The global growth cycle at risk

• The ECB turned more hawkish faced with persistently high eurozone inflation
• In China, both imports and exports have slowed down significantly in recent months due to the impact of Beijing’s zero-Covid policy
• Pending some market stabilisation, we remain negative on equities

The much-awaited US consumer price index was higher than expected but came with a few surprises. Inflation decreased from 8.5% to 8.3%. Energy prices decelerated. Petrol prices were, however, offset by higher electricity and natural gas prices. Food was more expensive and plane ticket prices jumped 18.6% over the month. The data triggered another wave of uncertainty, sending Wall St sharply lower but also long bond yields. The underlying surge in inflation, driven by services, reinforced worries the Fed would speed up tightening and possibly disrupt growth momentum.

And yet consumer loans increased by an annualised 7% to $52bn in March, one of the biggest monthly increases since records began in 1950. 

In Europe, the ECB turned more hawkish faced with persistently high eurozone inflation and suggested a first rate hike would occur in July even if growth were to suffer. The euro and government bond yields were unchanged on the news so markets had clearly factored in this development.

Elsewhere, the European Commission’s Repower EU project will entail €195bn by 2027 in investments to reduce carbon emissions in the energy sector and ensure supply security. This means doubling renewable capacity from GWh 511 to 1,236. Europe’s energy network will receive €29bn, mainly for the construction of new LNG import terminals and connecting pipelines to the existing network. Measures to improve energy efficiency and boost electrification are also part of the programme.

In China, both imports and exports have slowed down significantly in recent months due to the impact of Beijing’s zero-Covid policy. Even so, overall inflation was running at an annualised 2.1% in April, mainly because of more expensive food and fuel. However, producer prices edged lower to an annualised 8%.

Mounting investor concerns about global growth have fuelled risk aversion and market volatility. Inflation is everywhere and there are increased signs of economies slowing. China’s lockdown and the Ukraine war could well result in food shortages and have maintained pressure on commodity prices and disrupted global supply chains.
Pending some market stabilisation, we remain negative on equities and cautious on long-term US and European government bonds.

EUROPEAN EQUITIES

Despite highly volatile conditions, markets ended the period slightly higher. Market uncertainty nevertheless caused big swings. The situation in Ukraine is still tense and Vladimir Putin's speech at Russia’s May 9 celebrations offered no relief. Inflation continued to rile markets and some ECB officials are now openly hawkish. 

As a result, fears of a recession continued to weigh on sentiment. No sector has really been spared, with only autos and consumption managing to advance after several weeks of analysts revising prospects lower. Even so, there were more positive earnings reports for the first quarter. 

Infineon (semiconductors) revised guidance higher for 2022. The group expects demand to outpace production capacity at least until 2023. In contrast, Siemens Energy sounded a more cautious note for this year; its renewable energy division is struggling with supply chain bottlenecks. In chemicals, Bayer maintained guidance after reporting a sharp increase in quarterly earnings. The group benefited from strong demand for its seeds and fertilisers. Ikea is to invest €3bn on new and existing stores as it repurposes its out-of-town outlets into distribution centres for online purchases. Germany’s ThyssenKrupp raised sales guidance after increasing prices. In transport, Alstom maintained guidance amid a focus on cutting costs. Results at Ubisoft came in below expectations and the video game designer lowered guidance. 2022 will indeed be a year of transition.

US EQUITIES

In another torrid week on Wall St, the Dow fell 3.84% (-12.68% year-to-date), the S&P500 5.23% (-17.54%) and the Nasdaq 7.69% (-27.32%!).

The previous Friday, new job creations increased by 428,000, or more than the 380,000 expected. Wages rose 0.3% MoM in April and March's figures were revised higher to +0.5%.

April consumer prices rose 8.3% YoY, or more than the 8.1% expected, so the likelihood of new restrictive measures from the Fed increased.

Producer prices were on the same trend, up 11% in April compared to expectations for 10.7%. Jerome Powell said he was considering a 50bp hike at the next two FOMC meetings but that a 75bp jump was not being actively discussed.

Joe Biden said inflation was the biggest national priority and added that his administration was looking at the possibility of lifting import duties on Chinese goods as they represent $350bn in extra costs for US companies.

In a sign of rising risk aversion, Bitcoin fell 25% over the week to below $27,000 -around 40% of bitcoin investors are now underwater- and the VIX volatility index hit intraday year-to-date highs.

WTI oil was unchanged at $107 despite Hungary and Slovakia refusing to agree to an EU embargo on Russian oil. Both countries had until the end of 2024 to comply with the suggested ban.

Due to the “tech wreck” on markets, Apple ($2.31 trillion in cap) lost its place as biggest global cap to Saudi Aramco ($2.4 trillion).

