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Four Space Stocks Show Promise Entering 2023

Four space stocks show promise entering 2023 as war rages in Ukraine. Despite a handful of space stocks showing promise, many others in the industry struggled…

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Four space stocks show promise entering 2023 as war rages in Ukraine.

Despite a handful of space stocks showing promise, many others in the industry struggled in 2022. Indeed, the past year was marred by poor performance of special-purpose acquisition companies (SPACs) that operate as shell organizations to merge with private companies.

SPACs, an alternative to traditional initial public offerings (IPOs), typically have no tangible assets other than the cash they obtained from investors. Transactions involving private companies going public through a combination with a SPAC are called de-SPACs.

Long Beach, California-based Rocket Lab (NASDAQ: RKLB) became the best-performing de-SPAC last year in the space industry among the stocks tracked by BofA Global Research, yet RKLB still underperformed the S&P 500 by 50 percentage points. The worst-performing name in BofA’s coverage universe, Astra Space (NASDAQ: ASTR), traded down 94% during 2022.

“We believe the strong underperformance of these names can be attributed to a multitude of factors — general de-SPAC discount, limited institutional ownership and pre-earnings nature of most businesses,” according to BofA. “However, we see several factors that point to an inflection on the horizon for some, but not all, space names.”

Four Space Stocks Show Promise, Especially Iridium

McLean, Virginia-based Iridium Communications Inc.’s (NASDAQ: IRDM) CEO Matthew Desch and Vice President of Investor Relations Ken Levy met with analysts at Chicago-based investment firm William Blair on Jan. 17 to discuss a Qualcomm Inc. (NASDAQ: QCOM) Snapdragon Satellite (QSS) partnership. The Iridium leaders emphasized that their company’s core business was growing 10% annually, before factoring in the new Qualcomm smartphone partnership.

William Blair’s analyst Louie DiPalma described the Qualcomm partnership as “net incrementally positive.” Iridium shares are already up 18% year-to-date on top of its 25% return in 2022. Despite the valuation increase, the investment firm forecasts further upside in 2023 to a range of $63 to $78, up from the investment firm’s prior projected range of $60 to $75. Iridium’s stock closed at $59.58 in afterhours trading on April 24.

Chart courtesy of www.stockcharts.com

Iridium’s third in-orbit satellite constellation may cost less than the $3 billion required for Iridium NEXT. Iridium spent $3 billion to fund its 66-satellite constellation from 2010 through 2019, before it likely will have another hefty capital expenditure from 2030 through 2037. Desch estimated that the company’s third-generation constellation should cost less than the $3 billion it paid for the NEXT constellation, partly due to SpaceX’s Starship launch vehicle slashing the cost to reach orbit by half.

Four Space Stocks Show Promise: Auto Industry Application

Iridium management voiced optimism about opportunities associated with the auto sector and machine-to-machine (M2M) data. The auto industry has the potential to generate significantly more usage fees per device than smartphones.

Consumer internet of things (IoT) cannibalization should be mitigated by new features. Iridium has consumer IoT messaging partnerships with Garmin (NYSE: GRMN), Zoleo and Bixby.

These partners should unveil devices that will let users send and receive picture messages. The enhanced feature, along with an ecosystem of products, should provide differentiation relative to the Qualcomm Snapdragon Satellite partnership and allow the consumer IoT segment to keep its momentum.

“Carrier subsidies could be a source of upside,” DiPalma wrote. “Cellular carriers or device OEMs such as Samsung may subsidize recreational messaging plans to drive customers.

Iridium will continue to be valued on a sum-of-the-parts basis, DiPalma wrote. First, he estimated Iridium’s interest in Aireon is worth $4.35 per share. Second, he gave a free cash flow (FCF) multiple of 22 times to 28 times his 2024 FCF estimate of $63 to $78 per share for the next 12 months. The valuation estimates of William Blair do not factor in the smartphone partnership.

“We believe that this FCF yield is warranted due to Iridium’s strong competitive moat,” DiPalma wrote. “In our view, Iridium deserves this premium multiple due to its record of execution and new products and services in the pipeline.”

Four Space Stocks Show Promise: Iridium Rated ‘Outperform’

For these reasons, William Blair reiterated an “outperform” rating on Iridium. The main risk for Iridium’s stock is that its smartphone technology experiences quality of service issues or Samsung does not initially adopt the satellite service.

