 1-year performance and year-to-date performance among our theme baskets. We introduced our bubble basket on 8 January 2021 and updated our methodology during early February publishing a renewed basket on 12 February 2021 in which we warned of bubble stocks. In a striking coincidence the 12 February 2021 happened to be the day when the Ark Innovation ETF peaked on close prices. Since that day almost a year ago, our bubble stocks basket is down 55.2%, slightly more than the Ark Innovation ETF down 53.4%, basically behaving as we warned about in February 2021 that higher interest rates due to inflation pressures would severely pressure these stocks. In many ways the collapse in bubble stocks fell like an echo from the dot-com bubble days and the downward pressure may continue. As the long-term chart also show, the bubble stocks basket is currently back to levels from September 2020, but still up significantly over a five-year period. However, the key risk remains higher interest rates as this group of stocks has a high equity duration, meaning that their terminal value is very sensitive to changes in the discount rate.Source: Saxo Group Significant changes to the bubble basket The methodology behind the bubble stocks basket is not changing and thus we are still selecting the 40 largest stocks on market capitalization with the following characteristics: Market capitalization above $2bn Listed on exchanges in North America, Western Europe, Singapore, Japan, Australia, and Hong Kong 12-month forward EV/Sales above 8x 12-month forward EPS less than 0 Based on a current screening there are 26 stocks out of 40 stocks leaving the bubble stocks basket: Kuaishou Technology Sea Ltd Airbnb Inc NIO Inc Snowflake Inc DoorDash Inc Roku Inc Bilibili Inc Teladoc Health Inc XPeng Inc Cloudflare Inc Splunk Inc Exact Sciences Corp Gaotu Techedu Inc Farfetch Ltd DraftKings Inc GDS Holdings Ltd Ping An Healthcare and Technology Co Ltd Innovent Biologics Inc Zai Lab Ltd Kingsoft Cloud Holdings Ltd Yatsen Holding Ltd Oak Street Health Inc Inc Canopy Growth Corp Appian Corp Many of these companies still have market capitalization above $2bn and negative earnings expectations, but they have fallen a lot over the past year combined with revenue growing such that their 12-month forward EV/Sales ratio has gone below 8x. The 26 new stocks entering the basket are: Rivian Automotive Inc Lucid Group Inc NU Holdings Ltd/Cayman Islands Cellnex Telecom SA Okta Inc SenseTime Group Inc Grab Holdings Ltd Confluent Inc Qualtrics International Inc Brookfield Renewable Corp SentinelOne Inc Robinhood Markets Inc Samsara Inc Gitlab Inc Asana Inc Ltd Biohaven Pharmaceutical Holding Co Ltd Procore Technologies Inc Kingdee International Software Group Co Ltd Guidewire Software Inc Ginkgo Bioworks Holdings Inc Smartsheet Inc Novocure Ltd Shanghai Junshi Biosciences Co Ltd Ascendis Pharma A/S Intellia Therapeutics Inc The table below shows the new updated bubble stocks basket and some key statistics. The bubble stocks basket now represent $687bn in market value down from $1,565mn a year ago highlighting the shareholder value destruction that has taken place in the part of the equity market. A year ago, the bubble stocks basket had a median 12-month forward EV/Sales ratio of 21.3x which has now declined to 14.6x. Name Mkt Cap (USD mn.) 12M Fwd EPS 12M Fwd EV/Sales Diff to PT (%) 5yr return (%) YTD return (%) Rivian Automotive Inc 54,874 -4.97 14.8 118.1 NA -41.2 Lucid Group Inc 45,160 -1.02 17.7 61.6 NA -27.9 NU Holdings Ltd/Cayman Islands 41,017 -0.02 14.9 29.9 NA -5.1 Unity Software Inc 31,483 -0.13 19.7 47.6 NA -24.7 Cellnex Telecom SA 30,482 -0.08 10.6 67.5 277.2 -23.3 Okta Inc 29,623 -0.45 16.5 43.5 NA -15.0 SenseTime Group Inc 29,154 -0.03 31.5 7.8 NA 23.3 MongoDB Inc 27,998 -0.90 23.8 32.8 NA -20.8 Seagen Inc 25,598 -0.49 10.3 29.5 132.7 -9.5 Holdings Inc 24,468 -0.48 31.9 32.2 NA -5.2 BeiGene Ltd 23,748 -11.04 13.7 80.2 486.6 -22.0 Grab Holdings Ltd 19,491 -0.25 17.2 88.4 NA -26.9 Confluent Inc 19,079 -0.75 33.8 24.6 NA -5.4 Affirm Holdings Inc 18,336 -1.44 10.5 55.9 NA -35.1 Alnylam Pharmaceuticals Inc 17,658 -3.35 12.4 42.3 224.0 -12.9 Qualtrics International Inc 17,559 0.00 11.7 33.8 NA -13.1 Argenx SE 15,084 -19.10 67.2 30.4 1,494.6 -19.8 Plug Power Inc 12,657 -0.24 9.4 98.5 1,761.0 -22.2 Brookfield Renewable Corp 12,373 -0.17 13.1 24.7 NA -6.8 Wolfspeed Inc 11,849 -0.16 12.6 25.4 269.4 -14.8 SentinelOne Inc 11,568 -0.68 28.2 48.9 NA -14.2 Robinhood Markets Inc 11,559 -1.07 9.3 59.1 NA -24.7 Samsara Inc 11,031 -0.31 21.9 35.1 NA -22.1 Gitlab Inc 10,773 -1.04 29.1 64.1 NA -14.5 Asana Inc 10,246 -0.98 19.9 58.9 NA -26.3 10X Genomics Inc 10,118 -0.24 13.6 109.8 NA -39.2 Avalara Inc 9,383 -0.19 10.2 68.3 NA -16.4 Ltd 9,141 -2.44 17.9 78.1 NA -32.9 Biohaven Pharmaceutical Holding Co Ltd 8,570 -5.16 9.3 20.8 NA -5.1 Elastic NV 8,497 -0.45 8.2 73.6 NA -25.5 Procore Technologies Inc 8,358 -0.76 11.4 68.5 NA -20.8 Kingdee International Software Group Co Ltd 8,770 -0.04 9.7 57.5 529.5 -18.0 Guidewire Software Inc 8,042 -0.24 9.2 36.1 76.9 -15.0 Ginkgo Bioworks Holdings Inc 8,028 -0.15 21.7 118.5 NA -35.0 Smartsheet Inc 7,952 -0.25 10.3 46.7 NA -19.0 Novocure Ltd 7,818 -0.38 13.0 73.5 960.6 0.3 Shanghai Junshi Biosciences Co Ltd 7,609 -0.89 14.9 61.7 NA -19.4 Guardant Health Inc 7,353 -4.38 14.4 116.5 NA -27.7 Ascendis Pharma A/S 7,021 -8.05 65.0 53.5 423.9 -8.2 Intellia Therapeutics Inc 6,940 -4.10 163.0 69.2 617.9 -21.1 Aggregate / median 686,470   14.6 56.7 455.3 -19.6 Source: Bloomberg and Saxo Group
As Prices Of Fertilizers Grows, Prices Of Food Would Most Probably Increase

