Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Bumps in the road, Volkswagen vs Tesla, Chinese tech clampdown
Peter Garnry
Chief Investment Strategist
Summary: Today is another trading session highlighting the interest rate sensitivity of technology stocks with the segment underperforming the broader equity market. This divergence could continue until the US 10-year yield stabilises in the area 2-2.5% over the coming quarters as the US output gap is closed. Long-term we are still positive on equities and also technology stocks. We are also focusing on the strong performance of Volkswagen this year and how the German carmaker is gaining on Tesla. Finally we talk a bit about the ongoing Chinese technology regulation and how it signals what to expect in other jurisdictions going forward.
We promised on today’s podcast that we would launch our new equity theme basket on travel companies today, but the underlying calculations on the basket is not done, and as a result it will be on Monday. We are excited about launching this basket as there is no good ETFs out there on the travel theme, and specially not a broad approach to it, so we truly believe we are bringing a unique basket to the marketplace like our green transformation and commodity sector baskets. In today’s equity update we will instead go through various interesting developments in the equity market.
Rising interest rates create divergence
Regularly readers of our equity notes will know that we have talked a lot about interest rate sensitivity, even before it become a visible thing in the equity market, and today we are seeing this on full display with technology stocks underperforming the overall equity market. Our view is that the divergence between technology stocks and the rest of the market could continue to be a theme as US interest rates continue to rise in a repeat of the same underlying divergence during the peak of the dot-com bubble in 2000. We are significantly more upbeat on US interest rates than consensus and believe we will hit 2.5% by year-end driven inflationary pressures caused by overstimulating the economy. The chart below shows that the US economy is currently having a 3% GDP output gap with 16.2% fiscal deficit. As the US economy reopens after vaccination over the summer the output gap will quickly be closed and the $1.9trn stimulus bill just passed will accelerate and stimulate a US economy already operating at full speed.
Volkswagen vs Tesla
The past year, Tesla has stolen the limelight from all the other carmakers as the market has celebrated the continued penetration of electric vehicles despite the pandemic. As we have pointed out in several equity notes the past three months, Tesla is losing market share in Europe, the world’s largest EV market, and is experiencing pricing pressure in China. Even in its home market the new Ford Mustang Mach-E is doing quite well. Everywhere you look Tesla sees increased competition and in our view their advantage as a first mover is fading and their lead in battery technology is also diminishing as the car industry catches up. Even more importantly, the existing car industry has larger production facilities, more experience in building cars, and a larger distribution and service network which is particularly important in the European car market. Whether it is that the market is beginning to price in, we do not know, but it is interesting to see Volkswagen shares up 26% this year with Tesla shares flat. This is a signal that should not be ignored and something we will continue to track going forward.
China is serious on technology regulation
Hang Seng futures are down 2.3% as Chinese regulators today have moved aggressively against Chinese technology companies including Tencent saying that there will be increased oversight and regulation applied to FinTech subsidiaries. China’s government is serious when it comes to protecting the existing banking industry, in all fairness just leveling the playing field, but also enforce more competition by clamping down on monopolistic behaviour and especially around acquisitions. The developments in China, EU’s continued fight with US technology giants, France’s technology tax, and Biden’s latest appointments to the FTC of people very vocal against big technology companies are all signs that investors in large quasi-monopolies within the technology sector should prepare for more negative headlines on regulation and potentially headwinds on profit growth.
Stimulus checks to prop demand next week?
Many Americans will receive their stimulus checks from the government over the weekend. In a recent survey from Deutsche Bank many retail investors say they plan to spend the money in the equity market. This fresh buying power among a growing importance of retail investors could support technology stocks next week despite rising interest rates. As we discussed on today’s podcast next week is going to be eventful and potentially adding a lot of volatility to markets.
The 5-year chart below on Tesla and Volkswagen is for regulatory purposes
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