Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Weekly Update: Saxo Thematic Investing Performance
Peter Garnry
Chief Investment Strategist
Summary: Financial trading firms were going through a boom during the pandemic as trading activity accelerated, but since the economy reopened activity has been declining and the stocks of financial trading firms have underperformed. But last week was a strong rebound week for the industry driven by better than expected Q3 results and an improving outlook. While the industry generally was up 7% last week, Hong Kong Exchanges and Clearing had a terrible week down 15% extending the year's decline to 53% as the market is getting worried about the outlook for the participation of foreign investors in the Chinese equity market following the recent Chinese leadership shuffle.
Financial trading firms in comeback as uncertainty drives activity
Our financial trading basket was the best performing basket last week rising 7.1% outperforming other strong themes such as NextGen Medicine and Renewable energy. While it was a strong comeback week for financial trading firms the theme has still had a tough year underperforming the MSCI World Index. Financial trading firms are keeping up with inflation so far growing revenue by 7% y/y although earnings down 3% y/y as wage pressures are impacting margins. Analysts are generally still positive on the industry and the rising interest rate environment should create a tailwind on earnings for these companies. The best performing stock in the basket last was Flow Traders that delivered better than expected Q3 earnings.
The medium outlook for the industry is improving as higher volatility in currencies and bonds is typically good for trading activity and the rising interest rates make excess client funds more valuable. After the initial repricing of the equity market in the beginning of the year, the financial trading industry has got back on its feet outperforming the MSCI World Index by 5.7% since mid-July. Since early 2016, the industry has outperformed global equities by 60%.
Hong Kong Exchanges & Clearing was caught in the Chinese rout last week
Last week was dramatic for Chinese equities due to the significant leadership shuffle in China which we covered in our Monday equity note. The market is judging the leadership shuffle to be long-term negative for the private sector and negative for earnings growth. For an exchange such as Hong Kong Exchanges & Clearing (HKEC) the rout in Chinese equities was bad taking the stock price down 15% during the week. One thing is the short-term interpretation of the leadership shuffle, but the long-term impact on the Chinese equity business is seen quite obvious in the plunging share price of HKEC which is down 53% this year. One of the key drivers of future revenue is participation of foreign investors, but we see signs now that investors are pulling out capital in Chinese equities pushing up the Chinese equity risk premium.
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