As Prices Of Fertilizers Grows, Prices Of Food Would Most Probably Increase

Peter Garnry Peter Garnry 08.02.2022 11:50
Summary:  In today's equity update we take a look at Yara's Q4 results which show that the high fertilizer prices are beginning to hurt demand from the agriculture sector and lower fertilizer use mean less yield and higher food prices which was also recently warned about by Tesco's chairman. The more we look at the economy and all its supply driven constraints the more it looks like the 1970s are coming back to haunt central banks and financial markets. We take a look at equity returns during the 1970s and it is unfortunately grim reading for today's equity investors. Companies can navigate inflation but investors will have few places to hide and it is about time to get exposure to those pockets of the market. From energy crisis to food crisis Yara International has reported Q4 results this morning and it is not good reading. Urea prices (key input for fertilizer production) were up on average three times in Q4 compared to a year ago and Yara is unable to realize prices on par with this growth reflected in its Q4 revenue of $5bn vs est. $5.5bn. Yara is not passing on the full increase in input prices because it would kill demand. Deliveries are down in Europe, Africa, and Asia, while Americas are still seeing positive growth, but delivery declines are due to higher prices. The higher urea and ammonia prices are directly linked to the higher natural gas prices which are haunting Europe and Asia, which was the reason for our Q1 Outlook focus on the energy crisis. Our Head of Commodity Strategy, Ole S. Hansen, has commented on the galloping food prices and the problems in fertilizer production in his recent note High energy costs risk aggravating food price rises. Recently, Russia has announced a two months export ban on ammonium nitrate to secure the country’s own supplies, but the ban can aggravate the situation in many other countries. Two days ago, Tesco’s chairman John Allan said that the worst is yet to come in terms of food inflation, which will disproportionately hit lower income families, as the full effect on food prices from higher fertilizer prices will not be felt until later into this year’s harvest season. As we wrote in our Q1 Outlook, the world has underinvested in energy for too long and we have taken energy supplies for granted, and how now we are paying the price. The green transformation, ESG, and lack of oil and gas investments will drive a long-term energy cycle with marginal higher energy prices to restore incentives and ROIC in traditional energy assets to spur more investment and supply. This transition will create upward cost pressure on all businesses as energy is the foundation of all modern activity. It will also lead to a 1970s style replay in the 2020s. The 1970s were not fun for equities The energy crisis in Europe has already begun a cycle of policy intervention with price controls in France and the UK, and in Denmark the government is contemplating subsidies for low income families. These are also signs that the 1970s are coming back. The next two obvious battlefields for politicians will be soaring food prices and higher interest rates. Both forces will hurt the lower 50% of the income distribution and disrupt voter patterns. Politicians will do what they do best, create short-term panic solutions reacting to the negative forces instead of implementing long-term solutions that aims to solve the structural issues in the economy. The interesting thing about the current regime is that it is the supply side of our economy that is driving the inflation pressures and as such the interest rate will do little to tame inflation unless interest rates are put to levels that kill demand growth; in other words putting the economy into recession to alleviate pressures on ressources. Given the many parallels back to the 1970s it is worth having a look at what it could mean for equities. The two charts below show inflation adjusted logarithmic return in earnings per share and total return (the MSCI USA Total Return Index starts on 31 Dec 1969). We have marked the 1970s in grey to see what happened to earnings and shareholder return during that decade. Corporate earnings had remarkable ability to grow faster than inflation but also growing faster than the long-term trend growth in real earnings (the blue line increases faster than the orange during the 1970s). In other words, companies have an extraordinarily ability to pass on inflation and even come ahead through innovation and productivity gains. However, if we look at the total return for US equities adjusted for inflation the 1970s were ugly years with the real rate of return being -31.8% or -3.8% annualized. How could equities be so bad an investment when the underlying performance of companies were so strong? The simple answer is expectations at the beginning for the 1970s, which are reflected in P/E ratios, which gradually came down during the decade leading to a substantial contraction in valuations eroding the underlying business performance. A combination of higher operating volatility, lower ROIC through higher reinvestment rates to drive revenue growth, and higher discount rate (to battle inflation) all pushed equity valuations down. Do all of these things sound familiar? Inflation components at the expense of growth stocks As we have argued many times over the past year commodities are likely in a supercycle and commodities are one of those sectors that deliver positive inflation adjusted returns during supply-driven inflation periods because they are the primary cause of inflation. Investors have shown this year what they believe will protect portfolios against inflation and is expressed clearly in year-to-date performance across our theme baskets. The commodity sector, travel (due to scarcity driven pricing power), defence, emerging market equities, financial trading, and mega caps. The key word underlying these themes are pricing power and supply, and we believe retail investors should quickly balance equity portfolios between these themes and growth pockets.
Nubank to test fintech appetite; Umicore signs JV with VW