Iridium is the leading global provider of low Earth orbit L-band satellite services for customers across commercial, aviation, recreation, maritime, and defense markets. Environmental, social and governance (ESG) considerations should be accounted for when assessing Iridium. The most important considerations for Iridium and the satellite sector generally relate to space sustainability and the risks associated with orbital debris and orbital collisions.

Consider the de-orbiting process for the original Iridium satellite constellation. Working satellites were removed within 30 days of service being turned off. However, there are many nonworking Iridium satellites that remain in orbit.

Iridium has collaborated with the Combined Space Operations Center (CSpOC) to develop optimal practices for collision mitigation. Iridium publishes an annual ESG report. In 2021, Iridium appeared on Newsweek’s “America’s Most Responsible Companies” list.

Four Space Stocks Show Promise: Leidos Holdings

Reston, Virginia-based Leidos (NYSE: LDOS), a science and technology company, has been awarded prime contracts by the U.S. Army. One example is the Geospatial Center’s (AGC) High-Resolution Three Dimensional (HR3D) Geospatial Information Operation and Technology Integration program. That single-award contract has a total estimated value of $600 million, if all options are exercised.

The period of performance for the contract includes a one-year base, as well as three one-year options. Work will be performed predominantly in Virginia and other locations.

Chart courtesy of www.stockcharts.com

Leidos, previously known as Science Applications International Corporation, serves the U.S. defense, aviation, information technology and biomedical research industries. The company also provides scientific, engineering systems integration and technical services.

Four Space Stocks Show Promise: BofA Recommends Leidos

BofA set a price target of $130 on Leidos, forecasting that the company should trade in line in the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. The company also has solid free cash flow, countered by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.

Risks to reach the price target include cuts to the U.S. government budget, compared to expectations, increased competition from non-traditional competitors and problems integrating mergers and acquisitions (M&As), hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts. The company also could face reputational risk.

Potential outperformance could come from a better-than-expected federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated M&A activity, along with unexpected capital return to shareholders through dividends or share buybacks, market share gains, or better-than-forecast margin, BoA wrote.

Michelle Connell, who leads Dallas-based Portia Capital Management, recommends Leidos as a strong mid-cap defense stock that is not covered as prominently as the large-cap stocks in the industry. The company has a large domestic customer base that produces 90% of its revenues.

LDOS has a record for beating earnings estimates, and it is likely to beat estimates again on Feb. 15 when the company reports, Connell said.

“The options market has an interesting take on the stock,” Connell said. “When you break down the part of the premium that compensates for implied volatility, the compensation is high for the Feb. 17 calls.”

This means that the options market expects a big move one way or another for the stock, Connell said. Given that Leidos typically exceeds expectations, it would be logical for the stock to outperform estimates.

With the company’s stock price down 7.5% so far this year through Tuesday, Jan. 24, maybe the market has been incorrect in its recent assessment, Connell continued.

Four Space Stocks Show Promise: Skousen Questions SpaceX Chairman Elon Musk

Mark Skousen, the head of the Forecasts & Strategies investment newsletter, also is a leader of the Fast Money Alert trading service that invests in stocks and options. Skousen queried SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, recommended Tesla with Jim Woods in Fast Money Alert this month due to the stock’s reduced valuation after it plunged 66.3% in the last year.

Mark Skousen, a scion of Ben Franklin and chief of Fast Money Alert, meets Paul Dykewicz.

Skousen and Woods, co-leaders of the Fast Money Alert trading service, combined to produce a short-term gain of nearly 10% with their Oct. 3 recommendation of defense, space and cyber consulting firm Booz Allen Hamilton (NYSE: BAH), of McLean, Virginia. The call options they recommended soared 239.27% in just 28 days before they advised selling.

U.S. Military Veteran Woods Seeks out Defense and Space Stocks on the Ascent 

Woods, a seasoned investment guru and the leader of the Bullseye Stock Trader advisory service, recommends stocks and options that include defense and space stocks. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has invested in defense and space stocks profitably. In fact, he recently recommended the stock and options in a traditional defense investment.

Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.

Four Space Stocks Show Promise: Rocket Lab

Rocket Lab received a $13 price objective from BofA, based on a long-term discounted cash flow (DCF) of Base, Bull, and Bear cases for different revenue and cash generation scenarios between now and 2035. BofA’s DCF factors in a 13% discount rate and assigns 33% probability to the Base case, 33% probability to the Bull case and a 33% probability to the Bear case.

