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Demand for Roche’s COVID-19 Tests Exceeding Capacity; 5-Star Analyst Says ‘Buy’

Demand for Roche’s COVID-19 Tests Exceeding Capacity; 5-Star Analyst Says ‘Buy’

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As the worldwide coronavirus case count has risen towards 1 million, and as several people who have no known ties to existing cases have started to chart symptoms, the need for a reliable, mass-produced diagnostic test has become pressing.

On March 12, Roche (RHHBY) received approval for its SARS-CoV2 test (PCR) that runs on the COBAS platform. The test has a fast turn-around time of 3.5 hours but there is limited supply. At the moment Roche can supply 3.5 million tests per month.

Indeed, Deutsche Bank’s Richard Parkes argues disruption to Roche’s routine diagnostic sales are offset by strong demand for COVID-19 tests. The demand for kits has exceeded capacity, with Roche able to produce 900,000 tests per week. Without providing specific pricing details, the company has confirmed that it is distributing its COVID-19 test at a price “modestly below its standard assay pricing structure.”

Accordingly, the 5-star analyst reiterated a Buy rating on Roche shares, along with a CHF 350 price target, which implies about 10% upside from current levels. (To watch Parkes’ track record, click here)

“We believe this could represent a monthly revenue opportunity of ~$100m-200m, equal to 2-3% of Group sales on an annualized basis,” Parkes said.

The development of a serology test to identify previously exposed infections with ongoing immunity is also currently in accelerated mode, but there is no timeline attached. Roche has warned that due to the “implications for informing healthcare policy” and allowing individuals to forego social distancing measures, the accuracy of such a test was vital.

While the rest of its pipeline hasn’t seen any meaningful delays, there are other coronavirus developments taking place. A Phase III trial is due to start early this month of Actemra in severely ill COVID-19 patients, with results hopefully available by May or June. Roche have been reluctant to be drawn on the commercial opportunity, due to, so far, there is only anecdotal evidence the treatment will succeed.

“In theory, we believe the sales opportunity could reach $1bn or more. However, this remains highly dependent on how the pandemic develops over time,” Parkes added.

In contrast to the many companies struggling in the current climate, Roche remain aware of the current situation’s ability to further enhance its reputation, as Parkes concluded, “Roche also see potential for its highly visible presence during the COVID-19 pandemic to help improve brand awareness and thus its penetration of the US diagnostics market in the long-term. (See TipRanks’ Analysts’ Top Stocks)

The post Demand for Roche's COVID-19 Tests Exceeding Capacity; 5-Star Analyst Says 'Buy' appeared first on TipRanks Financial Blog.

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Economics

JPY forecast amid the Bank of Japan keeping the monetary policy easy

The rapid depreciation of the Japanese yen (JPY) in the last couple of years led to one of the most impressive moves seen in the FX market in recent history….

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The rapid depreciation of the Japanese yen (JPY) in the last couple of years led to one of the most impressive moves seen in the FX market in recent history. The yen simply melted, losing value against all its peers – not only against the US dollar.
Speaking of the US dollar, the yen dropped to over 131 recently before gaining some ground in the last few days. How will the yen perform for the rest of the year, and is the Bank of Japan right in keeping the monetary policy easy?

Bank of Japan still sees inflation as transitory

The main reason for the JPY’s move lower is the Bank of Japan’s policy. The central bank sees inflation as transitory, and, for this reason, it keeps the monetary policy easy.

It keeps buying government bonds, despite PPI or Producers Price Index (i.e., inflation on the producers’ side) rising at a four-decade high.

But so did the Fed, before dropping the transitory word when talking about inflation. If the PPI transfers to consumers, as it should, then the Bank of Japan would have to reverse its policy.

Truth be said, inflation in Japan is below 2% for decades, hurting the Bank of Japan’s credibility. It might have dramatic implications on the FX dashboard if it rises considerably above the target.

Only that the FX market is a leading one. Traders speculate and position themselves well before a central bank acts.

So did we see the lowest point in the JPY or not?

AUD/JPY daily chart points to a possible reversal

All JPY pairs’ charts look more or less like the AUD/JPY daily chart below. It shows that following the COVID-19 pandemic dip in 2020, the market rallied relentlessly.

But the recent breakout in 2022 following the Bank of Japan’s yield curve control comments is only the last leg of an otherwise super long trend. In other words, the yen was sold well ahead of the Bank of Japan’s comments. It followed the US stock market higher.

Now that the US stock market is coming down (i.e., Nasdaq 100 dropped -28% YTD), the JPY pairs may follow. The AUD/JPY chart above shows a possible head and shoulders pattern at the top which might just signal the top of a bigger head and shoulders pattern.

In other words, should the recent highs hold, a move back to 80 should not be discounted, especially if the US stock markets keep falling.

The post JPY forecast amid the Bank of Japan keeping the monetary policy easy appeared first on Invezz.