Nubank to test fintech appetite; Umicore signs JV with VW

Peter Garnry Peter Garnry 09.12.2021 13:56
Equities 2021-12-09 13:30 8 minutes to read Summary:  Nubank is set to start trading today on NYSE after closing one of the largest IPOs this year raising $2.6bn. Nubank is a digital first and Brazil's fastest growing bank expected to grow net revenue by 100% in 2021 and backed by Berkshire Hathaway, and will be seen as a major test of the fintech business model and investor risk appetite for this type of businesses. We also take a look at the Belgian-based Umicore which is an unique company set to gain from the green transformation and especially the adoption of electric vehicles. The company has just signed a major JV with Volkswagen. The most valuable bank in Latin America Nubank is a Brazilian-based digital first bank with 40 million accounts and net revenue growth of almost 100% expected in 2021. The bank lists Berkshire Hathaway, Sequoia Capital and Tencent as its shareholders, and is raising $2.6bn in its IPO after reducing its valuation by 20% last week a demand was weaker than estimated. The shares were priced yesterday at $9 and will start trading today on NYSE with the Saxo ticker code NU:xnys. The bank is still not profitable but will still get a market value close to $42bn making Nubank the most valuable publicly listed bank in Latin America ahead of Itau Unibanco. This is a major milestone for the fintech industry and if the IPO turns out to be well-priced and Nubank delivers on expectations in the coming years then it will pave the way for many more fintech companies going public. The overall industry is still lacking to become profitable on a broad scale and Nubank will be the first test. What is interesting about Nubank is that it is rare to see a bank with revenue of $1.04bn in the last 12 months going so fast as investors are used to look at banks being low growth. The deal also highlights that Berkshire Hathaway is slowly changing its behaviour as it was also part of the Snowflake IPO (pure cloud infrastructure play) showing that the investment company famous for not investing in digital technology companies is increasing exposure in these newer technologies. Source: Bloomberg Umicore signs long-term supplier contract with VW The Belgian company Umicore is likely unknown to most but with a market value of €10bn and a very green transformation oriented business strategy, it is a company investors will get used to hear about in the future. Yesterday, Umicore shares were down 9% because the company downgraded its outlook for its battery materials unit, but at the same time it announced a joint-venture (JV) with Volkswagen on supply of cathode materials to Volkswagen’s battery production. The JV expects to ramp up production from an initial output of 20 GWh to 160 GWh by the end of the decade, which is equivalent to power 2.2mn electric vehicles. Volkswagen has planned to build six battery factories in Europe to control the supply chain of the most key component of electric vehicles as the German carmaker drastically ramps up EV production. Back in October Umicore signed Lithium supply deals with Ganfeng Lithium, one of China’s largest producers, and Vulcan Energy Resources from Australia. Source: Saxo Group With the JV, Umicore is positioning itself as gaining a lot growth from adoption of electric vehicles which is expected to deliver very growth rates this decade. Besides its battery materials unit, it also has business units within emission control for traditional cars and materials recycling. Umicore is well positioned to grow with the green transformation and for a better understanding of Umicore’s business the June 2021 investor presentation gives a good overview. In the short-term the business is facing headwinds from lower production and new car registrations across key markets in North America, Europe, and China. Like our Green Transformation basket, Umicore is up 4% following a strong start to the year up 55% by August as the company had the right green profile, but green transformation has suffered lately in terms of sentiment as many green companies have difficulties lifting profitability. Umicore is expected to deliver €1.17bn in EBITDA in 2022 which means that the company is valued at 10x on EV/EBITDA 1-year forward, which is roughly a 25% discount to the MSCI World Index. The consensus sell-side target price is €46. As we wrote in our recent equity note Things are not adding up any longer in the car industry, the valuations on EV-makers have reached levels where expectations are likely exceeding what can be achieved in the coming years due to supply constraints. In our note, we suggest that investors might indirect ways to get exposure to the electrification of the transportation sector such as getting exposure to semiconductor manufacturers to the car industry, lithium miners, battery manufacturers, and Umicore also fits this group of alternatives for investors.
The anatomy of Fed tapering is different this time

The anatomy of Fed tapering is different this time

Peter Garnry Peter Garnry 08.12.2021 14:20
Equities 2021-12-08 14:00 8 minutes to read Summary:  Growth and bubble stocks celebrated its best day in nine months yesterday on good news about the Omicron variant, but the true underlying risk in the form of higher interest rates has not gone away. The Fed has acknowledged inflation which will give it less flexibility should tapering cause some wave splash in equities. Interest rate sensitivity will be a key theme in 2022 for equities and especially growth and bubble stocks. For those growth companies that can lift expectations for operating margin trajectory can mitigate the negative impact from higher interest rates, but those growth companies that fail to lift profitability will likely experience a tough 2022. Bubble stocks are back on positive Omicron news It was a blockbuster equity session like we have not seen in nine months with our NextGen Medicine, E-commerce, and Bubble Stocks baskets gaining between 5% and 6.6%. The culprit was of course the continued positive news flow suggesting that the new Covid-19 variant Omicron is less virulent than feared and today Pfizer announced that three shots with their vaccine protect against Omicron. Does that change the overall concern for growth and especially bubble stocks? In our recent equity note Interest rate sensitivity is back in town haunting technology stocks we show quantitatively how the Nasdaq 100 Index (US technology stocks) is significantly more interest rate sensitive than the S&P 500 Index and STOXX 600 Index (see chart below). This interest rate sensitivity is key to understand the underlying risk in growth and especially bubble stocks, and the risk of higher interest rates has gone away. The Fed will have less flexibility this time In fact the Fed has acknowledged that inflationary pressures are more rooted and broad based, and of concern for US households seeing their purchasing power declining. The Fed has three times since early 2013 tried to taper its bond purchases all with negative impact on financial assets. Every time markets hit a big enough pain point, the Fed reversed and restarted quantitative easing. This could be done because inflation expectations were low and well anchored. But fast forward and today’s inflationary outlook is very different and the Fed might not be in a position where it can go back to expanding the balance sheet. Tapering will be accelerated in the coming months and then rate hikes are coming and if the economy or financial markets are deteriorating the Fed might have to remain tight to control inflation. As we have said many times the past couple of months investors must balance their portfolios before the tighter monetary policy cycle kicks properly into gear. Investors should reduce exposure to growth and bubble stocks, while increasing exposure to themes that can provide some cover during inflationary pressures. The themes we think will do well during inflationary periods are mega caps (Microsoft’s recent price hike shows why), semiconductors, logistics, financial trading firms (bet on volatility), cyber security (business necessity), and the commodity sector. The fact that mega caps have reached unimaginable market power and are hugely profitable is bad for the overall economy, but it is likely going act as a cushion for the equity market when interest rates start rising. The chart below shows another important aspect of markets that we need to be aware of. The decade of the 2010s was the best decade in terms of earnings growth adjusted for inflation in the S&P 500 since WWII. It explains the multiple expansion under lower interest rates, but it also explains the rise of passive investing as the rapid earnings growth has lifted all boats. The 2010s is unlikely be repeated in the current decade and a higher inflationary outlook will likely give rise to a different investing climate in equities and active strategies might stage a big comeback. Higher operating margin will differentiate growth stocks in 2022 We recently modeled a growth stock which had a price implied expectation of four years into the future, meaning that the market value was derived by extrapolating consensus expectations of growth and operating margin until 2025. The interesting part of this analysis is to find out which parameter gives rise to the biggest change in market value. In this case it was not revenue growth unless it went down a lot, which would only happen under a recession scenario. An upside change to operating margin expectations drives a rather large change in value; in other words, growth companies that can raise operating margin faster than expected will get rewarded. But the most sensitive parameter to the market value was the interest rate. By moving up the 10-year interest rate by 100 basis point the company’s value fell 26% because the higher interest rate impact financing costs on debt and the cost of equity. The example above provide a glimpse into the important battleground in equities in 2022. Higher interest rates because of higher inflation combined with the fiscal drag will create an environment with higher discount rate on cash flows while likely lower overall growth. This will penalize a lot of growth and bubble stocks, these companies can only mitigate this impact by raising operating margin beyond current expectations. If they do not manage to do that, then we could see great losses in 2022 in these pockets of the equity market.
The risk vortex of crypto and bubble baskets