BofA employs a lower discount rate relative to peers to account for the company’s more mature launch capabilities. In its view, the equal weighting fairly reflects current investor risk appetite, momentum for new technology space stocks and the perceived viability of Rocket Lab’s business model compared to peers.

Risks to BofA’s price objective are persistent COVID-19 restrictions in New Zealand, production delays, constellation launch market remaining captive to certain providers, setbacks to the economic recovery, inability to achieve mergers and acquisitions (M&A) synergies and setbacks to Neutron vehicle development. Potential outperformance could come from better-than-expected cost cutting and margin expansion, well-integrated M&A activity, market share gains in satellite components and services, higher reutilization levels and better-than-expected commercialization of the Neutron launch vehicle.

Chart courtesy of www.stockcharts.com

Four Space Stocks Show Promise: Terran Orbital

BofA values Boca Raton, Florida-based Terran Orbital Corporation (NYSE: LLAP) based on a long-term unlevered discounted cash flow (DCF) using Bull, Base and Bear cases, assigning an equal weighting to each scenario. The investment firm’s DCF extends for 10 years. 

Terran Orbital’s revenue growth, margin growth and capital expenditure assumptions by scenario are primarily driven by assumption differences within Earth Observation Solutions, where revenues are mostly dependent on the number of satellites in orbit. BofA’s bull case assumes a constellation of 96 satellites. The base case assumes 48, while the bear case assumes 24, all achieved by 2029. As a result, BofA derives a price target of $9 per share, which is based on a 9.9% discount rate. The investment firm applies a $0 value in scenarios where the value is negative. In this model only, the Bear case returns a negative value.

Risks could come from not building out the PredaSAR constellation or if the demand for SAR imagery does not come to fruition. Damage to the relationship with Lockheed Martin (NYSE: LMT) could also provide downside pressure. However, if the company is able to grow faster than BofA expects, then there could be heightened upside potential.

Chart courtesy of www.stockcharts.com

China COVID-19 News

Last weekend, China reported 13,000 COVID-19-related deaths in just one week. The death toll from that week is in addition to 60,000 deaths that the country has attributed to the virus since December.

With many people in China returning to their hometowns to celebrate the Lunar New York, the country’s most important festival, risk mounts that elderly people may be infected by COVID-19 from those visiting from elsewhere. Government officials have cautioned about the risk.

In general, the country has been accused of lacking transparency since the virus emerged in late 2019. Critics contend China may not be sharing data about evolving strains that may spark fresh outbreaks in other countries.

Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China will need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus during the first 20 days of December. COVID-19 still is roaring through cities in China.

The U.S. government began requiring negative COVID-19 tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China after the latter country’s spike in COVID-19 cases. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern about new variants.

Four Space Stocks Show Promise Despite COVID 

Worldwide COVID-19 deaths soared to 6,741,826 people, with total cases of 669,247,236, Johns Hopkins announced on Jan. 24. COVID-19 cases in the United States totaled 102,078,090, while deaths reached 1,105,176, as of Jan. 20, according to Johns Hopkins University. Until reports found China had 248 million cases of COVID-19, America had ranked as the nation with the most coronavirus cases and deaths.

The U.S. Centers for Disease Control and Prevention reported that 268,765,902 people, or 81.0% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Jan. 18. People who have completed the primary COVID-19 doses totaled 229,08,443 of the U.S. population, or 69.1%, according to the CDC. The United States has given a bivalent COVID-19 booster to 47,859,040 people who are age 18 and up, equaling 18.5% as of Jan. 18, up from 18.2% on Jan. 11, 17.7% as of Jan. 4, 17.3% as of Dec. 28, rising from 16.8% the previous week, up from 16.3% the week before that one and and jumping from 15.5% the preceding week.

Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., let him to speak face-to-face with U.S. President Joe Biden to advocate for essential military equipment to defend effectively against Russia’s continuing attacks. Zelensky’s address to a joint session of Congress that evening appears to have won support of many U.S. lawmakers. The surprise visit marked Zelensky’s first international trip since Russia’s invasion.

Russia is sustaining its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.

Four Space Stocks Show Promise Amid War Against Ukraine

Even though Russia’s leaders describe their attack of Ukraine launched on Feb. 24 as a “special military operation,” its soldiers are intensifying their assault of Ukraine, especially the city of Bakhmut. One of Russia’s military leaders claimed his troops had gained control of a nearby city in eastern Ukraine called Soledar.

