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6 February, 2023 - Are we slowing down or not ?



The week ended with big question marks, leaving investors happy but confused. The main theme coming into this year was the potential significant slow-down in the economy, which could push the European and the US economy into recessions, as evidenced by many macroeconomic metrics. Corporations have been announcing lower growth in their revenues as well as cost cutting measures and thousands of layoffs, which again appears to be a recipe for recession. The central banks are starting to pass a message about coming to the end of the interest rate increases cycle, as economic activity together with inflation are slowing down. And then we get the IMF upgrading global growth, investment banks changing their minds about a pending crisis coming in Europe in the winter and on top of all that, a blow-out number from the US labor market on Friday, to leave everyone wondering what is going on.

At the same time, the US retail investors are back in the market in volumes. According to JPMorgan data, the retail accounted for 23% of total market volume in late January, above the 22% peak from the 2021 mania and which led to the bubbles which were created and then later of course to disaster for most of the stocks that the retail loves to trade. Having said that, the force of such a surge in trading is significant and could lead the market much higher, regardless of fundamentals or logic. But this phenomenon is primarily a contrarian one, in the sense that when retail joins the party it could be close to ending abruptly again.


In this environment, equity markets moved higher. The US equities added almost 2% (with the exception of the Dow Jones) while in Europe, France and Germany also moved higher by 2%. Defensive regions like Switzerland barely moved, as investors are abandoning the safety of Healthcare and Consumer Staples to chase higher the more cyclical stocks (linked to the economic growth) in the Consumer Discretionary and Technology sectors.


The FED raised interest rates by 25bp to 4.75%, as expected, but conveyed the message that we could be close to the end. It was the first time that J. Powel akcnowledged that the disinflationary process has started and that the FED is getting into a "data-dependent" mode to decide the next moves, rather than continuing indiscriminately with rate hikes. He even acknowledged the possibility that the FED might actually cut rates during the second half of the year, if inflation moves down significantly. But he also said during the interview that "we might need a couple more hikes", which means that the FED will probably stop some time in the spring, at 5.00% or 5.25%. Overall, it was a meeting during which the FED tried to remain hawkish, as the phrase "ongoing increases of interest rates are necessary" was maintained and repeated by Powell, but it was finally interpreted by the market as rather dovish.


The ECB also slightly toned down its message, after raising by 50bp to 2.50%, as expected. The central bank went further to give guidance that they will raise again by 50bp in March, against speculation that they will slow down to 25bp. However, Mrs. Lagarde also mentioned the phrase "data-dependent" after March, which the markets interpreted it as a willingness to stop there and adopt a wait-and-see stance. Overall, the markets were already looking for the slightest clue that we are finally very close to the end of the current interest rate increases around the world and they found it. A few hours before the ECB meeting, the Bank of England raised interest rates by 50bp to 4% and also conveyed a message similar to the above.


The Eurozone inflation numbers (CPI) dropped more than expected for January, but there will be a revision, as the German figures were not included in the calculations due to technical issues. The unrevised headline numbers stands at 8.5% on a yearly basis, down from 9.2% in December and from the peak of 10% in November. The core CPI which does not include food and energy remained unchanged at 5.2%, which is also the highest in this inflationary period.

But the US labor market data were unbelievably strong for January. The non-farm payrolls rose by a stunning 517'000 vs expectations of just 170'000 which would still be consistent with a rather robust labor market. There is a lot of debate on the credibility of this monthly series and whether it reflects correctly the status of the labor market, but still unemployment was announced to a new low of 3.4%. From an inflation point of view, the positive outcome is that this strength in the jobs market does not translate (yet) to "run away" wages, as these rose by 4.4% on a yearly basis, which is again lower from the previous month. The labor market is still a major puzzle as all other indicators point to a significant deterioration of economic activity, which does not translate in the numbers, despite the on-going job cuts being announced in most of the industries.


China's economy is gradually recovering, as the January Services PMI returned above 50, which signals expansion. In particular the Markit/Caixin PMI was announced at 52.9, a singificant improvement from the 48.0 reading in December and better than the expected 51.6. Similarly, the Manufacturing PMI returned in expansion territory in January, at 50.1 vs 47.0 in December.


Bonds had a very volatile week. The slowdown message from the FED and the change in tone from the ECB and the BoE made bonds rally and yields to drop the lowest level of this year. But the strong jobs data on Friday prompted a huge u-turn in prices and yields and they finally finished the week almost unchanged. The US 10-year yield dropped from 3.55% to a low of 3.35% on Thursday only to return to 3.55% the mext day. In a similar fashion , the German 10-year dropped to 2.05% from almost 2.25%, to return back to 2.21%.


The large Technology companies in the US confirmed the slow-down in sales growth through their Q4 earnings reports. Amazon's cloud business grew by only 20% since last year, which is the lowest level of growth in years, while it also guided for an even lower rate of growth for next quarter. Apple missed its revenues and earnings expectations due to lower device sales and smaller operating margin, but blamed primarily the supply issues in China and the strong dollar. Alphabet (parent company of Google) missed profits by almost 10% and lowered guidance for the next quarter. The only "good" news came from Meta Platforms (Facebook) which announced that it will focus on efficiency and cost cutting this year, along with 40bn $ share buy-back. Shares soared 20% on the announcements. But overall, the conclusion from the world's largest companies is that the focus this year is management of costs in order to safeguard margins and profitability as revenue growth should be at best slightly positive.


With the majority of the S&P500 having already reported, the earnings growth rate for Q4 stands at -5.0% according to FactSet's latest Earnings Insight report, worse than the -3.2% expected at the end of the previous quarter. In addition, only 69% of the companies have surpassed consensus earnings expectations, below the five-year average of 77%. And among the ones who exceed expectations, they do so by only 1.5% above expectations, below the five-year average of 8.6%

 

Chart of the Week :

Buying again the boring Swiss stocks.


Now that equity markets are getting again very euphoric and lower quality stocks are jumping while healthcare and other defensive sectors are being dumped by investors and traders, perhaps it is a good time to look into the "boring" large cap swiss stocks. The chart shows the SMI index which primarily consists of Nestle, Roche and Novartis (>70% of the index) for the last two years. We have highlighted in red, dotted lines the down-trend channel, in place since the beginning of last year. But this is beginning to be challenged and broken. The SMI has risen "only" 5 % this year which compares to more than 10% of the Eurostoxx and almost 15% of Nasdaq. In a slowing world, where volatility is destined to increase as markets try to guess the next moves of central banks and the state of the economies, revisiting the relative safety of large-capitalization swiss stocks could eventually pay out.


Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Factset, KSH

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