The risk vortex of crypto and bubble baskets

Peter Garnry Peter Garnry 06.12.2021 14:04
Equities 2021-12-06 13:30 5 minutes to read Summary:  Our Bubble Stocks and Crypto & Blockchain baskets are the two worst performing baskets this month as these pockets of the market are currently going through a big realignment in terms of expectations. The Fed's new objective of getting inflation under control will accelerate tapering and led to several rate hikes next year. Combined with a significant fiscal drag next year, US growth stocks will be hit by both lower growth and higher discount rate on cash flows, the worst of all combinations. This means that growth stocks that can show a credible upward sloping path on operating margin will fare much better whereas growth stocks that will fail in delivering higher operating margin will experience more trouble. Friday’s price action was not pretty. Despite strong economic figures from the US the 10-year yield declined and normally that would have been a positive for technology stocks, but instead Nasdaq 100 continued lower with our Bubble Stocks and Crypto & Blockchain baskets leading the declines. On Saturday, Bitcoin was down as much as 21.2% at the lows adding to the woes of these pockets of the market. We know from surveys that there is a large overlap in exposure between investors in growth/bubble stocks and cryptocurrencies and that it is people under the age of 35 that dominates the exposure. Source: Saxo GroupThe Crypto & Blockchain basket (see composition below) is down 12.7% in December making it the worst performer and if we see the Fed getting ahead of the curve hiking rates three times next year then it could take more steam out of the crypto industry. The recent high profiled listing of Bakkt through a SPAC is a crypto related company that we will soon release a more thorough analysis of. As the table below also show analysts remain bullish on the industry with a median price target 77% above current prices. The key risk for bubble stocks and crypto related assets this week is the US inflation report on Friday which could accelerate the market’s expectations of tapering and rate hikes if inflationary pressures remain stubbornly high. Name Segment Market Cap (USD mn.) Sales growth (%) Diff to PT (%) YTD return (%) 5yr return Coinbase Global Inc Crypto exchange 57,169 139.3 44.1 NA NA Signature Bank/New York NY Bank 18,487 9.7 22.2 128.2 110.5 MicroStrategy Inc Investment firm 6,896 5.1 38.5 62.4 218.0 Galaxy Digital Holdings Ltd Crypto services 6,245 NA 83.5 128.3 1,213.0 Silvergate Capital Corp Bank 4,364 61.3 32.1 121.0 NA Marathon Digital Holdings Inc Crypto mining 4,274 4,562.5 64.1 298.9 57.7 Bakkt Holdings Inc (*) Digital assets platform 3,354 NA 114.9 29.3 NA Riot Blockchain Inc Crypto mining 3,339 1,497.4 90.3 68.6 659.6 Northern Data AG Infrastructure 2,523 62.7 20.7 26.8 NA Voyager Digital Ltd Crypto broker 2,105 8,169.3 83.1 234.0 NA Monex Group Inc Financial institution 1,827 75.3 50.4 111.2 182.7 Hut 8 Mining Corp Crypto mining 1,553 203.9 102.8 241.8 352.1 Hive Blockchain Technologies Ltd Crypto mining 1,216 395.3 NA 67.4 3,900.0 Bitfarms Ltd/Canada Crypto mining 1,194 7.0 57.0 220.0 NA Canaan Inc Infrastructure 1,040 225.5 NA 2.2 NA Stronghold Digital Mining Inc (*) Crypto mining 872 NA 132.3 NA NA Argo Blockchain PLC Crypto mining 690 131.5 127.5 236.4 NA Coinshares International Ltd (*) Digital asset management 586 NA -7.3 NA NA Bit Digital Inc Crypto mining 571 NA 69.9 -62.4 NA Bitcoin Group SE Crypto broker 236 138.7 187.4 -41.8 626.8 DMG Blockchain Solutions Inc Investment firm 128 2.7 104.1 58.1 1,533.3 Digihost Technology Inc Crypto mining 118 NA NA 100.7 NA Taal Distributed Information Technologies Inc Blockchain platform 105 NA 139.5 49.0 NA Future FinTech Group Inc Blockchain e-commerce 85 2,555.0 NA -35.1 -83.6 Quickbit EU AB Crypto payment services 59 -27.2 NA -18.1 NA Safello Group AB Crypto broker 17 NA NA NA NA Aggregate / median   119,055 135.1 76.5 68.0 352.1 Source: Bloomberg and Saxo Group* Added to theme basket on 29 October 2021** Infrastructure segment means physical computing applications for crypto mining Growth stocks have a profitability problem more than a growth problem The selloff in growth stocks have many liquidity and technical characteristics, and the recent shift by the Fed to focus on getting inflation down is beacon of what to come. The Fed will accelerate its tapering of bond purchases and move more quickly on interest rates which means that the discount rate will go up while growth might face headwinds from higher interest rates and a fiscal drag (the fiscal deficit will shrink in 2022). This is a double whammy for growth stocks. DocuSign’s Q3 earnings release was portrayed as a problem of revenue growth but if you model the company’s shareholder value then you will see that the more sensitive parameter to its implied expectations is its future operating margin. While DocuSign lifted its operating margin to 3.1% for the quarter up from 0.5% in Q2 and -5.2% a year ago, it was still below expectations and that extends the trajectory for improving the operating margin and thus lowers the value of the company. Many growth companies will not have growth trajectories that will differ much from what is implied in current market values, and a downside miss is definitely not the biggest downside trigger on market value. The reality is that growth stocks are priced for high growth and then a hockey stick on operating margin, but if that hockey stick is pushed further out then it has a big impact on market value. The next year will separate growth stocks into two camp. Those that can deliver on expanding their operating margin and those that will fail to do that. 
Twitter steps out of Dorsey’s shadow

