Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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US equities rally; Tesla worries grow on Q4 deliveries
Peter Garnry
Chief Investment Strategist
Summary: US equities are rallying on the first day of trading following the positive vibes observed yesterday in Europe and today in Chinese equities. Investors are hoping that this year will prove more positive for equities than 2022 but many of the issues remain the same including margin compression, a slowing economy and inflationary worries. In today's equity update we are also zooming in on Tesla that announced Q4 deliveries last night that disappointed against estimates fueling more worries about demand for EVs.
The first two weeks will reveal investor preferences
S&P 500 futures are up 0.5% on the first day of trading after being up as much as 1.2% at the intraday high. It is a new year with fresh hopes, but all the issues around inflation, interest rates, geopolitical risks and China remain the same. In a couple of weeks from now Q4 earnings will begin to be announced and the key question is whether companies are lowering their forecasts for 2023 and continue to see headwinds on their operating margins.
Last year saw strong performance among stocks in themes such as commodities, defence, renewable energy, nuclear power, and logistics. Over the next two weeks we will find out whether investors are using the same playbook or new themes are emerging as the big bets for 2023. One potential joker could be technology related themes that will see inflows following a terrible 2022.
Does Tesla have a demand issue?
As we alluded to in several equity notes during Q4 problems were arising for Tesla due to elevated battery costs and excessive electricity costs in Europe and to some extent in China. Future demand was clearly coming down which got reflected in many EV stocks. Tesla shareholders were late to see the underlying trends but quickly corrected affairs in Q4. Last night Tesla announced Q4 deliveries of 405.3K coming short of estimates at 420.8K and significantly below the Q4 production number of 439.7K expanding the production gap to delivery (see chart). The gap might be driven by a combination of US demand being pushed into Q1 by the US Inflation Reduction Act which enables a US tax credit for purchasing an EV in 2023. But the other effect is a clear demand surprise in Europe and China, and something VW executives have alluded to as well.
Lithium and nickel prices remain elevated and battery costs soared in 2022 forcing Tesla to raise prices multiple times. The higher price point combined with high electricity prices caused a negative impact on demand. Does Tesla has a demand problem? In the short-term yes, in the sense that production must be realigned with the short-term reality, but the EV adoption is powering on at a blistering pace and will not stop. As our ‘EV battle’ chart shows, Tesla is still in a comfortable position against the competition with BYD and VW being its main competitors for the EV crown. This year will likely prove to be a difficult one for Tesla due to margin pressures and ever growing competition, but the EV maker is here to stay and demand will continue to grow. But for now the Q4 delivery miss will add to investor worries over Tesla.
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