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Today I will focus the analysis on three main topics: Earnings, FED and China. Then I will give a quick update on my portfolio view.
Earnings Season
The earnings season just passed the peak as all FAAMG gave their results. So far more than 50% of the S&P 500 companies reported quarterly earnings and things are going definitely well as you can see in the chart below:
There have been positive surprises in every sector, especially on Financials, Consumer Discretionary, Communication services, Info Tech and Industrials. In general 90% of S&P 500 companies beat expectations.
Tech giants posted impressive numbers, both at revenue and earnings levels, but market reaction has been tepid: Apple and Facebook both announced that growth could slow in next quarters, and that put some pressure on their stocks.
The biggest disappointment came from Amazon, that missed expectation on Q2 revenue and expected revenue for the rest of year. The immediate reaction has been a price fall higher than 7%. Here a recap of tech giants earnings:
FED MEETING
On Wednesday the FED Meeting took place and the usual statement was published, followed by Powell Press Conference.
The expectations in this case were not high and the outcome was not very surprising: during the conference Powell said that, talking about inflation and employment, “The economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings”, but then added that more progress has to be made before to meet the conditions to scale back bond buying program.
That was not a dovish conference but markets didn’t have a big reaction to Powell statements: the Treasury is still close to 1.25%, where it has been in the last two weeks.
Investors believe that Jackson Hole, at the end of August, could be the first date to see a tapering signal, and September FED meeting as the most likely one.
Goldman Sachs has a more detailed timeline about next FED moves:
The investment bank expect a first signal in Q3 2021, and a formal tapering announcement in Q4 2021: the tapering should start at the beginning of 2022 at a pace of $15 bn/meeting, that means that every meeting the FED will announce a purchase of $15 billion less of bonds (starting from the current $120 billion). At the start of 2023 a first rate hike could be done.
Currently markets expect a first 25 bps rate hike for February 2023 and a second for September 2023.
You, as an investor, should give lot of attention to GDP, employment and CPI data, in order to understand if the FED will accelerate or not the tapering and rates hike process: a persistent and high inflation will force the central bank to be more hawkish, and markets could not like that too much.
CHINA
Probably the most discussed topic of the week is the fall of Chinese Stocks: in July the CSI 300 is down by almost 8% and the Hang Seng Tech Index by 17%!
Just to give you a comparison, the S&P 500 is up 2.8% in July.
Why so bad?
Everything started in November, when Chinese Government stopped the Ant Group IPO, expected to raise $ 37 billion. Officially it happened because regulator saw major issues in information disclosure requirements, but more then some investor think that the real reason has been another one: Ant’s parent Company, Alibaba is held by billionaire Jack Ma, who few weeks before had some hard criticism about Chinese banking regulation.
Is it possible that goverment decided to punish Jack Ma?
Chinese economy grew thanks to public investments but even thanks to the growth of private sector and companies like Alibaba, Tencent, JD.com, Pinduoduo, Meituan, Didi and many others. The founders of those firms are now billionaires, and few of them criticized some government moves. It could be possible that CCP (Chinese communist Party) decided to teach to its billionaires that CCP is more important than everything, and it can bring them down whenever it wants.
After Alibaba, the regulator decided to intervene heavily on anti-monopolistic policies, aiming to hit the main tech giants, and now, in a much harder way, the private education companies.
What should you ask yourself as an investor is: will these moves come to an end?
My belief is that short term pain could last for a while, but China needs private companies and tech giants to reach its growth target, and investors money. For this reason I see CCP to return to a more accomodating position in the future, and Chinese companies to go up again.
Final considerations (for your portfolio)
After the big recap of the last events, let’s make some reasoning about investments.
Is the outlook on markets changed? Not really. There are no concrete reasons to see big corrections or bear market coming shortly for equities.
The FED and all the major central banks need more positive signals before to make any restrictive move on monetary policies. As long as rates will stay low and tons of liquidity will be still put in the economy, there are no big alternatives to equities.
Moreover macro policies like QE are probably reducing any tail risk for investors, as said by Peter Oppenheimer.
The recent earnings season and economic data suggest that US and European stocks remain the top spots for equities. I see those geographic areas as “overweight”.
Moreover the fall of chinese stocks made their valuations very interesting: looking at multiples and fundamentals it is very difficult to find something so cheap in other markets, but of course the political risk is weighing on valuations.
If you are ready to suffer for a while, the current prices of Chinese stocks like BABA, BIDU and JD, for example, seem like a very interesting entry point. An idea could be to start to accumulate those shares, or to buy the KWEB ETF (see the chart below) and use any further fall to buy more (and remember that this is not a financial advice).
If any major change will arrive to the macro situation and from Covid Delta variant diffusion, I would use any coming dip to accumulate more quality stocks.
Have a great weekend!
Market Radar
Disclaimer: Market Radar is not an investment advisor. Any information provided as part of the services is impersonal and not specific to any person’s investment needs. You acknowledge and agree that no content published or otherwise provided as part of any service constitutes a personalized recommendation or advice regarding the suitability of, or advisability of investing in, purchasing or selling any particular investment, security, portfolio, commodity, transaction or investment strategy.