Twitter steps out of Dorsey’s shadow

Peter Garnry Peter Garnry 30.11.2021 17:54
Equities 2021-11-30 14:30 6 minutes to read Summary:  Twitter's founder Jack Dorsey is stepping down as CEO leaving the reign to CTO Parag Agrawal. This is hopefully the beginning of a new trajectory for Twitter that has underperformed relative to its potential for way too long. The company has two main objectives. Lift revenue growth to around 30% which would put Twitter well above Facebook and Alphabet in terms of growth, and then drastically improve the operating margin to around 35% which would be almost double of the current level. Is this Twitter’s Nadella moment? Another technology founder in Silicon Valley is leaving the stage, Mark Zuckerberg of Meta is one of the few left, with Jack Dorsey stepping down as CEO after presumed a lot of pressure from shareholders such as the activist hedge fund Elliott Management. His successor is the CTO Parag Agrawal and Dorsey will stay on the board for 2022. The main question is whether this is Twitter’s Nadella moment (Nadella is the current CEO of Microsoft and took over in 2014) meaning whether the new CEO with less strings attached and not being a founder can drastically change the growth and product profile of the company. Too much fat Our main issue with Twitter has always been the lack of consistency in operating margins. Given how consistent Google and Facebook are running their business it has always been a mystery why Twitter has not been more consistent in its operating performance. The company’s operating margin has come down for three straight quarters despite a healthy backdrop for online advertising spending in terms of demand and pricing. Free cash flow generation has been very disappointing over the past year and ultimately that has been driving the share price lower. Twitter has to fundamentally improve the EBITDA margin from its current 18.5% to somewhere closer to 35%; it will be a stretch to demand Facebook-like margin of 50%. If Twitter’s new CEO can deliver that then shareholders are in for some great returns. But more importantly there are no excuses for not delivering high revenue growth while improving the operating margin when you are generating $5bn in annual revenue. Facebook and many other technology companies have been able to grow revenue and operating margin at the same time. Twitter must do the same. Source: Bloomberg So there are two operating yardsticks for shareholders: revenue growth and operating margin. The latter should easily be done by either reducing headcount or at least stop hiring more people at the same pace as before. On revenue growth the key yardstick is to grow faster than the duopoly (Meta and Alphabet) which is expected to grow revenue around 20-25%. Twitter needs to take market share and get closer to Snap revenue growth in order not to lose the narrative and sentiment from investors. In our book, Twitter should be able to grow 30-35% on improved engagement, product features, more brand spending from large brands etc. and with analysts currently estimating 21% revenue growth in 2022, there is a heavy and urgent task ahead for the new CEO. Source: Bloomberg Twitter is an acquisition target With Dorsey gone as CEO and eventually leaving the board by late 2022, it clears the way for an acquisition of the company should the right buyer with the right price come by. Twitter could be an interesting bolt-on acquisition for a traditional media company that wants to enter the social media industry. Investors were initially trading the shares higher on the news of Dorsey stepping down, but the shares ended lower for the session now down 43% from the peak in late February. Given the expectations from earlier this year it is clear that the company has not performed as expected and the new CEO Agrawal will have to quickly earn the trust of investors. For Twitter we really hope this is the company’s Nadella moment. Analysts remain positive on the stock with a 12-month price target of $68 which 49% above yesterday’s close.
Things are not adding up any longer in the car industry

Things are not adding up any longer in the car industry

Peter Garnry Peter Garnry 29.11.2021 13:49
Equities 2021-11-29 13:00 10 minutes to read Summary:  In today's equity research note we take a look at the global car industry. Since late 2005 it has been a low growth industry also reflected in the low total return of the industry prior to the pandemic. But during the pandemic and with the high revenue growth rates of pure electric vehicles makers the industry's combined market value across traditional carmakers and pure EV-makers has gone to unprecedented levels reflecting excessive expectations that we do not think can hold. The reason behind this is the acceleration in EV adoption and we provide concrete alternatives to bet on this transition without getting exposure to pure EV-makers with elevated equity valuations. Market value does not add up with structural growth profile This year should have been the year when the global car industry came back from the dismal 2020 impacted by the global pandemic and a 6% rise in global new passenger car registrations could be interpreted as the industry coming back. However, as the chart on car registrations in the US, Europe, and China shows, the global car market has been weakening the past couple of months and most notably in Europe. In fact, the combined new car registrations across the three largest car markets in the world are down 19% from the peak in August 2018. Since December 2015, global new car registrations have only grown by 1.8% annualized with a clear saturation starting in early 2017 and then turning into a longer term decline by late 2018. It seems that the global car market has become saturated and the pandemic exacerbated an already weak industry on the demand side. As demand came back, the car industry faced new issues on supplies of semiconductors. In the early days of the pandemic, car manufacturers cancelled orders on semiconductors as they believed demand to be weak for a long time, but as governments unleashed unprecedented stimulus economies weather the pandemic and with the vaccines approved in late 2020, the economy came roaring into 2021. But car manufacturers buy lower margin semiconductors and as they were late to come back ordering semiconductors, the semiconductor industry had already found willing buyers due to high demand on graphics cars for gaming and crypto, and semiconductors used in datacenters and computers. Car manufacturers were put back in line and have ever since scrambled to get priority causing production to be reduced on lack of semiconductors. The pandemic and climate change awareness also happened to ignite demand for electric vehicles (EVs) and the EV transition may have reached an inflection point where it is beginning to drive postponement of buying a gasoline car. Why buy a technology that is being phased out and why not buy an EV when governments are providing incentives to do so? Despite these structural challenges and low growth profile the MSCI World Automobile Index has exploded in value over the past 18 months driven by a bonanza in EV-makers and excessive expectations best exemplified around the Rivian IPO. From December 2005 to the peak in new car registrations in August 2018, the index gained 5.2% annualized compared to 3.9% annualized gains over the period in new car registrations. This highlights that market value more or less follows volume plus/minus changes in price mix and operating margins. With the recent gain in the global index on car manufacturer the industry’s market value has become completely unanchored to the underlying structural growth rate. The only explanation that can justify this is new car registrations quickly closes the drawdown from August 2018 and that EVs can be manufactured at higher operating margins, but this requires that competitive forces do not force retail prices on new cars down to the old profitability level on gasoline cars. Source: Bloomberg EV bonanza will end in a graveyard The key change in the car industry is the production ramp-up of EVs as consumers are increasingly demanding these new cars. Public markets have been flooded with new car companies producing only EVs and the market is currently putting a higher market value on the 11 largest EV-makers compared to the 11 largest traditional carmakers. As we have written in previous research notes this reflects excessive expectations on EVs that we find difficult to justify given the structural growth profile of the overall car industry. Having said that the outlook for cars over the coming three decades is clearly in our view. ICEs will experience a negative growth profile while EVs will have a steep growth curve over the next 10 years before gradually slowing down. But are pure EV-makers the best play? At current market values, we believe expectations are set above what these companies can deliver and we encourage investors to find other ways to bet on the high growth rates in EVs. One way is to find exposure among semiconductor companies with exposure to cars, lithium miners or battery makers for the batteries to EVs. The list below highlights a few names across this supply chain for EVs. Infineon Technologies (semiconductors) NXP (semiconductors) Renesas (semiconductors) Texas Instruments (semiconductors) STMicroelectronics (semiconductors) Jiangxi Ganfeng Lithium (lithium miner) Albemarle (lithium miner) SQM (lithium miner) Livent (lithium miner) Orocobre (lithium miner) Panasonic (battery) QuantumScape (battery) TDK (battery) Gotion High-tech (battery) Varta (battery) Should carmakers spin off their EV units? Given the market value on pure EV-makers the traditional carmakers should in our view consider spinning out their EV units into separate businesses with their own public listing, but maintaining majority shareholder control. The higher market value for a pure EV-business could be used to raise significant amount of capital to accelerate growth in production, but a separate business unit could reduce friction from internal culture and political fights. The recent problems internally at VW show that labour unions and workers in the traditional internal combustion engine divisions will make the transition difficult. Porsche is a good bet on a specific EV spinoff from a traditional carmaker and something that could yield a significant valuation improvement. Porsche is aiming to get 40% of revenue from EVs in 2025. If traditional carmakers are not spinning off their EV units, we believe they will have difficulties keeping up with pure EV-makers.
New virus strain pulls back online vs offline bets in equities

