Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
The stakes are high for growth stocks as FOMC looms
Peter Garnry
Chief Investment Strategist
Summary: Underneath the major equity indices a bloodbath has taken place in bubble and e-commerce stocks with our bubble stocks basket down 43% from the peak in February. However, with inflation pressures more persistent and an US administration eager to ease the pain of inflation for voters, the FOMC is likely to double tapering and signaling a rate hike as early as March next year. Growth stocks have already to some extent discounted this but depending on nuances in tonight's FOMC statement the selloff in Nasdaq 100 and more generally growth stocks could continue.
Significant shift in investor appetite for growth stocks
The past month has seen a big shift in the underlying structure of the equity market which is not clear if you just watch the main equity indices such as S&P 500 and Nasdaq 100. Powell (Fed Chair) and Brainard (Fed Vice Chair) are clearly on a mission, and likely dictated by the US administration, to bring down inflation as it has proved more deep-rooted than the Fed’s models initially were indicating. The change in tone and intention have wrecked growth pockets in the equity market with our Bubble Stocks and E-commerce baskets down 11.5% and 10% respectively, and with other baskets across the green transformation and next-generation medicine themes just behind. On the flipside investors have bid up the commodity sector, defense, and logistics stocks in a sign that investors are betting that the physical world will continue its revenge against the online world into 2022.
Will the bloodbath in bubble stocks continue?
A hawkish FOMC could extend the already massive drawdown among bubble stocks that has reached -43% as of yesterday. Technically bubble stocks could correct 11% from current levels on a hawkish FOMC before finding support; there is growth after all regardless of interest rates and inflation in this pocket of the equity market. But to get an idea of the equity duration (interest rate sensitivity) read my Twitter thread from yesterday on Pinterest. Here we provide an idea of the interest rate sensitivity for such a growth stock with our cash flow model showing that a 100 basis point upward move in the US 10-year yield would mean a drop of 18% in market value for Pinterest. This an interest rate sensitivity that is more than twice that of the US 10-year bond itself and this is even for a profitable growth company. Non-profitable growth companies such as our bubble stocks have likely an equity duration around 25-30.
What can we expect tonight at the FOMC? Consensus is looking for a doubling in the pace of tapering which puts the Fed in a position to hike the rate in March and then most likely two times more hiking rates three times next year. This is the consensus, but the nuances and interpretations will also lie in the dot plot which will highlight whether FOMC members have become more hawkish looking a bit further out than 2022. The US labour market is tight and wage pressures warrant the FOMC to tighten monetary policy.
For an immediate interpretation tonight of the FOMC statement watch the US 2-year T-Note futures Mar 2022 (Saxo ticker is ZTH2). For those clients that do not have futures enabled on the trading platform can watch a delayed price on this CME website. The most sensitive reaction in equities will happen in Nasdaq 100 futures Dec 2021 (Saxo ticker is MNQZ1) as this index represents the most interest rate sensitive equity index or the major indices.
The tables below shows the composition of our bubble stocks and e-commerce baskets, so for investors with a large exposure to these stocks the risks are extra high going into tonight’s FOMC meeting.