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Weekly investment update – The soft underbelly of hard inflation data

Warnings by the US and Chinese authorities have underscored the dilemma of conflicting inflation and growth data, with energy and tight labour markets…

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Warnings by the US and Chinese authorities have underscored the dilemma of conflicting inflation and growth data, with energy and tight labour markets pushing up producer and consumer prices amid creeping signs of softening growth. This has put global monetary policy, and markets in risky assets, in a bind.

The Dow Jones Industrial Average fell for the seventh consecutive week last week, while the benchmark US Treasury 10-year yield hovered around 3.0% (almost double the 1.6% of a year ago). Commodity prices came under selling pressure as risk aversion among investors mounted. Safe-haven flows pushed up the US dollar, driving its trade-weighted index to near two-decade highs (see Exhibit 1).

Policy warnings…

China fanned market worries early last week, with Premier Li Keqiang warning that the domestic jobs situation was getting ‘complicated and grave’. The country’s zero-Covid policy is taking a heavy toll on the local economy with negative spillover effects globally. While Shanghai’s lockdown may be wound down soon, other major cities (including Beijing) are facing renewed restrictions.

US Federal Reserve Chair Jerome Powell issued a warning mid-week: The Fed could not guarantee a ‘soft landing’ as it looked to get runaway inflation back to its 2% target amid a tight US labour market. The US Senate nonetheless overwhelmingly confirmed Powell for a second term, signalling monetary policy continuity.

Earlier in the week, former Fed Chair Ben Bernanke warned about the risk of stagflation in an interview with The New York Times.

Aggravated by hard inflation data…

US consumer price inflation was 8.3% YoY in April, down slightly from 8.5% in March. However, core inflation (which excludes food and energy prices), rose on the month from 0.3% to 0.6%, a level still too high for the Fed’s comfort.

Services inflation was particularly strong, rising by 0.7% MoM in April, marking the biggest monthly gain since August 1990. Underscoring continued robust consumer demand, retail sales rose by 0.9% vs the prior month, though this marks the third month in a row that the growth rate has decelerated. 

The prospects for inflation to fall back to the Fed’s 2% target anytime soon may not be good: High wage growth – hourly earnings rose at around 5% YoY – could continue to fuel inflation in the near term. We note that services inflation tends to be much stickier than other index components.

From the Fed’s perspective, these price pressures could in turn drive inflation expectations higher.

The market perceives the latest inflation report as sealing a 50bp rate rise at the June and July meetings of Fed policymakers. It also boosts the chances of the Fed persisting in its aggressive tightening stance at later meetings. A key question is the extent to which – and when – higher interest rates will hit real incomes and crimp demand growth, slowing the economy overall. 

The high services inflation data also suggests labour market tightness would have to ease significantly to bring wage growth back to levels that are acceptable to the Fed. We believe something will have to give. If not, the Fed may have to tap harder on the brakes down the line.

The ECB continues to move closer towards a hawkish policy, with the market now expecting its asset purchasing programme (APP) to end in July, to be followed by a 25bp rate rise soon after. Underpinning the ECB’s policy tightening stance is strong inflation, which rose by 7.4% YoY in April (same as in March), and falling unemployment (the jobless rate hit a record low of 6.8% in March).

The war in Ukraine has added to the upside risks to inflation via food and energy price increases and supply bottlenecks. In addition to higher inflation, the ECB also appears to be concerned about the spillover effects from wage increases. An increasing number of policymakers has spoken out recently in favour of an initial rate rise as soon as July.

And creeping signs of slower growth

Indications of weakening growth momentum have appeared, most noticeably in the UK where GDP growth contracted unexpectedly by 0.1% MoM in March.

In the eurozone, industrial production shrank by 1.8% MoM in March and manufacturing output was down by 1.6%. The main culprit was disruption caused by the war in Ukraine. The weakness was concentrated in Germany, whose supply chains are more integrated with eastern Europe. Its car sector is missing components produced in Ukraine.

Even in the US, recent data showed signs of slowing growth. Jobless claims filings showed an increase in initial claims; the May Senior Loan Officer Opinion survey recorded a drop in demand for mortgages; the University of Michigan consumer sentiment May index hit its lowest level since the start of the pandemic; and the May Empire State Manufacturing survey plunged.

China also released weak data, with industrial output, fixed-asset investment and retail sales all showing year-on-year declines. The property market’s woes deepened, with new home sales and starts falling precipitously.

Investment implications

Mr. Bernanke’s warning of stagflation underscores the dilemma facing policymakers and financial markets: Inflation and growth data are sending conflicting signals. Parts of the US yield curve are inverted, pointing to some risk of an economic recession.

The slowdown concerns are linked to inflation forcing the Fed to tighten policy into restrictive territory and turning weaker growth into a contraction.