New virus strain pulls back online vs offline bets in equities

Peter Garnry Peter Garnry 26.11.2021 11:52
Equities 2021-11-26 11:20 7 minutes to read Summary:  Equities markets are selling off due to new virus strain due to this strain being much more infectious than the current dominant variants, but more importantly uncertainty over how effective the vaccines will be on this new strain. This uncertainty lifts the probability of more lockdowns and travel restrictions and as a result traders selling off physical companies in energy, mining, financials and consumer discretionary against health care, utilities, and technology stocks. While overshadowed of today's risk-off event there have been several key news out on Chinese equities related to Didi Global, Evergrande, and Meituan which we cover in today's equity update. Equities react to increased likelihood of new lockdowns Financials markets are in upheaval over a new Covid virus strain (called the Nu variant) has been identified in South Africa, which seems to be more infectious than the current dominant strains. With Europe and some northern parts of the US in a stretched situation to an already high number of new cases and hospitalizations, this new virus strain comes at the worst possible time. The good thing is that the more infectious the virus get the less likely it is to also get more virulent, but it can still put pressure on hospitals. Equities are reacting negatively because it is unknown at this point to what degree the vaccines will be effective against the new strain, and thus it increases risk of new lockdowns which leads to an economic hit. Another good thing is that South Africa has been open and transparent about the virus strain which means that countries can react faster and because societies are better prepared the impact overall on the economy such be less than initially during the pandemic. The online vs offline companies trade is expressed today Due to the rising probability of lockdowns, which was already in play before the news of the new virus strain, traders and investors are again pulling out the pandemic playbook on equities. The chart below shows Nasdaq 100 futures vs Stoxx 50 futures over the past 10 trading days which expresses the online/technology vs offline/physical companies. The idea is that online companies can better weather new lockdowns where as companies operating in the physical world obviously are more impacted by travel restrictions and potential lockdowns. Smaller companies are also more vulnerable which is why Russell 2000 futures and the global index on small cap companies are under pressure today. Liquidity is thin today going into the weekend and being on the backside of Thanksgiving in the US (trading in US equities ends today at 1300 EST) and thus the initial reaction in equities was aggressive, whereas a couple of hours into trading European equity futures have bounced back somewhat. Not surprisingly the worst performing sectors today in Europe are energy (lower demand for oil), financials (potential hit to loan books), industrials (more supply constraints and lower demand), consumer discretionary (lower demand for cars and other large consumer items), where as health care, utilities, and technology companies are less off as these sectors are necessities and can weather lockdowns better. China equities continue to weighed down by bad stories Besides the risk-off trade in equities several key stories have hit Chinese equities over the past 24 hours. The Chinese government has asked Didi Global to delist from NYSE emphasizing once again the hidden volatility in Chinese listed stocks in the US. Our view remains that investors that want exposure to China should do that through mainland and Hong Kong listings. Stocks related to the housing market was impacted negatively today from news that Evergrande’s founder Hui Ka Yan has sold shares worth $344mn which is seen as a negative for the company and the industry’s outlook, as the Chinese government is urging Hui to use his own wealth to bolster the company’s finances. Finally, Meituan has reported Q3 earnings showing revenue growth of 38% as expected but operating margins under pressure leading to widening losses as the technology crackdown and “Common Prosperity” are forcing Meituan to increase operating expenses on social security for its gig workers. Appendix: 5-year chart on Nasdaq 100 and Stoxx 50 futures
Danish equities are feeling the heat from interest rates

Danish equities are feeling the heat from interest rates

Peter Garnry Peter Garnry 24.11.2021 14:14
Equities 2021-11-24 13:00 6 minutes to read Summary:  The last two trading days US technology stocks have been impacted by rising interest rates and rising market expectations of Fed rate hikes next year. US technology stocks have interest rate sensitivity due to their high equity valuation, but several other key equity markets such as Netherlands, New Zealand, Singapore, Switzerland, and Denmark are also having high equity valuation and thus high duration. These equity markets would likely underperform next year if the interest rates move considerably higher. In yesterday’s equity note, we showed how Nasdaq 100 and STOXX 600 are the yin and yang of interest rate sensitivity based on equity market reaction this year with Nasdaq 100 underperforming significantly when the US 10-year yield has a large increase. But outside these two major equity indices, investors felt what higher interest rates can do to sentiment. Danish equities were down 3% in its worst day since March 2020 during the panic days of the pandemic and Dutch equities were down 3.1%. What do these two markets have in common? They both have equity valuations that are well above many other markets, which simplistically can be translated into higher duration which means that these equity markets are more sensitive to big changes in interest rates. Why is that? Because high equity valuation implies that a larger part of the present value comes from the terminal value on cash flows (meaning way into the future) and this value is more sensitive to the discount rate. Dutch equities are the most expensive of 26 equity markets in the developed and emerging markets with a 12-month forward EV/EBITDA of 23.3x with Denmark and Switzerland less frothy at 14.3x and 14.7x respectively. If we exclude Australia, India, New Zealand and Singapore from yesterday’s market reaction because of the time delay to the US session then we do observe that equity markets with high equity valuations were hit harder yesterday confirming that we did observe a repricing related to a larger move in interest rates. It is all related to the value vs growth trade which is essentially STOXX 600 vs Nasdaq 100, but which can also be expressed between individual equity indices such as Norway vs Denmark. The main point of yesterday’s equity note and today’s observations is that we have a group of equity markets such as Netherlands, New Zealand, Singapore, USA, Switzerland, and Denmark that are in the high equity valuation group. These markets have higher interest rate sensitivity and would likely underperform in a rising interest rate environment and exacerbated if flows also favour value over growth. In our view the equity market is telling investors that tail risks are rising for high duration equities and in order to mitigate this investors should begin balancing their portfolios better between high valued growth stocks and value stocks such as energy, financials, and mining companies. Appendix: 5-year charts of OMXC25 (Danish equities) and AEX (Dutch equities)
Interest rate sensitivity is back in town haunting technology stocks