Secretary of Defense Lloyd Austin recently cautioned that time is short for the United States and other Western countries to provide Ukraine with the advanced weapons required to thwart a Russian offensive in the spring. Ukraine not only needs the weapons but training to use them.

The Ukraine Defense Contact Group, a group of U.S.-assembled defense ministers, announced major new commitments of weapons, including an additional $2.5 billion of Bradley fighting vehicles, Stryker vehicles and other important military equipment.

The four space stocks show promise to assist in many ways, including in-orbit surveillance of battlefields. Billions of dollars of Western weapons have been sent to Ukraine and others reportedly are on the way. With Russia’s military releasing criminals to serve in the front lines of attacks to let commanders identify pockets of Ukrainian resistance, then have contractor soldiers follow up next, the death toll is mounting for both sides.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Special Holiday Offer: Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for special pricing on multiple-book purchases.

The post Four Space Stocks Show Promise Entering 2023 appeared first on Stock Investor.

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Week Ahead Alchemy: Can Powell Turn a Quarter-Point Move into a Hawkish Hike?

The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating…

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The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating will materialize. The Federal Reserve will most likely hike by 25 bp on Wednesday, followed by half-point moves by the European Central Bank and the Bank of England the following day. On Friday, February 3, the US will report its January employment situation. It could be the slowest job creation since the end of 2020. The Bureau of Labor Statistics also will release the preliminary estimate of its annual benchmark revisions. 

The markets' reaction may be less a function of what is done than what is communicated. The challenge for Fed Chair Powell is to slow the pace of hiking while pushing against the premature easing of financial conditions. In December, ECB President Lagarde pre-committed to a 50 bp hike in February and hinted that another half-point move was possible in March. With the hawks showing their talons in recent days, will she pre-commit again? Amid a historic cost-of-living squeeze that has already kneecapped households, can Bank of England Governor Bailey deliver another 50 bp rate hike and sell the idea that it is for the good of Britain, for which the central bank does not expect growth to return until next year?

United States: The Federal Reserve has a nuanced message to convey. It wants to slow the pace of hikes, as even the hawkish Governor Waller endorsed, but at the same time, persuade the market that tighter financial conditions are necessary to ensure a times convergence of price pressures to the target. Indeed, Fed Chair Powell may warn investors that if it continues to undo the Fed's work, more tightening may be necessary. The market has heard this essentially before and is not impressed. Financial conditions have eased. Consider that the 2-year yield is down 20 bp this year, and the 10-year yield has fallen twice as much. The trade-weighted dollar is off by more than 1.5%. The S&P 500 is up 4.6% after a 7% rally in Q4 22. The Russell 200 has gained nearly 7% this month, on top of the 5.8% in the last three months of 2022.  

Last year, Powell drew attention to the 18-month forward of the three-month T-bill yield compared to the cash 3-month bill as a recession tell. It has been inverted for over two months and traded below -100 bp last week, the most inverted since the tech bubble popped over two decades ago. The market seems more convinced that inflation will fall sharply in the coming months. The monetary variables and real economy data, including retail sales, industrial production, and the leading economic indicators, suggest a dramatic weakening of the economy. Yet just like most looked through the contraction in H1 22, seeing it as primarily a quirk of inventory and trade, the 2.9% growth reported in Q4 22 does not change many minds that the US economy is still headed for weaker growth, leaving aside the fuzzy definition of a recession.

The median forecast in Bloomberg's survey is for a 188k rise in January nonfarm payrolls. If accurate, it would be seen as concrete evidence that the jobs market is slowing. This is also clear by looking at averages for this volatile series. For example, in the last three months of 2022, the US created an average of 247k jobs a month. In the first nine months of the year, nonfarm payrolls rose by an average of 418k a month. Average hourly earnings growth also is moderating. A 0.3% rise on the month will see the year-over-year pace slow to 4.3%. That matches the slowest since June 2021. The decline in the work week in December to 34.3 hours spurred narratives about how businesses, hoarding labor, would cut hours before headcount. Yet, we suspect it was partly weather-related, and that the average work week returned to 34.4 hours, which is around where it was pre-Covid. 

