The year has started with impressive share price moves for the Magnificent-7, with just a couple of exceptions. As a reminder, the Magnificent-7 group include Nvidia, Apple, Microsoft, Amazon, Alphabet (Google), Tesla and Meta Platforms (Facebook) and their were given this name because their share prices rose last year by an explosive number. With the group accounting for almost 35% of the S&P500 market capitalization, one realizes that the short-term direction of the index is highly correlated to what these mega-cap companies will do as they report their previous quarter earnings, but most importantly what their initial guidance for this year will be. On Tuesday Microsoft and Alphabet will report after the close of the market and then on Thursday, we will hear from Apple, Meta Platforms and Amazon.
But Tesla was the first company of this group to report last week, with its announcements disappointing investors. It announced lower than expected revenues and profits, due to lower operating margins, but the worst part was the lack of guidance for the 2024 deliveries, for the first time in years. Instead they said that "growth will be notably lower". Having risen almost 100% last year in anticipation of another stellar year ahead, the stock fell 12% on the day of the announcement and is now down more than 25% since the beginning of the year. It does not look so magnificent anymore (at least for now).
On the contrary, European luxury and lifestyle names had a superb week. It was not only the news about a large monetary stimulus by the Chinese authorities in their effort to kick-start their economy, but a continuation of good corporate results, after Richemont in the previous week. LVMH, the maker of Louis Vuitton bags and Hennessy cognac among others, posted solid results for the final quarter, removing investors' fears for a significant slowdown. The company grew its revenues by 9%, which of course is down from the "crazy" 20%+ growth rates right after the pandemic, but still very respectable. Its share price spiked 12% on the day of the announcement. Their better-than-expected sales growth in the Spirits division was quickly translated to good news for the other spirits companies who saw their prices also rally (Pernod Ricard +8%, Davide Campari +6%, Diageo +5%). We have highlighted that the valuation of companies in the Food & Beverages sector as well as luxury names like Richemont and LVMH were low compared to their own history, making them increasingly attractive for the longer-term investor.
The ECB is preparing the ground for a summer rate cut. On Thursday, they kept the key interest rates unchanged with the deposit rate at 4% and repeated the message that they are happy with the progress on inflation: "The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued." In the press conference that followed and afterwards through the usual "sources said" stories, the basic message was that the ECB is watching the data and could well alter its guidance towards a more explicitly dovish view in March, setting up for a cut in June. The sources speaking to Reuters said the emphasis was being placed on underlying inflation and in particular wage data. The thought process is that a continued softening of data will lead to softer economic forecasts in March, which in turn will lead to a cut in June – with the wait to June to coincide with official wage data, which will be known before the start of the summer. The FED meeting on this coming Wednesday will also be very important, as it comes after the "crazy" market action in bonds and equities, which was sparked by their pivot in the December meeting.
The US January PMIs revealed a solid improvement, both in services and manufacturing. Even more importantly, manufacturing returned to expansion territory (above 50), for the first time since May of last year. Services rose to 52.9, up from 51.4 in December, the highest level since June of last year. The report shows that companies started the year with increased optimism, buoyed by disinflation hopes, prospects for rate cuts, and a resilient economy. Although the PMIs are considered "soft-data" as they are surveys which try to quantify the sentiment of the Purchasing Managers of companies, they do have a high correlation with economic activity in the following months. The economies are driven by everyday decisions of human beings, whose sentiment does matter in this process.
The Eurozone January PMIs also shed some rays of optimism. The German and French Composite PMIs declined, but the Eurozone Composite PMI rose by 0.3 points to a six-month high of 47.9, thanks to sentiment in the rest of the Eurozone, which recovered above the neutral level of 50 for the first time in five months. While the numbers signal ongoing contraction at the beginning of 2024, improvements were visible in manufacturing output, new orders, employment and the one-year business outlook. The data, however, is consistent with a GDP growth barely above zero for 2024 (+0.5%) and a high risk of a recession, albeit a shallow one.
The fourth quarter GDP growth in the US exceeded expectations, again. The economy grew by 3.3% (annualized) compared to the previous quarter and better than the 2% forecasted. Consumer spending was resilient in the holiday season, as we had already seen in other data (retail sales and company announcements), but the biggest contribution to the positive surprise came from higher inventory building. This means that there is a risk that next quarter's GDP growth could be significantly lower, if inventory building corrects from current levels.
China made headlines as they cut the Reserve Ratio Requirement for banks by 50bp, which is set to release 1trn Yuan of liquidity in the economy. Of course the markets since 2021 have been dreaming of a "bazooka" type of monetary stimulus and they have been frustrated by the "drop-by-drop" mode of easing. But we should note that since November, Chinese policymakers have being easing their monetary policy at an accelerating pace. Every drop is now several hundred of billion to one trillion yuan which corresponds to 0.8% of GDP. Chinese authorities also announced a new credit department to be set up within the central bank to push credit to five areas : technology, green transition, SMEs, elderly care and digitalization. Investors have been fleeing the local equity markets for almost three years, leaving the valuations at almost ridiculous levels. The Year of the Dragon that starts in ten days, could bring better fortunes to the local markets and to their investors.
Equities had a lot to cheer about, with Europe outperforming the rest of the global markets. The news from China (new stimulus and rate cuts) as well as the superb quarterly results by companies like LVMH and semiconductor company ASML, sparked a rally in Europe that led the indices to move higher by 2-3% on average. Nasdaq and the S&P500 had a respectable 1% gain, to finish at record highs. In terms of sectors, Energy made a comeback with 4% gains, as oil prices moved higher, but the sector is still negative for the year. European healthcare also had a strong finish and gained 3.5% for the week.
Bonds traded in a rather tight range, finishing the week at about the same levels as the previous one. Better macoeconomic data, which are usually negative for bonds, were offset by the perceived dovishness of the ECB and the good inflation numbers out of the US. The US 10-year treasury is at 4.15% and the German equivalent at 2.30%
Chart of the Week : Will the Red Sea events make oil prices spike ?
The situation in the Middle East is far from over and the recent events in Yemen and the Red Sea cannot pass unnoticed, as they might have implications, not only on the prices of oil but on many consumer goods that are shipped through that channel. According to the analysts at L.C.V. Research, it is estimated that 9% of global oil output transits via the Red Sea. A full diversion of marine traffic via the Cape of Good Hope could reduce available oil flows by about 4% worldwide. Such a shock would be comparable to that witnessed in the Second Gulf war. The instant impact on the oil price would exceed 40%. For now, only about 45 to 50% of traffic has been diverted, suggesting, all else being equal, a maximum upside impact of USD15/bbl. With oil prices hovering around the lows of the last two years, it is worth revisiting the Energy sector, as a good hedge for any oil spike. At the same time, their 5% or so dividends look very safe as long as oil prices remain above 50$. Our top picks in the sector are TotalEnergies, Shell and Chevron.
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• Sources, Chart of the Week : FactSet, Photo: https://www.ft.com/content/05957040-f7d7-4bf8-ba47-29f176a991f2