Interest rate sensitivity is back in town haunting technology stocks

Peter Garnry Peter Garnry 23.11.2021 16:23
Summary:  Interest rate sensitivity came back roaring yesterday pushing down all of our growth baskets. Yesterday's move shows the potential for a correction in US technology stocks should the US 10-year yield continue to rapidly advance towards the highs from March. We also show how the Nasdaq 100 and STOXX 600 move in opposite direction during large up or down days in the US 10-year yield. Growth baskets look awfully vulnerable Yesterday’s move in the US 10-year yield of 8 basis points made it the 10th biggest move higher in US yields this year. Back in March when technology stocks were under pressure we wrote a lot about interest rate sensitivity in growth stocks as their present value are derived from expected cash flows further into the future than the typical MSCI World company. If interest rates rise faster than future growth expectations then the net effect is negative on the present value and more so for growth stocks as they have a higher duration. We saw downside beta (higher sensitivity) in all of our growth equity baskets with the gaming basket down 2.3% and the worst performers being the E-commerce and Crypto & Blockchain baskets down 4.2% and 5.1% respectively. This tells you a lot about the sensitivity and given the drawdown in technology stocks back in March, we could easily experience a 15-20% drawdown in technology stocks. The local highs from March in the US 10-year yield is the key level to watch for a breakout and a new trading environment. With all the options activity in Tesla dwarfing the combined options activity in FTSE 100 constituents, we believe Tesla will be at the center of the next risk-off move in technology. Nasdaq 100 vs STOXX 600 are yin and yang of interest rates We have previously tried to calculate the interest rate sensitivity, but this time we are pursuing a different approach. We look at the past 231 trading days this year and group the 1-day difference in the US 10-year yield into deciles. In order to measure interest rate sensitivity we calculate daily excess log returns for Nasdaq 100, S&P 500 and STOXX 600 against the MSCI World Index and compute their average daily excess return for each decile. As the barplot shows, there is significant negative excess return in Nasdaq 100 in the 1st decile (the 10% days with the highest positive difference in US 10-year yield) and significant positive excess return in STOXX 600. This makes perfect sense because Nasdaq 100 is high duration growth stocks and STOXX 600 has a clear value tilt towards financials, energy and mining which exhibit much lower duration. The pattern is completely reversed in the 10th decline (days with large negative difference in US 10-year yield). The other eight deciles do not show the same clear spread between Nasdaq 100 and STOXX 600. In other words, if interest rates suddenly move aggressively higher then growth portfolio will take a serious hit and hence why we recommend investors to improve the balance between growth and value stocks, or said differently reduce the equity duration.
Special Podcast: Happy 30th Birthday To Saxo, An Overview Of The Market In Recent Decades And Reflection On Its Future

ChiNext: The growth market that has defied Chinese equity trouble

Peter Garnry Peter Garnry 22.11.2021 14:26
Summary:  ChiNext is up 19% this year while the rest of the Chinese equity market is down highlighting that there is a high quality pocket in China that investors should have on the radar. The ChiNext Index comprises of leading technology companies within battery and medical technology including biotechnology. It is a closed market for most investors but luckily a Hong Kong based asset management is offering a Hong Kong listed ETF providing exposure to this interesting market in China. China has a growth pocket nobody talks about This year has been a rollercoaster ride for Chinese equities. It all started with blistering growth and strong momentum in Chinese equities before rising US interest rates and inflation talks temporarily ended the trade in technology stocks. While technology stocks came back in the developed equity market Chinese equities went from crisis to crisis, first in housing during the summer months and which is still ongoing, to that of an energy crunch like in Europe as energy prices have galloped higher. But there is one pocket in the Chinese equity market that has defied the negative forces of higher energy prices and housing woes, and that is the ChiNext board on the Shenzhen Stock Exchange. ChiNext is up 19% this year highlighting a stunning comeback following a 29% drawdown during the technology correction during February and March. CSI 300, the leading benchmark index of Chinese mainland equities, is down 4% this year, and Hang Seng in Hong Kong is down 6% this year. While ChiNext is the crown jewel in terms of innovation and growth companies within key technology, it has struggled to deliver against Nasdaq 100 which is up 29% this year, and since June 2010, Nasdaq 100 is up 23.2% annualized compared to 13.1% annualized for ChiNext. ChiNext is closed market for foreign investors In recent years China has opened up its capital markets making it easier for foreign investors to invest directly in mainland China equities listed in Shanghai and Shenzhen, but the ChiNext board is still closed land for most investors due to prohibitive rules. In effect it is only accessible for few foreign institutional investors. Luckily the ETF market is providing an opportunity for retail investors to get access to this market through the CSOP SZSE ChiNext ETF (Saxo ticker is 03147:xhkg) managed by CSOP Asset Management which is a Chinese regulated asset management firm based in Hong Kong with $10bn in asset under management as of December 2020. The ETF consists of 160 securities with $110mn in assets and tracking the ChiNext Index and a total expense ratio of 1.16%. The ETF uses a combination of a physical representative sampling and a synthetic representative sampling strategy (swaps), which means that the fund is not holding the underlying index 1:1, but tries minimize the tracking error through sampling. This enables the fund to minimize tracking error while getting better liquidity conditions for investors. The 10 largest positions in the fund constitute 49.3% of the funds market value with Contemporary Amperex Technology (CATL) being the largest position with 19.1% weight and also the biggest company in our battery equity basket. CATL is one of the world’s largest manufacturers of lithium-ion batteries and is becoming China’s crown jewel within the fast-growing and emerging battery industry which will be transformational and essential to the green transformation including electric vehicles. The ETF also provides exposure to China’s largest financial and stock information provider East Money Information with $1.8bn in revenue and growing 82% over the past year. The ETF also gives exposure to some of the most interesting medical technology and biotechnology companies in China. The 10 largest holdings in the CSOP SZSE ChiNext ETF The history of ChiNext and why it will play a major role ChiNext was first discussed in August 1999 in the CPC Central Committee and the State Council during the height of the dot-com bubble. China was looking at the technological change in the US and especially what was going on with the Nasdaq exchange. In August 2000, China decided that the Shenzhen Stock Exchange should prepare to create a second board which should include innovative companies with key technologies in order to support growth industries. The ChiNext board was inaugurated on 23 October 2009. In 2020, more than 800 companies were listed on the ChiNext Market with the combined market capitalization approaching $1trn.
Electrification and urbanisation will drive growth in copper