Benchmark revisions are usually of more interest to economists than the market, but last month's report by the Philadelphia Fed raised the stakes.  It looked more closely at the April-June 2022 jobs data. After adjusting for updated data from the Quarterly Census on Employment and Wages, it concluded that job growth was nearly flat in Q2 22. It estimated that only 10,500 net new jobs were created, a far cry from the 1.05 mln jobs estimated by the Bureau of Labor Statistics. The Business Employment Dynamics Summary (released last week) was starker still. It points to a job loss of nearly 290k. Lastly, we note that US auto sales are expected to have recovered from the unexpected almost 6% decline (SAAR) in December. However, the 14.1 mln unit pace would still represent a 6% decline from January 2022, when sales spiked to 15.04 mln.  

The Dollar Index continues to hover around 102, corresponding to the (50%) retracement of the rally recorded from January 2021 through September 2022. It has not closed above the 20-day moving average (now ~102.80) since January 3. It remains in the range set on January 18, when it was reported that December retail sales and manufacturing output fell by more than 1%. That range was about 101.50-102.90. Although we are more inclined to see it as a base, the prolonged sideways movement last month saw new lows this month. That said, the next retracement target (61.8%) is near 99.00.

Eurozone:  The ECB rarely pre-commits to a policy move, precisely what ECB President Lagarde did last month. Apparently, as part of the compromise with members who at first advocated another 75 bp hike in December, an agreement to raise rates by 50 bp was accompanied by an agreement to hike by another 50 on February 2 and explicitly not rule out another half-point move in March. There was a weak effort to soften the March forward guidance, but the hawks pushed back firmly. The swaps market has about a 70% chance of a 50 bp hike in March rather than a 25 bp move. 

The ECB's deposit rate stands at 2.00%, and the swaps market is pricing 125 bp of hikes in the first half of the year. In contrast, the Fed is expected to raise the Fed funds target range by 50 bp. This has been reflected in the two-year interest rate differential between the US and Germany, falling from about 275 bp last August to around 160 bp now. We had anticipated the US premium would peak before the dollar, and there is a lag of almost two months. The direction and change of the interest rate differential often seem more important than the level. In late 2019, before Covid struck, the US premium was near 220 bp, and the euro was a little below $1.12.

There has been a significant shift in sentiment toward the eurozone. The downside risks that seemed so dominant have been reduced. A milder-than-anticipated winter, the drop in natural gas prices, and successful conservation and conversion (to other energy sources) lifted the outlook. Some hopeful economists now think that the recession that seemed inevitable may be avoided. The preliminary January CPI will be published a day before the ECB meets. The monthly pace fell in both November and December. The year-over-year rate is expected to ease to 5.1% from 5.2%, while the core rate slips to 5.1% from 5.2%. The base effect suggests a sharp decline is likely here in Q1, but divergences may become more evident in the euro area. This could see a reversal of the narrowing of core-periphery interest rate spreads. 

The EU's ban on refined Russian oil products (e.g., diesel and fuel oil) will be implemented on February 5. It is considering imposing a price cap as it did with crude oil. Diesel trades at a premium to crude, while fuel oil sells at a discount. There have been reports of European utilities boosting purchases from Russia ahead of the embargo. Separately, reports suggest that the EU was still the largest importer of Russian oil in December when pipeline and oil products were included. However, at the end of December, Germany stopped importing Russia's oil delivered through pipelines. This does not count oil and refined producers that first go to a third country, such as India, before being shipped to Europe.  

Pullbacks in the euro have been shallow and brief. Most pullbacks since the low was recorded last September, except the first, have mostly been less than two cents. That would suggest a pullback toward the $1.0730 area, but buyers may re-emerge in front of that, maybe around $1.0775. On the top side, the $1.0940 is the (50%) retracement of the euro's losses since January 2021. The euro rose marginally last week, even though it slipped by around 0.2% in the last two session. It has risen in eight of the past 10 weeks.   

UK: Without some forward guidance that stopped short of a pre-commitment, the market is nearly as confident that the Bank of England will deliver another half-point hike in the cycle to lift the base rate to 4.0%. The BOE was among the first of the G10 countries to begin the interest rate normalization process and raised the base rate in December 2021 from the 0.10% it had been reduced to during the pandemic. The swaps market projects the peak between 4.25% and 4.50%, with the lower rate seen as slightly more likely.

High inflation readings and strong wage growth appear to outweigh the economic slump. The BOE's forecasts see the economy contracting 1.5% year-over-year this year and output falling another 1% in 2024. The market is not as pessimistic. The monthly Bloomberg survey (51 economists) founds a median forecast for a 0.9% contraction this year and an expansion of the same magnitude next year. The survey now sees only a 0.2% quarterly contraction in Q4 22 rather than -0.4% in the previous survey. The median forecast for the current quarter was unchanged at -0.4%. 