E-commerce platform Shopify tumbled 8.6% after a bigger-than-expected loss as its business slowed due to economies reopening.

Virgin Atlantic lost close to 9% after postponing the launch of its space flights to the first quarter of 2023. The company cited labour and supply issues. 

Disney fell 2.6% after the bell on an earnings miss. The group nevertheless signed up more subscribers than expected to its video streaming services.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX fell 4.65% and 4.53% for the period as investors fretted over the Fed’s increasingly hawkish tone and risk-off sentiment rose across the globe.
Only two sectors rose this week, Electric Power & Gas (+ 2.61%) seen as defensive in a volatile market and Marine Transportation (+0.46%) on robust results and guidance. Elsewhere, Nonferrous Metals, Wholesale Trade and Mining declined by 8.26%, 7.94% and 7.81% as investors took profits on commodity plays and shifted to defensive sectors. 

Olympus Corp surged 9.13% on much stronger FY22 results and FY23 guidance above market consensus. Tokyo Gas rose 5.08%, on solid FY23 operating profit guidance and double-digit year-on-year growth. Canon gained 4.86% after unveiling a JPY 50bn share buyback (with an upper limit of 1.9% of outstanding shares), its first in almost 2 years. On the other hand, Sumitomo Metal Mining and Sumitomo Corporation tumbled 13.58% and 12.93% on lower guidance for FY23 due to the group’s conservative forecasts of commodity price trends. M3 plunged 13.19% mainly due to investors selling small and medium cap growth stocks across the board on global stagflation concerns. 
The yen rose from around 130.50 yen to around 128.50 against the US dollar amid a sharp drop in US equities and stabilising US bond yields. 

On Wednesday, the government announced that it planned to double the capacity of foreign tourists to 20,000 a day in June. Japan will open its borders to small groups of vaccinated foreign tourists as early as this month to help the ailing travel industry.

More health experts in Japan suggested that it was alright to remove masks in certain outdoor settings, especially when social distance was secured.

The Ministry for Health, Labour and Welfare adopted a plan in late April to limit eligibility for the fourth dose of the COVID-19 vaccine to people aged 60 or above and those who aged 18 or over with underlying conditions.

EMERGING MARKETS

The MSCI EM Index was down 4.22% this week as of Thursday’s close, mirroring developed markets as global investors worried about rising inflation numbers and interest rates. China retreated 3.37% in USD and India fell 5.1% but Brazil (unchanged) outperformed.

In China, April exports rose 3.9% YoY. This was better than expected but still a two-year low. Imports were flat. CPI in April was up 2.1% YoY, or higher than the 1.8% expected. Elsewhere, PPI moderated further to 8% YoY, or slightly higher than consensus of 7.8%. The renminbi has lost more than 6% against the US dollar in one month as the economy slowed due to prolonged COVID-19 lockdowns. Beijing officials denied rumours of a quiet period or lockdown while resumption of production in Shanghai started to accelerate in sectors such as semiconductors, automobiles and biotech. More and more new tier-1 cities like Suzhou and Changsha announced they were relaxing property purchase and sales restrictions. Sunac defaulted on a dollar bond, another large Chinese property company forced to renegotiate its borrowings. The company is reportedly preparing funds to pay an onshore bond due on Sunday.

In Taiwan, April exports rose 18.8% YoY, or well above consensus expectations. TSMC is reportedly to raise prices across all nodes for a second time starting 2023 amid inflation concerns.

In India, April CPI inflation surged to an 8-year high of 7.8% on rising food and fuel prices. March IIP rose by a lacklustre 1.9% YoY, pulled down by a base effect. April domestic airline passengers hit 10.5 million, or only 5% below April 2019 levels. Reliance 4QFY22 results showed strong performance for the O2C business, but disappointed (admittedly high) expectations in retail and telecoms.

Indonesia’s first-quarter GDP expanded by 5% and the labour market continued to recover as Covid-19 restrictions eased. In Thailand, Airports of Thailand reported FY2Q22 earnings fell short of expectations on higher maintenance costs ahead of a full reopening in the coming months. Malaysia’s central bank raised its policy rate by 25bp to 2% after the economy grew by 5% in the first quarter, or more than expected.

First-quarter growth in the Philippines accelerated to 8.3%, largely exceeding consensus forecasts and surpassing pre-pandemic levels seen in the fourth quarter of 2019. The pro-growth candidate, Ferdinand Marcos claimed victory in the presidential elections, and a smooth transition of power is expected.

Brazil's inflation rate came in higher than expected at more than 12%, a 26-year high, driven by food and fuel prices. The government reduced import taxes for 11 product categories, including food, fertilisers and iron/steel bars as part of its efforts to combat persistent inflation. First-quarter revenues at Natura fell 4.6%. Margin guidance was unchanged while revenue guidance was postponed due to increased macro volatility. Itau reported solid first-quarter results, with recurring net income up 15% YoY on increased lending. The bank reaffirmed its full-year guidance.

