Additional Chinese $560bn stimulus, new ATH for Gold, Oil dropped, Q3 earnings showed stronger and worse data
WEEKLY TRENDS
Q3 China GDP disappointed at +4.6% annualised that led to additional economic measures being taken by China who doubled loans for unfinished properties to $560bn
Regarding Q3 earnings from financials, Investment Banks (MS, GS) came out as clear winners while Retail banks like Citi were impacted by more credit risk provisions
The US mid caps led the charge last week with the Russell 2000 adding 2% while the Nasdaq and the S&P rose by only half of that. India and Japan equities suffered from a switch to China (-0.2% and -1.6% vs +1%)
In terms of non-financial corporate earnings, ASML served up weaker than expected results and a cautious outlook. Same for LVMH impacting other luxury goods stocks. Netflix saw strong results and raised Q4 guidance.
MARKETS
Equities
Q3 earnings releases last week (stock WoW performance) :
+++ GS (+11%), MS (+9%), Netflix (+5%), BofA (+1%), Nestlé (+3%), Blackstone (+13%), Boots (+17%) good Q3 results, perspectives (earnings growth expected at +4.6% on average)
Analysts : French Teleperformance (+12%) on Kepler upgrade; Ericsson (+15%) several upgrades after strong results
NB : Spanish Pharma Mar (+41%) after successful lung cancer clinic test ; German Northern Data (+23%) on Cloud and Nvidia GPU turnover; United Airlines (+20%) on new buyback programme; Eramet (-22%) on China downturn; Coty (-16%) lost its Lacoste licence
Rates
US curve (2-10 years) steepening, remained at 15bps. Market expects a 25bps cut from the FED on Nov 7th and a cut from the ECB in December
Commodities
OPEC and IEA revised down their demand growth forecasts, added to the head of Hamas being killed, likely to lead to a cease fire in Gaza, and to a 5.8m barrels US stockpile increase last week
Gold reached a new ATH, past $2700 an ounce, despite a stronger USD
EU
ECB cut by 25bps last Thursday,market starts to expect a 50bps cut at the next meeting on December 12th
China
New $560bn stimulus package for unfinished property loans; Sep CPI annualised at +0.4% vs +0.6% prior; Q3 GDP annualised at +4.6% vs +4.5% expected and +4.7% prior (Q2). China’s debt to GDP ratio has hit a massive 365% in Q1 2024 (corporates at 170%, government 85%, households at 65%, Financials 45%)
Crypto
$1.7bn net BTC ETF inflows last week (Trump is a strong supporter) ETH +6% on the week, SOL +3% and BNB +4%. Italy decided to increase the CGT on crypto currencies from 26% to 42%
Nota Bene
Alibaba will be added to the Hang Seng indices on Oct 25th
Tikehau Capital North America - Strategic focus High Yield fund
Goldman Sachs - Briefings
UBS - Regional view UK
BlackRock - Weekly commentary
Tikehau Capital North America, September 2024 - Strategic focus High Yield fund
Author: High Yield team NY
The U.S. high yield market returned +1.6% in September in the JPMorgan Index with 1% of that gain generated right up until the day of the 50 bps rate cut and the balance afterwards. 2Q economic growth was stronger than consensus and the rate cut should help households take on more debt and support a strong consumer spend.
The outperforming sectors in September were Cable/Satellite (+5.1%) and Telecom (+3.8%). Given the pain these two sectors have undergone in recent years it is no surprise that the CCC rated portion of the market also outperformed in September returning +5.9%. The Broadcasting sector also had strong returns in September which is one of our top 5 sectors in terms of exposure.
Fund flows improved in September with $3B coming into the high yield space. The LTM default rate continued to decline this month and now sits at 0.9%. Of note, 2024 default forecasts have once again been reset lower to 1.25% while 2025 remains at 3%, for now.
The Focus fund returned + 1.4% in September driven by a decent recovery in the Broadcasting space which the fund's exposure is about 10%. Given recent gains, we will likely reduce some of our exposure in this sector. We also have very little exposure to the Telecom sector with only 2% and no exposure to Cable/Satellite which were the two strongest returning sectors as mentioned above. We have no issues missing the upside in those two sectors as we believe there remains more stress in those spaces.
We added some new names into the portfolio this month in sectors such as automotive, transportation and restaurants. We will be paying out our 46th quarterly distribution next month and still target a +7.5% annual distribution. We were pleased to see the portfolio react favorably to the rate cuts as it did feel like it was priced in early in the month.
Despite the rate cut, the portfolio was performing well with a few select names moving up over 5 points during the month. There was some weakness in the energy names and a poor earnings report from a recent investment in a railroad company which we believe should turn around in coming months. We have one bond being called next month at over $102 and another bond maturing next month. These two names should will deliver additional cash to help manage internal fund flows and provide some opportunities to redeploy into existing positions or new names.
