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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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It takes $300bn to join the mega cap club; FedEx earnings vs e-commerce
Peter Garnry
Chief Investment Strategist
Summary: Mega caps have done well in the past five years driven by strong gains across the FAANG segment but our mega cap equity basket launch is driven by our goal of providing clients with another option during inflation than our commodity sector basket. Mega caps have important characteristics such as high market share, pricing power, strong balance sheets, strong earnings power and global distribution which means that they should be able to offset inflationary pressures better than the general equity market. We also take a look at FedEx earnings last night and what their forecast of higher prices mean for e-commerce stocks over the coming year.
Today we are launching our next equity theme basket with a focus on global mega cap stocks. The basket consists of the 25 most valued companies across the stocks exchanges and tickers that are supported on Saxo’s trading systems. For a company in 2021 to join the exclusive join it must have a market capitalization of at least $300bn. As the table below shows this group of companies have delivered 8.5% revenue growth in 2020 during a global pandemic and grown earnings by 13% underscoring the high quality of these companies. The average price target is also 15% above the current price suggesting a substantial upside from current levels.
| Name | Industry | Market Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) |
| Apple Inc | Technology Hardware | 2,023,469 | 9.9 | 16.4 | 25.6 |
| Microsoft Corp | Software | 1,740,140 | 14.2 | 25.5 | 21.2 |
| Amazon.com Inc | E-Commerce Discretionary | 1,524,789 | 37.6 | 81.5 | 33.5 |
| Alphabet Inc | Internet Media & Services | 1,367,875 | 12.8 | 2.1 | 19.2 |
| Facebook Inc | Internet Media & Services | 793,418 | 21.6 | 23.0 | 20.3 |
| Tencent Holdings Ltd | Internet Media & Services | 775,814 | 27.4 | 53.7 | 30.1 |
| Alibaba Group Holding Ltd | E-Commerce Discretionary | 640,990 | 31.8 | 7.7 | 38.2 |
| Tesla Inc | Automotive | 626,938 | 28.3 | NA | -2.9 |
| Taiwan Semiconductor Manufacturing Co Ltd | Semiconductors | 593,806 | 25.2 | 46.9 | 25.3 |
| Berkshire Hathaway Inc | Insurance | 582,412 | -12.5 | -7.7 | 12.1 |
| Visa Inc | Technology Services | 487,543 | -8.7 | -10.4 | 10.0 |
| JPMorgan Chase & Co | Banking | 481,070 | -8.9 | -13.2 | -3.6 |
| Samsung Electronics Co Ltd | Technology Hardware | 433,645 | 2.8 | 21.9 | 20.0 |
| Johnson & Johnson | Biotech & Pharma | 422,470 | 0.6 | -8.3 | 14.5 |
| Kweichow Moutai Co Ltd | Beverages | 388,007 | 10.7 | 9.2 | 16.0 |
| Walmart Inc | Retail - Consumer Staples | 367,835 | 6.7 | 8.7 | 21.5 |
| Mastercard Inc | Technology Services | 364,564 | -9.4 | -17.5 | 6.5 |
| Walt Disney Co/The | Entertainment Content | 349,039 | -19.2 | NA | 6.5 |
| UnitedHealth Group Inc | Health Care Facilities & Svcs | 342,253 | 6.2 | 11.9 | 9.3 |
| LVMH Moet Hennessy Louis Vuitton SE | Apparel & Textile Products | 335,837 | -16.8 | -31.1 | 0.7 |
| Bank of America Corp | Banking | 335,945 | -17.5 | -29.8 | -4.8 |
| Procter & Gamble Co/The | Household Products | 316,921 | 6.3 | 19.3 | 16.5 |
| Nestle SA | Food | 318,629 | -8.8 | -4.2 | 11.6 |
| NVIDIA Corp | Semiconductors | 315,518 | 52.7 | 76.2 | 24.5 |
| Home Depot Inc/The | Retail - Discretionary | 304,850 | 19.9 | 17.2 | 6.4 |
| Aggregate / mean | 16,233,777 | 8.5 | 13.0 | 15.1 |
Source: Bloomberg and Saxo Group
* Sales and EPS growth is measured on 12-month trailing figures, Diff to PT is the difference between consensus price target and the current price in %
One of the reasons we have created the mega caps theme basket is because we started the year with our commodity sector basket as way to get exposure to rising commodities which tend to perform quite well both in absolute and relative terms during inflationary periods. Another way to lower the portfolio’s sensitivity to rising inflation is to increase exposure to companies with pricing power. Companies with market value above $300bn have gotten there because of great products, global distribution network, high market share, and strong earnings power. These characteristics are associated with high quality and likely pricing power suggesting they can keep up with rising inflation.
The chart below shows the performance of this mega caps group since December 2015. As the basket performance is based on today’s mega caps it naturally possesses survivorship and selection biases, so the historical performance should not be taken at face value. In any case, historical performance is no indicator of future performance. But tracking the mega caps going forward will be interesting against our these of relative strength during inflationary pressures.
FedEx forecasts elevated logistics costs
FedEx reported FY21 Q3 earnings (the company does not follow the calendar year) delivering adjusted EPS of $3.47 (146% growth y/y) vs est. $3.22, and revenue of $21.5bn (23% growth y/y) vs est. $20bn, but worse than expected operating margins due to input cost pressures. The company provided several interesting pieces of information such as that the company expects elevated prices for ‘at least the next 12 months’ and that online sales could likely see a deceleration in the short-term. Despite the deceleration in e-commerce short-term the company remained very positive on the outlook for volume and prices overall.
Overall logistics costs and last-mile delivery are important for e-commerce companies as it is around 10% of their revenue and thus around one third of most e-commerce businesses’ gross profit. On top of logistics costs rising there is also price pressure on warehouses in key spots around logistic hot spots. This means that e-commerce businesses are facing higher costs over the coming year which they can choose to eat out their operating margins to preserve market share or they can eventually choose to pass it on to consumers. This will be a story we will monitor closely this year and something investors in e-commerce stocks should as well. So far year-to-date e-commerce stocks have been doing relatively well against other parts of the year market (see table).
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