Electrification and urbanisation will drive growth in copper

Peter Garnry Peter Garnry 22.11.2021 08:26
Summary:  Copper is an essential metal in our green transformation driven by electric vehicles and upgrades to our electric grid infrastructure. The ongoing urbanisation in the world is also driving construction which is one of the key demand drivers for copper. The demand outlook looks strong, but how can investors get exposure to copper. We explore the different options and highlights specifically six miners with high exposure to copper. The long-term growth drivers of copper The green transformation will electrify the global economy as cars go electric and more homes in colder areas will switch from natural gas as heating source to that of air to water heat pumps. In warmer parts of the world we will continue to see an acceleration in air conditioners to cool homes. The main usage of refined copper is for electrical applications, but it is also used in housing (pipes and fittings), cars, telecommunication and industrial machines. Copper has the second highest thermal conductivity at room temperature among pure metals and is thus the preferred metal used in electrical applications. As the world electrifies in the name of the green transformation and rapid urbanization continues in Asia, Africa, and South America, copper will continue to enjoy strong annual growth rates. How to get exposure to copper? Copper has been rebranded as a green metal because of its importance for the green transformation and investors are increasingly asking us how to invest in copper. The most direct way is of course to invest in high grade copper futures on COMEX (part of CME Group) with the current active contract being the Mar 2022 contract (Saxo ticker: HGH2), but the contract has a contract value of around $106,537 at current level making it inaccessible to most retail investors. One could also invest through CFD on futures (Saxo ticker on the Mar 2022 is COPPERUSMAR22) where the investor could buy 100 pounds of copper instead of 25,000 pounds in the futures reducing the contract size to $425. However, getting exposure through CFDs and futures the investor must regularly roll the contract to the next active contract, and the investor could also incur financing cost increasing the drag on performance. The chart below shows the continuous futures contract on high grade copper since 2002. Source: Saxo Group Few miners offer pure exposure to copper Another way to get exposure to copper that removes the difficulties of rolling futures or CFD contracts is to invest in mining companies that extract or refine copper. The table below shows 16 mining companies with exposure to copper with Codelco, the largest copper producer in the world, absent from the list as the Chilean miner is only listed in Chile and thus not investable for our clients. The copper mining industry has delivered a median total return in USD of 132.6% over the past five years beating the global equity up 105% in the same period. The rising copper prices the past year driven by investors positioning themselves in green metals (defined as metals that will play a key role in the green transformation) which in turn has pushed up revenue in the industry by almost 40%. Sell-side analysts are generally bullish on copper miners with a median upside of 16% from current levels. In our view investors should select one or two copper miners to get exposure and avoid the ETFs on the industry as they are too broad-based and lack the pure exposure profile needed to play the copper market. Name Market cap (USD mn) F12M EV/EBITDA Revenue growth (%) Price-to-target (%) 5Y return (USD) Revenue from copper (%) Antofagasta PLC 18,871 5.1 43.8 3.4 166.6 84.8 First Quantum Minerals Ltd 14,962 5.1 41.9 20.9 111.3 84.2 Southern Copper Corp 45,944 8.6 39.7 3.1 128.9 81.6 KGHM Polska Miedz SA 7,026 3.8 28.3 26.4 80.0 73.8 Jiangxi Copper Co Ltd 9,843 7.2 44.6 37.8 27.3 71.0 OZ Minerals Ltd 6,397 7.6 38.7 -6.1 288.4 60.0 Glencore PLC * 65,890 4.5 -7.5 13.9 78.2 39.0 Boliden AB 9,291 5.1 26.2 3.7 68.1 35.0 Freeport-McMoRan Inc 57,080 5.7 55.5 13.2 193.3 33.7 Teck Resources Ltd 14,468 3.9 28.7 19.9 22.0 27.0 BHP Group Ltd 131,046 4.0 41.7 18.6 136.4 26.0 Zijin Mining Group Co Ltd 39,925 8.8 27.4 52.1 396.4 22.7 Anglo American PLC 47,342 3.5 59.0 15.7 262.8 22.3 MMC Norilsk Nickel PJSC 47,479 5.1 27.1 13.5 191.1 20.6 Rio Tinto PLC 98,497 3.6 39.5 15.8 149.2 11.5 Vale SA 60,329 2.5 77.2 87.6 111.4 5.5 Aggregate / median 674,389 5.1 39.6 15.7 132.6 34.4 Source: Bloomberg and Saxo Group* EBITDA contribution as Glencore does not breakdown revenue split on metals As the table also show, there is no such thing as pure exposure to copper except for futures, options and CFDs on the underlying copper. The miner with the highest revenue exposure to copper is Antofagasta with 84.8% revenue share from copper extraction and refining. Most copper miners also extract gold and silver as part of their copper operations. Out of the 16 copper miners in our list, only 6 of these miners have more than 50% of revenue coming from copper extraction and refining. Outlook and risks High grade copper futures have been range trading for more than half a year as slowing demand out of China due to a slowdown in housing construction has weighed on the demand side. On the positive side inventories have been tight in copper which has helped support the copper price and the global pipeline of new copper mines, but also potential tax charges in Chile and Peru (roughly around 40% of global supply) could negative impact supply and keep copper prices high. The annualized growth rate in global refined copper demand has been around 3% in the period 2009-2020. China has for many years been the key driver of demand growth for copper, but going forward electrification (electric vehicles and air-to-water heat pumps and urbanization in India will begin to play a bigger marginal role on demand creating a more steady and diversified demand picture. In 2022, demand outside China will be driven by construction, grid infrastructure, and transport. Another risk to copper demand is significantly higher interest rates next year as that would curtail growth in construction which is interest rate sensitive.
Rivian sprints past Volkswagen on market value – what’s going on?

Rivian sprints past Volkswagen on market value – what’s going on?

Peter Garnry Peter Garnry 18.11.2021 16:15
Summary:  Rivian has become a new phenomenon we have never seen before getting a $153bn market value with zero revenue booked. However, the company has pre-orders for around $9.4bn in revenue but even with optimistic assumptions the estimated cash flow from these orders can not even remotely justify the current valuation. Too high expectations are always a dangerous thing for investors and Rivian has taken speculation to a new level in EV stocks. In yesterday’s equity update, we wrote about the current bonanza in EV stocks with the 11 largest EV-makers in the world now worth more than the 11 largest ICE-makers. The recent IPO of Rivian has taken equity valuation and high expectations of the future to a whole new level. Rivian reached a market value of $153.3bn on yesterday’s close more than double the IPO valuation in just a few trading sessions. But here is the kicker, the EV-maker has never booked any revenue. This dwarf anything we have ever seen before and makes our bubble stocks look cheap. Source: Saxo Group Expectations are so high that Rivian can only disappoint Let’s look at some facts. Rivian is backed by Amazon which has made an order for 100,000 EDV (Rivian’s electric delivery van) with an attached exclusivity for the next 4-6 years from the first delivery with an option of first refusal. This is a key execution risk and could impact Rivian from diversifying their revenue. In addition, they have around 55,000 pre-order for their R1T and R1S trucks/SUV (for passengers). If we assume an average selling price of $50,000 for the vans, which is close to the normal price for a Ford van, and $80,000 on average for their passenger vehicles, then they have orders worth $9.4bn. If we assume that they can get to the same operating margin as Tesla has had in the last 12 months (9.6%) and we assume 25% cash tax rate, then this revenue constitute net operating income after taxes of $677mn. Assuming cost of capital of 10% (primarily equity financed with a high beta and early-start risk premium) and we play with the thought that this revenue/orders were a perpetuity and it could pass on inflation of 3% in the future, then this cash flow is worth $10bn today, a far cry from the current $153bn valuation. While these estimates are crude and not meant to provide the definitive answer to Rivian, it gives an idea of the expectations that the current share price reflects relative to what the company has in terms of orders. Expectations are so high that there is an elevated probability that EV-maker will disappoint investors. Ramping up production of EVs has proven to be difficult with only Tesla and Volkswagen looking to have found a way.

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