The situation is similar in the eurozone: inflation is at its highest ever and could lead the ECB to take stronger measures, exacerbating headwinds from weak Chinese activity and a Russia-induced energy supply shock.

Against the backdrop of the continuing Ukrainian conflict and prolonged supply-chain disruptions, we do not favour sovereign bonds and European equities at this point. We prefer commodities, Japanese and emerging market equities, including Chinese stocks.


Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Chi Lo. The post Weekly investment update – The soft underbelly of hard inflation data appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Economics

The retailers that should weather the coming economic storm

Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These…

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Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These impacts will crimp the discretionary spending power of many people. The one exception could be the under 25-year-old Gen Z demographic, who have fewer non-discretionary costs than other age groups. The retailers who sell to them could fare better than most.

Over the last six months, discretionary retail stocks have been among the worst performers on the ASX, with the S&P/ASX 300 Retailers Accumulation Index underperforming the broader market index by 13 per cent over that period. Admittedly, this recent under performance merely unwinds the 20 per cent out performance of this index in the preceding 18 month period which coincided with the recovery in the market from the pandemic lows.

Over the last six months, only 1 of the 17 stocks in this index has managed to perform better than the broader market, JB HiFi, while four generated losses of over 50 per cent. Notably these stocks, Red Bubble, Kogan, City Chic and Temple & Webster, are all online retailers, and performed very strongly over the first year of the pandemic as they were perceived to be COVID winners.

Figure 1: Total return of retailing stocks between 16 Nov 2021 and 16 May 2022

Source: Bloomberg

The market is concerned that the combination of falling incomes – as households face rising inflation on a broad basis eating into real spending power, and rising interest rates – will reduce discretionary spending power. However, it is not as simple as this. 

While these factors are likely to lead to pressure on overall discretionary consumption, these factors do not affect all segments of the economy equally.

CBA’s economic team has released data for household income and spending growth for the March quarter of 2022. This data is broken down by age demographic.

In looking at the potential impact of spending from cycling the impact of large stimulus payments that were received by households in the prior year, CBA’s data suggests that the percentage of Millennials receiving some sort of government payment has fallen the most relative to the December quarter of 2021 followed by Generation X. Gen Z and Baby Boomers have experienced less of a reduction.

Offsetting the reduction in government benefits is an increase in the percentage of people receiving a salary. This is likely as a result of people returning to work post the pandemic and the current strong labour market.

Figure 2: Share of households receiving government benefits or salaries
(change between 4Q21 and 1Q22)
Source: CBA

This then feeds into the impact on each demographic’s growth in overall income over the last 12 months. This shows that Gen Z has benefited the most from the current strong employment market with increased employment and strong wage growth while the percentage receiving government benefits remains higher than other demographics and above pre-pandemic levels. 

Figure 3: Household income and spending – annual average % change in 1Q22
Source: CBA


Not surprisingly, it is also Gen Z that has shown the strongest spending growth in the March quarter. For the other generations, spending growth has exceeded income growth, implying that their savings rates have declined to fund that growth in spending.

But savings are still well above 2019 levels for all generations and still rising. This will provide a buffer against cost increases and slowing growth in the medium term as inflation and higher interest rates bite. Gen Z has the biggest savings buffer.

Figure 4: Household savings – average deposit and offset balancesSource: CBA

Not surprisingly, overall household wealth is considerably higher than at the end of 2019, primarily as a result of rocketing residential property prices on the back of emergency monetary policy settings. The wealth effect of housing prices is an important driver of discretionary spending in Australia and has benefited retailers over the last two years.

Figure 5: Household wealth – average per household

Source: CBA

Of course, what interest rates can give, they can also take away. With variable mortgage rates likely to increase 1-2 percentage points over the next year, residential property prices are expected to fall, reversing some of this wealth effect.

There is no doubt that conditions are set to tighten for retailers over the coming year. However, reversing wealth effects from falling property prices and falling discretionary income levels will primarily impact those generations that own most of the housing stock, namely the Baby Boomers, Gen X and to a lesser extent the Millennials. Baby Boomers are more likely to be impacted by falls in house prices while Millennials will be more impacted by the need to allocate more of their income toward mortgage repayments.

For those that rent rather than own their home, rents are also likely to rise, as property owners try to pass on rising mortgage, utility and maintenance costs to tenants.

Those with families will be more impacted by rising prices of non-discretionary goods and services like food and utilities. This impact will be concentrated on Millennials and Gen X.

While not immune, the younger Gen Z demographic is likely to fare better than other generations given it faces fewer non-discretionary costs, and is not as exposed to property and wealth effects. At the same time, it is experiencing the strongest income growth and has had the most significant increase in its savings over the last two years.

Hence, we prefer retailers that cater to this younger demographic in the discretionary segment such and Universal Store and Accent Group.

The Montgomery Funds owns shares in City Chic, Universal Store and Accent Group. This article was prepared 18 May 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Goodman Group you should seek financial advice.

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