Headline inflation also topped forecasts in Peru, Mexico, Colombia and Chile. In Colombia, Bancolombia reported solid first-quarter results with ROE rising to 21.7%.

CORPORATE DEBT

CREDIT

A more favourable interest rate environment left corporate debt markets higher over the period. 10-year US Treasury yields eased from Monday’s high of 3.20% to 2.91%. It was the same story on risk premiums: the Xover tightened by 21bp and the Main by 5bp. Investment grade bonds returned 0.91% over the week and high yield 0.07%.

There was more upbeat news on company earnings. Italian construction group Webuild (ex-Salini) saw like-for-like sales rise 5% compared to 2021 and its EBITDA margin increased from 6.7% to 7.5%. The order book rose sharply to €5.3bn and the group had €490m in cash at end March. Spain’s OHL also had a good first quarter. Sales in its construction division (82% of total sales) rose 8% to €643m and EBITDA was 28.6% better at €18m. The group also enjoys good visibility with an order book at €5.5bn, or 2 years of sales, and cash of €397m at end March.

A big contrast with Japan’s SoftBank which was hit by its flagship Vision Fund. The fund’s exposure to tech stocks led to a loss of €26.3bn But although the short-term looks difficult, Softbank could make several billion euros from the IPO of chip designer ARM.
Banijay, global number one in video content production, and BetClic, a large European online betting company, will be quoted in Amsterdam from July 1st via Pegasus Entrepreneurs, a SPAC controlled by Tikehau and Bernard Arnault's family. 

The deal will help Banijay add to market share, notably through an acquisition in this fast-consolidating sector. Note that Banijay acquired Endemol Shine in 2020.

Results in financials remained robust and were reflected in ratings. Moody’s raised Italy’s Banco BPM by one notch to Ba1/sta in senior preferred. However, Allianz booked another €1.9bn provision to compensate investors in one of its US funds. The group nevertheless made a profit in the quarter. 

Euro CoCo spreads continued to widen gradually, adding 44bp since the beginning of the week in spite of interest rates easing.

CONVERTIBLES

New issuance remained subdued due to market turbulence. In the US tech sector, Desktop Metal raised $100m at 6%. The group has designed and marketed 3D printers since 2015 and has received support from groups like BMW, Ford and even Google Ventures.

In company news, quarterly sales at Maisons du Monde slipped 4% to €313m but they were still higher than in the pre-Covid period. Despite production chain disruption from China's zero-Covid drive, the company also maintained guidance for this year. Sales at Italy’s Nexi SpA rose 7.1% to €713m and EBITDA was 17.4% higher to €307.5m, or a comfortable EBITDA margin of 43%. 

As part of its move to offload non-strategic activities, semiconductor producer AMS Osram sold its architecture and façade lighting business to Hong Kong property group Prosperity.

GLOSSARY

• Investment Grade: bonds rated as high quality by rating agencies.
• High Yield: corporate bonds with a higher default risk than investment grade bonds but which pay out higher coupons.
• Senior debt benefits from specific guarantees. Its repayment takes priority over other debts, known as subordinated debt.
• Debt is considered to be subordinated when its redemption depends on the earlier payment of other creditors. To offset the higher risk, subordinated Senior debt has priority over other debt instruments.
• Tier 2 / Tier 3 : subordinated debt segment.
• Duration: the average life of a bond discounted for all interest and capital flows.
• The spread is the difference between the actuarial rate of return on a bond and the rate of return on a risk-free loan with the same maturity.
• The so-called "Value" stocks are considered to be undervalued.
• Markit publishes the Main iTraxx index (125 leading European stocks), the HiVol (30 highly volatile stocks), and the Xover (CrossOver, 40 liquid and speculative stocks), as well as indices for Asia and the Pacific.
• EBITDA: Earnings before Interest, Taxes, Depreciation, and Amortization.
• Quantitative easing describes unorthodox monetary policy from a central bank in exceptional economic conditions.
• Stress Test: a process which simulates extreme but possible economic and financial conditions so as to assess any impact on banks and measure their resilience to these events.
• The PMI, for "Purchasing Manager's Index", is an indicator of the economic state of a sector.

DISCLAIMER

13/05/2022
This document is issued by the Edmond de Rothschild Group. It is not legally binding and is intended solely for information purposes.
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The figures, comments, opinions and/or analyses contained herein reflect the sentiment of the Edmond de Rothschild Group with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
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The Edmond de Rothschild Group therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of the Edmond de Rothschild Group. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.
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