Goldman Sachs, 18 October 2024 - Briefings
· Where the world's largest hedge fund sees investing opportunities
Karen Karniol-Tambour, the co-chief investment officer of Bridgewater Associates, believes the US economy will be able to sustain its current level of growth. “It's a very unique spot to be in, so late into an expansion,” Karniol-Tambour tells Goldman Sachs
“All it will take is one AI-powered startup in your industry to say: 'Wait a minute, I better go invest a lot in AI as well,'” says Karniol-Tambour. “You can look back to the 1990s and that midcycle easing, and how big the capex cycle in the internet boom was in powering the next leg. I think this is about as good of a backdrop as you could get so long into an expansion to be able to sustain growth. And you have a Fed that, with inflation where it is, is both willing and able to do more if it needs to.”
Meanwhile, as inflation and interest rates across global economies start to diverge, Karniol-Tambour sees opportunities in global currencies. “The world's not as synchronized,” she says. “Inflation is different in different countries. You're getting policy normalization differently in different countries. And that's what really drives currency moves,” she says. “I do think there are bigger alpha opportunities than there have been in a long time and it's also a really important time to kind of structurally consider: 'What am I doing with currencies in my portfolio?'”
UBS, 14 October 2024 - Regional view UK
Author: Dean Turner, Economist
The heady days of euro cash deposits paying 4% or more should soon be a distant memory, more so since the ECB is likely to ease faster over the coming months than its peers.
There is an important lesson here for those of us in developed market economies (it is nice to confidently refer to the UK as a “developed market” again now that the political shenanigans of the last few years are behind us…): Interest rates are heading lower.
We have to wait until November for the next Bank of England (BoE) meeting that will likely deliver the next rate cut. And while policymakers in London may proceed with a little more caution than their peers in Frankfurt, the direction of travel is the same.
Moreover, the risks are tilted toward the Bank having to start playing catch-up, certainly if Governor Bailey gets his way following recent comments. The far from disastrous, but less than stellar GDP print for August (which included revisions to past data) last week lent further credence to this school of thought.
Regular readers may be a little weary of seeing me repeat that it is time to “prepare for lower rates.” I can only apologise if this is the case, but this is no time to ignore what is likely to be one of the few certainties we have over the coming months.
The good news for those sitting on too much cash in the UK is that there are opportunities to lock in higher yields in bond markets. Given the almost blanket coverage everywhere we look, it was my aim not to mention the impending budget (yes, our taxes are still going up), but its impact on bond markets is becoming noticeable.
To be sure, the rise in gilt yields cannot be entirely explained by concerns about how far the chancellor will move the fiscal rules, but it is being felt. The opportunities for UK investors to lock in attractive yields go beyond the gilt market.
The sterling investment grade corporate bond market has been quiet in terms of new issues for quite some time. But it burst into life last month, with issuance up by over 80% compared to a year ago.
A major driver of this is companies wanting to secure their funding needs ahead of what is likely to be an uncertain period ahead (the budget, US elections, and the Middle East conflict to name a few). And this is good news for Investors.
· We see opportunities in global stocks trading at attractive relative valuations with potential catalysts for price appreciation – like in China and Japan.
· U.S. stocks hit all-time highs. U.S. 10-year yields rose further after the U.S. core CPI data prompted markets to trim expectations for Federal Reserve rate cuts.
· This week, we expect the European Central Bank to cut interest rates. We think it has more room to cut rates than the Fed because it tightened policy more.
China’s share surge shows the upside of keying on opportunities in global stocks when clear catalysts emerge. We keep our U.S. equity overweight on the artificial intelligence (AI) theme broadening. Outside the U.S., we favor markets where we have high conviction. We’re overweight Japanese stocks on a solid macro outlook and corporate reforms. We stay overweight UK stocks with less conviction. We upgrade UK gilts and see room for sharper policy rate cuts than markets expect.
Staying nimble allows us to seize on opportunities in global equities when catalysts emerge. China’s signal on policy stimulus prompted us to go modestly overweight, especially given depressed valuations. Details have been scant, so we could change our view if future announcements disappoint. We still think China faces long-term, structural challenges – like economic and geopolitical competition with the West, government debt and population aging. We have stayed overweight Japan stocks on a sunnier macro backdrop and corporate reforms driving strong earnings and shareholder returns. We trimmed our overweight in August due to the potential drag on earnings from a stronger yen and Bank of Japan policy missteps – yet we stay positive.
Even in regions where the growth outlook is more challenging, we see selective investment opportunities. With 11% gains this year, European stocks have lagged major markets – yet European banks have surged 31% and we still like the sector as we have since the start of 2024. We have less conviction in UK stocks on a soft economy and heading into the new government’s budget announcement, yet we stay overweight for now. We go overweight UK gilts as we see the Bank of England having to cut policy rates more than markets are pricing given the soft economy.
We lean into risk yet monitor signposts that could cause us to change our views. Geopolitical risk is elevated as tensions flare in the Middle East. Regional escalation could drive oil prices higher, highlighting this is a world shaped by supply constraints. We have seen oil price spikes drive bond yields higher, showing long-term bonds still aren’t providing reliable portfolio diversification, in our view. This makes quality key in fixed income, we think. The U.S. election will have global ramifications, especially for key trade partners like Mexico. Yet mega forces, structural shifts impacting returns now and in the future, are driving opportunities beyond the near-term risks. For example, the rewiring of supply chains is benefiting multi-aligned trading partners like Vietnam and Indonesia, both seeing a significant increase in trade and investment flows.
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