By Geoffrey Muns
Earnings season’s here and time to observe on who’s paying what dividends and solving EPS to find the best pick. This will be interesting to watch as the first quarter results will set the tone on how to proceed for the discerning investor, especially with the pandemic casting gloomy shadow of the third wave. Ramadan in the second week may dampen business deals and transactions except for the ones that need to be executed. However, the almost $2 bio-US stimulus plan should set the stage for boosting economic growth.
Last month’s subdued volatility at the beginning and opposite towards the month end was primarily on the back of stellar US employment figures and robust covid vaccination reports kept markets buoyant albeit with continued uncertainty. The question now arises is whether to be a part of a volatile period to eke out that bounce profit or wait on the sidelines as Ramadan approaches.
There’s no doubt there is a marginal to moderate impact on business and regional markets. UAE equities showed over 1% gains last month backed by some good numbers by retail, bank and logistics and would be interesting to see if they can continue up steady this month as well.
A transition towards a greener energy mix does provide the potential for further upside in metals, which would help lift the outlook for miners. Meanwhile, the potential economic resurgence that should come when Covid-19 restrictions are eased could help lift demand for electronic goods and thus rare earth metals. Infrastructure plans and an impending economic surge could provide yet another boost for construction demand, putting pressure on supply that clearly struggles to keep up with changes in demand.
For the last decade, tech stocks, and other high growth names, have been some of the star performers in the equity space. The stellar returns enjoyed by FANG names, and the Nasdaq itself, have eclipsed almost all others. The tech sector is well supported by high teens revenue and earnings growth.
FAANGS still constitute 33% of global equity market cap. More defensive sectors like healthcare and utilities sit at the bottom of the pile as would be expected in a potential cyclical rebound.
EV makers stepping out of the shadows of fossil fueled guzzlers (sorry couldn’t ignore the pun!) will be firing on all cylinders to niche their market share even by the shortage of chip manufacturers being unable to dish out supply as demand increases. Lithium batteries should see an upsurge in demand as the big three car giants try their best to keep the new presidency happy.
Spreads across select sectors in fixed income moved up last month which could be the start of a trend. Indices continued their weakness last month with yield and EM Debt dipping to a lesser extent than treasuries. Spreads may shrink from these levels in EM debt and high yield.
EM central banks have already increased rates to fight inflation with Turkey, Russia, and Brazil leading from the front. The Emerging Market central banks might not be as patient as FED with inflation. This would be negative for local currency bonds as rates increase across the board.
Fed action or otherwise will eventually determine and direct how high yields will scale. The Fed maintained a muted response without giving in to the demand of the markets. They reiterated their pose to look through intermittent inflation and no rate hikes till the end of 2023.
However, there seems to be a disparity between the treasury yields’ movement and the Fed’s guidance. The updated inflation numbers for this year and 2023 are above 2%, which is the Fed’s long-term target. While the road ahead is likely to be a bumpy one, the direction established by China looks likely to resume thanks to European and US plans. The green transition seems unlikely to abate, and that should in turn bring plenty of benefits for those stocks involved in selling or transporting raw materials.
About the Author: –
Geoffrey Muns – Geoffrey is an Independent Financial Advisor and Financial Planner certified from the UK, US and UAE based out of Dubai for the past 25 years. He has worked with international banks and investment firms and advises U/V/HNWI and professional clients. You can contact him at alphawealthmngt@gmail.com
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