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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Zalando in shock guidance cut, equities are lifted from yield plunge
Peter Garnry
Chief Investment Strategist
Summary: Zalando shares are down 13% today hitting levels not seen since 2014 as revenue growth is taking a massive hit as the European consumer is hurting from elevated energy and food prices. High logistics costs are also still hurting margins and because Zalando is not controlling the entire value chain they are squeezed as a retailer. Our e-commerce theme basket is down 65% over the past year only marginally surpassed by our crypto & blockchain basket. We also take a look at the historic move in the German 2-year yield yesterday which is helping equities to rebound further.
The never ending pain in e-commerce
We recently wrote about the guidance cut from Asos driven by the cost of living crisis causing higher recall rates than normal. Yesterday after the market close, Zalando issued a guidance cut indicating that Q2 revenue growth would be significantly below analyst estimates and that revenue growth for the fiscal year is now expected to be 0-3% down from previously 12-19% suggesting an unanticipated decline in consumer activity driven by weakening macroeconomic conditions also reflected in consumer confidence. Zalando is also revising down its fiscal year EBIT guidance range to €180-260mn significantly below estimates of €361mn. Zalando shares are down 13% in today’s trading session hitting the lowest levels since late 2014 just after its IPO. In its first quarter, Zalando swung back into negative free cash flow on a 12-month trailing basis.
E-commerce is hit hard from elevated logistics costs and higher wage pressures from a tight labour market, but being a retailer is also extremely difficult because you are controlling the entire value chain and thus the room for maneuvering is small. If we look across of theme baskets, e-commerce is now close to being the worst theme basket over the past year only marginally surpassed by the crypto & blockchain theme. With expectations being rock-bottom the question is increasingly when we hit the floor in e-commerce stocks.
When bad is good
Yesterday’s session was historic with a massive decline in the German 2-year yield falling 25 basis points, the second largest drop since 2005, and the US 2-year yield was down as much as 18 basis points during the session before rebounding again. Interest rates had already rolled over somewhat responding to the decline in commodities signaling a worsening economic outlook. But yesterday’s unusual move in interest rates was likely caused by safe-haven flows as preliminary PMI figures in the US and Europe suggest a much faster slowdown than anticipated. The US PMI composite index hit 51.2 vs est. 53.0 down from 53.6 in May and Europe’s composite PMI figure in June was 51.9 vs est. 54.0 and down from 54.8. The surprising factor was the services sector which is arguably being hit by weak consumer confidence also reflected in today’s surprise guidance cut from Zalando.
Lower interest rates and falling commodity prices are doing two good things to equities. Lower interest rates mean lower cost of capital which is positive for the present value of future free cash flows, and falling commodities are easing the margin pressure which lifts free cash flows or else being equal. So right now, bad figures are good for equities. If we look at forward estimates for earnings consensus is way too optimistic and equities have for the most part only priced in higher than expected inflation and not a recession, which is why we expect a lower leg down in equities when the recession becomes clear to all market participants.
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