Market Musings 040523: How fast will economies cool after a decent Q1?

Market Musings 040523:
How fast will economies cool after a decent Q1?

Strength of leading stock market indices masks underlying weakness in mid and small-cap stocks

Summary:

• Strong US employment data printed this week, but leading indicators still say a US recession is coming - we just don’t know exactly when…

• Much tighter bank lending standards in US, Europe point to sharp slowdown in credit demand (mortgages, company borrowing), in turn points to sharper economic slowdown ahead

• Getting to the end of central bank interest rate hiking cycles in the US, Europe.

• Wait until the end of May to sell stocks and buy bonds, say the statistics…

• Contrarian investors should be excited by the falls in Energy, Mining stocks off the back of global recession fears hitting oil, industrial metals prices

• Watch for potential breakdown in US dollar, breakout of gold price to new high

• Stock idea for further research: Sigmaroc (SRC.L)

Monthly VOX Markets Youtube Video:
Macro Investing Masterclass with Paul Hill, Chris Watling

Find out in this video, where investors Chris Watling (CEO Longview Economics) and
Edmund Shing (CIO BNP Paribas Wealth Management) believe interest rates, inflation and equities are heading. Alongside highlighting which sectors and stocks look attractive.

Podcast:
Hunting for better risk-adjusted returns in credit arbitrage funds

In this podcast, Edmund Shing, Global Chief Investment Officer, and Pascal Chrobocinski, Senior Alternatives Advisor, explain everything you need to know about long-short credit arbitrage funds.

- The context for credit markets

- Is now a good time to include good quality bonds in a portfolio?

- How exactly do funds execute a credit arbitrage strategy?

- The benefits of investing in a long-short credit arbitrage fund

What happened this week (in short)

1. US Federal Reserve and European Central Bank raised benchmark interest rates: +0.25% to 5.25% in US, +0.25% to 3.25% in the eurozone. Hopefully the Fed is done raising rates. The ECB will likely raise rates at least 0.25% further to 3.5%.

2. US employment remains more robust than expected judging by Friday’s US Non-Farm Payrolls number, which points to ongoing job creation despite the rising tide of corporate redundancy announcements..

3. US regional banks staged a sharp bounce on Friday, after share prices suffered all week on the back of the failure and purchase of San Francisco-based First Republic Bank. Whether US stock markets can stage a further recovery or not will depend on the direction of travel of US bank stocks next week, in my view.

4. The UK economy is doing a lot better than expected, judging by recent economic data. This has not helped the ruling Conservative party in the recent UK local elections, where they lost a lot of ground both to the opposition Labour party and also to Liberal Democrats in the South/South East.

5. European corporate results for Q1 2023 continue to give pleasant surprises, in general. Solid results from Banks, for instance.

6. European energy prices continue to fall - natural gas price slides to under EUR40/MWh, which should in time make its way into lower energy costs for households and thus lower energy inflation - this component of inflation should turn negative!

7. Gold remains well above $2000/ounce, so I remain optimistic of an eventual move to a new all-time high above $2075/oz soon.

What I am focusing on, now

UK doom and gloom not warranted, according to economic data

Strong UK economic momentum is evident in latest data releases, hence UK economic surprise index well above the 0 level (which would indicate economic data in line with forecasts).

Source: TS Lombard, Bloomberg

Sell in May.. or rather in June?

Over the last 50+ years, May has been a decent month for stock market returns.

Source: TS Lombard, Bloomberg

Global money supply strength supports stock markets

Global money supply (i.e. global liquidity) is one big support for global stock markets.

Source: Fidelity

US Dollar index (DXY) on bearish trend after a huge rally

Falling US dollar is good for global liquidity, and also tends to boost Gold, Emerging Markets.

Potential idea for further research: Sigmaroc

Sigmaroc (SRC.L):

SigmaRoc PLC is a United Kingdom-based quarrying company. The principal activity of the Company is the quarrying company. The Company is also engaged in the production of aggregates and supply of value-added industrial and construction materials. The Company operates through three segments: North West, West, and North East.

In general, I like heavy aggregates suppliers like Sigmaroc as they tend to operate local monopolies or oligopolies, as it is not economic to transport heavy aggregates (sand, stones etc.) long distances given the logistics costs.

Strong recovery in sales, profits post restructuring, acquisitions -

Profitability: low but improving, 7.9% operating profit margin and 5.5% Return on Capital Employed are the highest in several years.

Cheap: 8.6x forecast P/E, 0.95x price/book value, 8% free cash flow yield.

Positive recent AGM Q1 trading update (April 25, 2023):
Solid Q1 performance, with Group underlying EBITDA ahead of prior year and slightly ahead of management expectations.

“The Group is pleased to report that it has started 2023 well, with Q1 performance ahead of the prior year on a like-for-like basis. Volumes were 1% ahead of budget, contributing to revenues of £137.1m for the quarter. The ongoing benefit from cost management and asset enhancement programmes underpinned margin growth in the period, resulting in an Underlying EBITDA slightly ahead of management's expectations.”

Strong share price recovery, breakout from key resistance level of 61p

Source: tradingview.com

Have a great long weekend

Edmund