Bubble stocks basket
| Name | Mkt Cap (USD mn.) | 12M Fwd EPS | 12M Fwd EV/Sales | Diff to PT (%) | 5yr return (%) | YTD return (%) |
| Kuaishou Technology | 213,499 | -0.85 | 16.2 | 61.0 | NA | NA |
| Sea Ltd | 140,384 | -1.26 | 17.3 | 82.4 | NA | 12.9 |
| Airbnb Inc | 130,635 | -1.31 | 28.1 | 15.9 | NA | 14.4 |
| NIO Inc | 94,795 | -1.59 | 18.0 | 84.1 | NA | -33.7 |
| Snowflake Inc | 84,570 | -0.87 | 71.5 | 13.2 | NA | 24.6 |
| DoorDash Inc | 67,743 | -0.19 | 17.6 | 49.4 | NA | 9.6 |
| Roku Inc | 59,111 | -0.26 | 23.1 | 67.8 | NA | -33.3 |
| Bilibili Inc | 51,601 | -4.76 | 18.2 | 99.3 | NA | -38.2 |
| Teladoc Health Inc | 41,124 | -0.30 | 20.3 | 76.5 | 447.0 | -53.9 |
| XPeng Inc | 37,228 | -2.41 | 15.0 | 42.2 | NA | 3.8 |
| Affirm Holdings Inc | 34,499 | -0.89 | 39.7 | 54.4 | NA | NA |
| BeiGene Ltd | 34,490 | -9.78 | 35.8 | 51.2 | 840.3 | 7.8 |
| Unity Software Inc | 34,299 | -0.35 | 32.7 | 24.6 | NA | -8.8 |
| Plug Power Inc | 32,156 | -0.18 | 68.1 | 61.6 | 2,214.4 | -9.9 |
| Seagen Inc | 31,016 | -0.11 | 15.9 | 31.9 | 130.7 | -17.5 |
| Cloudflare Inc | 28,050 | -0.08 | 46.1 | 64.2 | NA | 73.7 |
| Splunk Inc | 27,486 | -0.21 | 10.8 | 52.5 | 97.3 | -35.6 |
| MongoDB Inc | 25,201 | -0.98 | 34.1 | 15.9 | NA | 33.3 |
| Exact Sciences Corp | 24,752 | -1.14 | 13.3 | 68.9 | 434.1 | -42.2 |
| Gaotu Techedu Inc | 24,455 | -3.34 | 11.8 | NA | NA | NA |
| Farfetch Ltd | 23,465 | -0.66 | 10.3 | 70.7 | NA | -53.5 |
| DraftKings Inc | 23,186 | -1.16 | 26.5 | 117.5 | NA | -40.3 |
| GDS Holdings Ltd | 20,998 | -0.15 | 18.6 | 72.9 | 387.2 | -50.2 |
| 10X Genomics Inc | 20,458 | -0.32 | 38.9 | 46.7 | NA | -3.7 |
| Argenx SE | 19,397 | -10.72 | 105.2 | 20.0 | 1,683.2 | 9.8 |
| Alnylam Pharmaceuticals Inc | 19,214 | -4.77 | 21.0 | 10.2 | 318.4 | 42.9 |
| Ping An Healthcare and Technology Co Ltd | 18,942 | -0.91 | 11.6 | 84.9 | NA | -68.5 |
| Innovent Biologics Inc | 18,305 | -0.61 | 24.0 | 67.9 | NA | -31.0 |
| Guardant Health Inc | 16,826 | -1.50 | 40.5 | 75.6 | NA | -29.0 |
| Zai Lab Ltd | 15,781 | -2.52 | 87.5 | 171.6 | NA | -53.9 |
| Kingsoft Cloud Holdings Ltd | 15,710 | -2.56 | 9.6 | 135.7 | NA | -64.5 |
| Yatsen Holding Ltd | 15,665 | -1.17 | 10.7 | 71.2 | NA | -88.7 |
| Oak Street Health Inc | 15,461 | -0.46 | 11.1 | 69.5 | NA | -46.7 |
| C3.ai Inc | 15,370 | -0.79 | 69.6 | 73.2 | NA | -77.5 |
| Bill.com Holdings Inc | 15,319 | -0.19 | 57.4 | 53.0 | NA | 76.7 |
| Canopy Growth Corp | 15,279 | -0.90 | 24.2 | 38.6 | 17.0 | -62.5 |
| Appian Corp | 15,229 | -0.40 | 43.3 | 58.4 | NA | -58.7 |
| Avalara Inc | 14,770 | -0.16 | 21.3 | 49.3 | NA | -14.2 |
| Elastic NV | 14,429 | -0.44 | 20.6 | 54.0 | NA | -22.1 |
| Wolfspeed Inc | 14,240 | -0.59 | 21.3 | NA | NA | NA |
| Aggregate / median | 1,565,141 | 21.3 | 61.3 | 410.6 | -30.0 |
E-commerce basket
