Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Sanctions on Russia are causing ripple effects everywhere
Peter Garnry
Chief Investment Strategist
Summary: Today's equity update touches on the EU's new plan to issue joint bonds to fund massive investments in energy and defence adding further short-term tailwind for Europe's oil and gas industry. The sanctions against Russia are causing all sorts of unintended consequences and ripple effects with the nickel market yesterday jumping in a spectacular way due to a massive short squeeze. The rapid rise in nickel and also lithium carbonate prices are putting enormous pressure on electric vehicle makers such as Tesla.
Energy and defence policy in EU takes another turn with joint bonds
The EU announced today a plan to issue massive joint bonds to fund investments in energy and defence which undoubtedly will make it more likely that the EU will succeed in its transition to more energy independence from Russia and a stronger domestic military force. The step is also a move towards a fiscal union in the future. In the UK, Boris Johnson is fleshing out a new energy plan which includes renewed exploration of gas and oil in the North Sea on top of more nuclear and renewable power. The problem is that the North Sea is a mature field and thus it is questionable how much production could be lifted. Oil and gas fracking in Europe has never materialized despite several attempts, but maybe this crisis could put fracking back on the table as short-term solution. We remain positive on the European oil and gas industry and believe they will reap future benefits from EU’s grand ambitions on reforming its energy policy.
Historic short squeeze in Nickel futures
Sanctions on Russia have also created massive ripple effects in commodity markets and Europe’s banking industry. With Russian assets worth little these days many European banks are no longer having the collateral that they thought for loans provided to Russian oligarchs causing significant margin calls on the Russian elite. The sanctions on Russia have also made it difficult for commodity markets to operate normally and prices are surging across commodities such as natural gas, thermal coal, oil, wheat, and yesterday nickel. The LME benchmark contract on nickel has spiked 250% over trading session with trades briefly touching above $100,000 a ton. LME has suspended trading today and also erased trades executed on or after 00:00 UK time on 8 March 2022; following these erased trades the high yesterday was $55,000 a ton instead of over $100,000 (see chart).
It turns out that a Chinese tycoon had a massive short position in nickel and suddenly faced billions of dollars of losses. While the nickel market will overcome this systemic shock it underscores the unpredictability and unintended consequences of the sanctions against Russia. These price signals should be taken seriously by everyone including equity investors which have still not put the MSCI World Index into a bear market. The fallout in nickel and soaring prices on lithium carbonate are putting enormous pressure on electric vehicles makers including Tesla which shares are down 36% from the peak.
International Women’s Day and women in leadership
Today is the International Women’s Day which is an annual event to commemorate the cultural, political, and socioeconomic achievements of women. This year’s theme is called “BreakTheBias” and focus on women’s equality and a world free of bias, stereotypes and discrimination. We are using today’s event as stepping stone for highlighting our Women in Leadership theme basket (see constituents below in the table) which we introduced back in late January. As we described in our introductory note on the Women in Leadership basket women are massively underrepresented among the 2,600 largest companies in the developed world with women only being 14.3% of the daily executives teams (not board of directors) globally. This is shockingly low representation and shows why women have a lot to fight for still in 2022.
| Name | Mkt Cap (USD mn.) | Sales growth (%) | ROIC (%) | Diff to PT (%) | 5yr return |
| JPMorgan Chase & Co | 379,731 | -2.1 | 18.3 | 33.5 | 61.0 |
| BHP Group Ltd | 177,245 | 47.1 | 40.5 | -6.1 | 223.4 |
| Investor AB | 58,064 | 201.3 | 39.9 | 19.4 | 128.6 |
| Block Inc | 56,637 | 86.0 | 2.3 | 84.2 | 472.0 |
| Lululemon Athletica Inc | 38,603 | 43.9 | 36.5 | 43.2 | 359.3 |
| Hang Seng Bank Ltd | 33,470 | -13.1 | 8.1 | 21.9 | 6.6 |
| DNB Bank ASA | 31,339 | -11.0 | 10.7 | 18.6 | 65.1 |
| Koninklijke DSM NV | 27,537 | 13.5 | 8.4 | 32.2 | 154.0 |
| Wolters Kluwer NV | 24,655 | 3.6 | 17.6 | 11.4 | 150.0 |
| CDW Corp/DE | 22,275 | 12.7 | 21.1 | 34.1 | 193.3 |
| Paramount Global | NA | 13.1 | 15.7 | NA | NA |
| Etsy Inc | 17,752 | 35.0 | 18.6 | 56.1 | 1,349.6 |
| Woodside Petroleum Ltd | 23,229 | 93.4 | 17.4 | -4.7 | 51.1 |
| Next PLC | 10,096 | 21.7 | 27.2 | 44.5 | 73.4 |
| REA Group Ltd | 12,138 | 33.8 | 32.8 | 26.2 | 145.7 |
| Xero Ltd | 10,317 | 19.7 | 1.3 | 44.0 | 458.8 |
| Booz Allen Hamilton Holding Corp | 11,585 | 3.3 | 17.8 | 4.3 | 155.0 |
| FinecoBank Banca Fineco SpA | 8,238 | 7.8 | 22.3 | 36.5 | 140.7 |
| CapitaLand Integrated Commercial Trust | 10,233 | 76.3 | 3.9 | 13.4 | 40.5 |
| Ascendas Real Estate Investment Trust | 8,609 | 16.9 | 5.2 | 18.4 | 50.9 |
| Jazz Pharmaceuticals PLC | 9,574 | 30.9 | 2.1 | 28.4 | 16.6 |
| Tenet Healthcare Corp | 9,235 | 10.5 | 12.9 | 16.4 | 323.7 |
| Castellum AB | 7,194 | 5.8 | 2.8 | 21.7 | 109.0 |
| Bright Horizons Family Solutions Inc | 7,686 | 15.9 | 5.7 | 19.3 | 87.1 |
| GDS Holdings Ltd | 7,546 | 37.4 | 1.2 | 77.3 | 407.0 |
| Stockland | 6,919 | -2.4 | 4.6 | 20.6 | 16.0 |
| ASR Nederland NV | 5,452 | 29.6 | 15.3 | 30.0 | 79.2 |
| Orion Oyj | 5,900 | -3.4 | 27.6 | 6.7 | -3.0 |
| Crocs Inc | 4,267 | 66.9 | 173.6 | 134.6 | 942.2 |
| Minth Group Ltd | 3,373 | 19.8 | 10.3 | 100.7 | -1.2 |
| Aggregate / median | 1,028,902 | 18.3 | 15.5 | 26.2 | 128.6 |
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