Five insights in five minutes
The epicentre of global finance is drifting east. But public companies in America are still worth four times more than China’s, seven times those listed in Japan and almost 25 times the market cap of Taiwan. Like it or not, therefore, you have to follow the US results seasons. So here’s a summary. American firms have smashed it in the first three months of 2021. With three quarters of the S&P 500 now reported, earnings growth of almost 50 per cent year on year is twice consensus estimates, while only 15 per cent of companies have missed revenues forecasts, the fewest in more than a decade. That said, a phenomenon seen in the fourth quarter is repeating. The average one-day ‘excess’ share price move for companies that exceeded their earnings estimates is negative. Over the past three years, for comparison, profit beats were rewarded with an average 0.7 per cent gain versus the index. Excluding tech, the reaction is more or less flat. US bosses are finding it hard to impress these days.
Themes: US equities, global equities
Buffett and Asia
Berkshire Hathaway’s annual shareholders’ jamboree took place last Saturday, during which the oracles of Omaha, Warren Buffett and Charlie Munger, showered investment wisdom upon their loyal disciples. One pearl was to millennials, warning that the generation born between 1981 and 1996 will have “a hell of a time getting rich compared to our generation” due to ultra-low interest rates and “boomed up” asset prices. Well hang on a minute! That might describe the situation in America, with ten-year treasury yields below 1.6 per cent and a forward price-to-earnings ratio for the S&P 500 index above 20 times – although there are good arguments to the contrary. But the world is bigger than Nebraska. Readers of Five in Five know that Asian fixed income yields are roughly 50 percent higher than the equivalent US bonds and most regional equity valuations are not even three quarters US levels. For millennials investing for retirement, a more useful piece of advice would have been: go east, young man!
Themes: Asian equities, Asian credit
Despite Janet Yellen backpedalling on inflation faster than Wile E. Coyote over a cliff edge this week, commodity prices moved higher and are now within touching distance of record levels. Three-month copper, for example, helped by a 600,000 tonne supply deficit this year and next, is pushing six figures again for the first time in a decade. What should investors think? As ever, separate the short and long run. The former is mostly about a recovery-driven surge in demand following capacity cuts. Such imbalances soon correct. Further out, innovation and a post-covid world will effect commodities differently. Copper, say, benefits from any boom in infrastructure spending or house building. Fossil fuel prices, however, hate new technologies (fracking, renewables) and the low-carbon transition. Hence there is no reason why the strong positive correlation of late between equity prices (also driven by innovation) and commodity indices, which include energy, has to continue. Indeed, as per the chart, there were long periods where the opposite was true.
Themes: commodities, equities, fixed income
Amidst the swirling chatter over inflated asset prices, hot air has yet to reach Latin America. The region’s equities still trade 15 per cent lower than pre-pandemic highs, and have underperformed broader emerging markets by a whopping 40 per cent since last February. Sure, last year’s economic contraction of seven per cent was more than double the global slowdown. And Latam growth projections for 2021 are over a percentage point less than the emerging market average, excluding China. But don’t throw the bebé out with the agua. A faster rebound in manufacturing than services, for instance, has aided exports for countries such as Mexico, as can be seen in the chart below. Furthermore, massive US stimulus will boost growth in Central America via trade and remittances. Indeed, overseas remittances to Mexico reached a new high of $42 billon over the last year. Risks notwithstanding, attractively valued assets in the region are worth talking about.
Themes: emerging markets equities and credit
Europe carbon prices
The European carbon market rally is ramping up, with the price of pollution hitting a new high of 50 euros per tonne on Tuesday. It’s a classic case of supply and demand. The increase in Europe’s emissions targets in December, from a 40 per cent cut by 2030 to 55 per cent versus 2019 levels, signalled a stricter future supply of carbon permits within Europe’s Emissions Trading System. Demand is being helped by the economic recovery and financial speculation, with prices rising some 60 per cent since the December agreement. Despite an allocation of free permits to aid international competitiveness, carbon-intensive sectors such as steel will take a hit, where demand in Europe is set to increase six per cent this year compared to last. But with analysts expecting an average carbon price of 56 euros per tonne in 2022, those pushing for climate neutrality should be encouraged, as heavy industry is forced to invest in cleaner technologies to generate energy and electricity.
Themes: ESG, commodities
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