| Name | Region (*) | Market Cap (USD mn.) | Sales growth (%) | EBITDA growth (%) | Diff to PT (%) |
| Amazon.com Inc | Global | 1,668,073 | 37.6 | 32.9 | 22.1 |
| Alibaba Group Holding Ltd | China | 713,104 | 35.3 | 48.1 | 23.0 |
| Meituan | China | 304,560 | 49.5 | #N/A | -3.7 |
| Pinduoduo Inc | China | 237,647 | 129.7 | 23.3 | -9.3 |
| Shopify Inc | Global | 149,775 | 47.0 | -37.4 | -1.9 |
| JD.com Inc | China | 149,448 | 24.9 | 518.9 | 12.8 |
| Sea Ltd | Southeast Asia | 124,491 | 163.1 | 21.1 | -10.9 |
| MercadoLibre Inc | Brazil | 93,108 | 59.5 | -112.4 | -4.0 |
| Carvana Co | United States | 45,593 | 101.5 | -6.5 | -2.3 |
| Chewy Inc | United States | 42,796 | 37.2 | 28.8 | -2.2 |
| eBay Inc | Global | 40,009 | -4.9 | 3.2 | 15.2 |
| Delivery Hero SE | MENA | 32,811 | 86.1 | -201.5 | 6.5 |
| Zalando SE | Europe | 29,908 | 20.3 | 75.3 | -6.1 |
| Ocado Group PLC | United Kingdom | 28,783 | 9.9 | -20.1 | -29.3 |
| Wayfair Inc | United States | 28,340 | 34.6 | -76.0 | 0.8 |
| Etsy Inc | United States | 26,488 | 35.6 | 40.1 | -2.3 |
| Farfetch Ltd | Global | 22,772 | 69.5 | -83.2 | -11.7 |
| Vipshop Holdings Ltd | China | 21,871 | 10.0 | 84.6 | -13.1 |
| Just Eat Takeaway.com NV | Europe | 16,437 | 79.0 | -55.1 | 33.3 |
| HelloFresh SE | Europe | 15,607 | 41.4 | #N/A | -4.2 |
| Rakuten Inc | Japan | 14,797 | 14.7 | -30.6 | 15.7 |
| Ozon Holdings PLC | Russia | 11,049 | 61.5 | -197.4 | 0.7 |
| Dada Nexus Ltd | China | 10,769 | 61.3 | 9.7 | 5.2 |
| ZOZO Inc | Japan | 10,197 | 6.0 | 9.8 | -4.6 |
| THG PLC | Global | 9,808 | 24.5 | -1.6 | 20.5 |
| Fiverr International Ltd | United States | 8,517 | 41.8 | 8.9 | -7.0 |
| Stitch Fix Inc | Global | 8,090 | 8.5 | #N/A | -32.3 |
| Mercari Inc | Japan | 7,965 | 47.6 | -59.4 | 3.5 |
| ANGI Homeservices Inc | United States | 7,567 | 10.7 | -41.3 | -4.3 |
| Grubhub Inc | Global | 6,937 | 38.7 | #N/A | -10.4 |
| ASOS PLC | United Kingdom | 6,781 | 19.4 | 147.1 | 15.9 |
| boohoo Group PLC | United Kingdom | 6,028 | 44.1 | 59.2 | 32.3 |
| Jumia Technologies AG | Africa | 5,715 | 24.3 | -31.3 | -49.0 |
| Qurate Retail Inc | Global | 5,225 | -4.3 | -55.7 | 1.4 |
| Shop Apotheke Europe NV | Germany | 4,804 | 29.9 | -19.4 | -12.6 |
| LivePerson Inc | United States | 4,548 | 16.7 | -716.7 | 7.9 |
| Stamps.com Inc | United States | 4,319 | -2.6 | -42.2 | 59.4 |
| Baozun Inc | China | 3,483 | 35.0 | 58.1 | 3.8 |
| BHG Group AB | Sweden | 2,209 | 44.4 | 93.3 | 17.4 |
| Boozt AB | Nordic | 1,389 | 23.0 | 68.9 | 6.0 |
| Aggregate / mean | 3,931,816 | 40.3 | -12.7 | 2.1 |
* Region is the main geographical revenue segment and global if geographical segments are almost equal
The 5-year chart below on Nasdaq 100 futures is for compliance reasons.
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