Investability bulletin 15/03/22: Covid’s Comeback

New lockdowns in China send a chill through the market

Photo by Martin Sanchez

News of new lockdowns in China, including its third largest city and major port Shenzhen, has sent a new chill through markets. Shenzhen is China’s major tech hub, and we’re hearing that the new lockdown will affect production at key tech manufacturing companies including Apple producer FoxConn, compounding another bad week for Chinese shares as regulatory tech threats mount and its real estate crisis worsens. 

In better news, we hear that Tom Brady is coming out of retirement. It barely lasted a month, but the greatest quarterback of all time is returning. Many other retirees are doing the same. As noted a week or so ago, there were some noteworthy findings from the US jobs report, specifically the rise in the 55+ male labour force participation rates, which are back to near the pre-pandemic highs. It seemed clear that many who thought they had enough to retire are rethinking their calculation. It could be inflation, it could be boredom, it could be their 401k plans are looking a little soggy. But it could be good news for labour shortages and stem the wage price spiral taking hold. 

We need more Tom Bradys…figures this morning show the number of UK job vacancies in December 2021 to February 2022 rose to a new record of 1,318,000. Despite the lack of labour, wages are not keeping up with rising prices with regular pay down 1% for the year when adjusted for inflation, the biggest drop since 2014. Still the labour market looks in robust shape and this means little doubt the Bank of England raises rates this week. 

Markets today: It’s a sea of red on the boards this morning as risk turns sour. After a decent rally for Europe on Monday, weakness in the US session and Asia is harder to shake off today. There’s little in the way of good news: bonds are capitulating, peace talks between Russia and Ukraine are going nowhere and China is locking down for Covid. And we have the spectre of stagflation + CBs hiking rates into a recessionary-type environment which = bear market conditions….albeit we have already hit that marker in some indices…so is the bottom in? The death cross on the S&P 500, as noted earlier this week, was last time after the bottom. Futs this morning back to the low end of the range around 4,150…feels like it wants to crack. 

Hong Kong fell as much as 8%, paring losses to around 6%, its worst day since 2015, after analysts at JPMorgan described it as uninvestable amid a regulatory crackdown and the lockdown across the water in China. Absolute carnage among China tech, chipmakers etc, ARKK down another 6%. The S&P 500 closed down by 0.7%, while the Nasdaq Composite declined 2% and is now down 20% YTD. Tech stocks were the main driver for the selling as rates rip higher, with US 10yr yields rising to their highest since July 2019, whilst energy also took a beating as oil prices crumbled with WTI back to $97. Exposed longs getting crushed on the China lockdown story it seems – the danger of being late to the party.

Inflation: risks aplenty but I can sound like a broken record… Russia banning grain exports…“The recent moves in a range of commodity prices are extreme, and if these moves hold for a prolonged period of time, the economic damage would be significant, but we still do not believe recession needs to be the base outcome, and do not see equities falling from current levels,” JPMorgan says. Tesla CEO Elon Musk warned the company faces “significant recent inflation pressure in raw materials and logistics”. Then he challenged Putin to single combat… (JH: with flamethrowers?) 

Growth slowing, with UBS lowering its global growth forecast from 4.6% to 3.6%. “The forecast is highly dependent on where commodity prices settle and whether energy supply to Europe will be disrupted,” the bank says. China going into lockdown means slower growth, but this hits oil prices and stocks are more sensitive to oil than anything else right now. India is also considering buying discounted Russian oil…if demand destruction can bring oil prices down it will be on balance good for risk. 

Don’t forget the Fed. Although a rate hike is fully discounted, it’s going to be about the dot plots and what tone Jay Powell strikes. We will also be looking at closely at where they think the terminal rate is: 2.5% is nowhere near close enough. Citi: “We see hawkish risk at Wednesday’s FOMC meeting. A 25bp hike is very likely but we think Chair Powell will leave the door open to the potential for a 50bp hike in May or beyond. Median “dots” will likely show five (or very possibly six) 25bp hikes in 2022”. Piper: “The Fed may not tighten monetary policy as aggressively as the market expects. An inverted yield curve has been a bearish signal for the U.S. economy and has restrained the Fed in the past from hiking rates.” 

Today’s sheet is focused on the US PPI print, Empire State manufacturing index and comments from Christine Lagarde. 

Company updates

Marks and Spencer (MKS): Over the weekend we heard the embattled retail bellwether (can we call it that any more?) is going to be bidding farewell to boss Steve Rowe, a mixed legacy I would say. Turned things around to an extent but paid a massive premium to get into online food (ultimately a good decision for the biz to stay relevant but value destruction in the process for shareholders), a great many stores closed to salvage the cost base, shares off by about 58% since he took over…not quite the legacy I’d be shouting about. The new co-CEO structure has me worried….and incomes are about to get the biggest squeeze in at least 40 years. Discretionary and staples about to get a pounding. 

Restaurant Group (RTN) finals out on Wednesday. In Jan management upgraded full-year guidance. Trading is likely to have been strong as the UK shrugged off omicron…see above the GDP, CHAPS trends. Shares are down 30% this year…worth a look? But…discretionary spend is about to get whacked and cost input inflation for food businesses is rising rapidly.  

There was a slew of price target cuts for UK banks yesterday from JPMorgan, Bernstein raised Unilever to market-perform from underperform; cut Reckitt to underperform from market-perform. 

Fascinating research from Bespoke: The 3 stocks removed from the Dow on Aug 31st 2020 – $RTX $PFE $XOM – are up 68% since then, while the 3 stocks added to the Dow – $CRM $AMGN $HON – are down 9.5% in the same period.  

FTSE Russell is deleting Evraz, Polymetal, Petropavlosk and Raven Property from its indices, citing restricted trading and a lack of institutional liquidity. These stocks had become almost untradeable as there was no liquidity left… Many investors had already gone on a buyer’s strike of anything Russian so it was increasingly hard to provide any liquidity. 

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