Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Critical week ahead for mining companies
Peter Garnry
Chief Investment Strategist
Summary: The news flow is broadly mixed on the coronavirus with the potential tail-risk still being large but regardless global equities are close to all-time highs buying the narrative of strong monetary and fiscal impulses from the world's largest economies offsetting the weakness from the coronavirus. Our view is that the equity market has lost its signal value on the economy and thus investors should look to commodities and the equity sectors of transportation and mining. For this reason this week is interesting with several large mining companies reporting earnings.
The alarm bells are ringing further and louder everyday from market participants that the market is becoming insane given the price action despite worrying comments from experts on the coronavirus which could infect 40-70% of world population in a worse-case global pandemic case. Meanwhile equities are bid as the narrative of dual stimulus from monetary and fiscal sources will offset any slowdown and supply chain disruption.
As we have said multiple times we put less weight on equities these days as they are clearly driven by the technology sector which is filled with quasi monopolies reflecting earnings power that is not reflecting the overall economy. The concentration risk is also alarmingly high in the S&P 500 with the 10 largest stocks now representing 24% of the overall index.
This means that equities have lost its signal value in relation to the fallout from the coronavirus and thus we cannot emphasize enough to watch commodities such as crude oil, iron ore and copper for real insight into the demand picture in China. Brent crude was bouncing back the entire last week but the momentum seems to have stopped for now but overall the price level reflects low demand and in theory we would expect equities to reflect this view but global equities are basically sitting at all-time highs. However, global logistics and transportation companies have been suffering recently although not sending stress signals.
This week is a critical week for mining companies with major miners such as BHP Group, Glencore, Anglo American and Vale reporting earnings. These companies are together with transportation companies the closest to the epicenter of the coronavirus as China is the world’s largest consumer of commodities. Global mining companies have been lagging the global equity market over the past five years and they also had a larger drawdown during the worst week of the coronavirus in terms of sentiment. We will be closely watching the outlook in these earnings releases and comments during the conference calls. Like the energy sector we have a negative long-term view on the mining sector as the return on capital is lower than the cost of capital and in the short-term the coronavirus will only worsen the demand picture.
Another important earnings this week is HSBC reporting tomorrow as the company has high exposure to Hong Kong and Asia in general. The key focus will be on the conference call with analysts likely asking question about loan quality and demand given the coronavirus outbreak in China but also the almost complete collapse in visitors to Hong Kong. Tomorrow’s earnings from Walmart are also interesting for two reasons; 1) their e-commerce efforts have ramped up and is beginning to compete on par with Amazon which is beginning to change the landscape for Amazon for decades have dominated US e-commerce market, 2) Walmart is still a good barometer on retail spending so Walmart earnings and outlook give clues to consumer spending which is important as the US economy is a consumer-driven economy.
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