Sterling continues to encounter resistance in front of $1.2450, which it first approached in mid-December. Although marginal new highs have been recorded, like the euro, it has been mainly confined to the range set on January 18 (~$1.2255-$1.2435). We are inclined to see this sideways movement as a topping pattern rather than a base, but it likely requires a break of the 1.2225 area to confirm.

Japan:  After contracting in Q3 22, the Japanese economy is expected to have rebounded in Q4 (~3.0% annualized pace). Reports on last month's labor market, retail sales, and industrial production will help fine-tune expectations. This month's rise in the flash composite PMI moved back above 50, pointing to some momentum. Still, Tokyo's higher-than-expected January CPI warns of upside risk to the national figure due offers good insight into the national figure, which may draw the most attention. We expect Japanese inflation to peak soon. The combination of government subsidies, the decline in energy prices, including the natural gas it gets from Russia, and the stronger yen (which bottomed in October) will help dampen price pressures. We look for a peak here in Q1 23. 

Last week, the dollar moved broadly sideways against the yen as it continued to straddle the JPY130 area. It repeatedly toyed with the 20-day moving average (~130.40) last week but has yet to close above this moving average for more than two months. Rising US and European yields may encourage the market to challenge the 50 bp cap on Japan's 10-year bond. A break of the JPY128.80 area may spur a test on the JPY128.00 area. However, the market seems to lack near-term conviction.

China:   Mainland markets re-open after the week-long Lunar New Year holiday. There may be two drivers. The first is catch-up. Equity markets in the region rose. The MSCI Asia Pacific Index rose every session last week and moved higher for the fifth consecutive week. The JP Morgan Emerging Market Currency Index rose about 0.40% last week and is trading near its best level since mid-2022. The euro and yen were little changed last week (+/- <0.20%). The second driver is new news--about Covid and holiday consumption. The PMI is due on January 31, and the median forecast in the Bloomberg survey is for improvement. It has the manufacturing PMI rising to 49.9 from 47.0 and the service PMI jumping to 51.5 from 41.6.  The offshore yuan edged up 0.3% last week, suggesting an upside bias to the onshore yuan, against which the dollar settled at CNY6.7845 ahead of the holiday. 

Canada:  After the Bank of Canada's decision last week, the FOMC meeting, and US employment data in the days ahead, Canada is out of the limelight. It reports November GDP figures and the January manufacturing PMI. Neither are likely to be market movers. The Bank of Canada is the first of the G7 central banks to announce a pause (conditional on the economy evolving like the central bank anticipates) with a target rate of 4.50%. The central bank sees the economy expanding by 1% this year and 1.8% next. It suggests that the underlying inflation rate has peaked and, by the end of the year, may slow to around 2.6%. The swaps market has 50 bp of cut discounted in the second half of the year. 

The Canadian dollar held its own last week, rising by about 0.5%, which was second only to the high-flying Australian dollar. The greenback approached CAD1.3300, its lowest level since last November when it traded around CAD1.3225. Quietly, the Canadian dollar has strung together a six-week advance, and since its start in mid-December, it has been the third-best performer in the G10 behind the yen (~6.2%) and the Australian dollar (~6.1%). We are more inclined to see the greenback bounce toward CAD1.3400 before those November lows are re-tested. 

Australia:  The market's optimism about China recovering from the Covid surge, with the help of government support and attempts to help the property market, has been reflected in the strength of the Australian dollar, which leads the G10 currencies with around a 4.4% gain this year. Yet, changes in the exchange rate and Chinese stocks are not highly correlated in the short- or medium-term. The surge of inflation at the end of last year, reported last week, lent greater credence to our view that the Reserve Bank of Australia will lift the cash target rate by 25 bp when it meets on February 7. In the week ahead, Australia reports December retail sales, private sector credit, and some housing sector data, along with the final PMI readings. The momentum indicators are stretched after a 2.5-cent rally from the low on January 19. It is at risk of a pullback and suggests a break of $0.7080 may be the first indication that it is at hand. We see potential initially toward $0.7000-$0.7040.

Mexico:  After falling by nearly 5.25% in the first part of the month against the Mexican peso, the dollar is consolidating. The underlying case for peso exposure remains, but there are two mitigating conditions. First, surveys of real money accounts suggest many are already overweight. Second, the dollar met key target levels in it late-2019 (~MXN18.80), even if not to the February 2020 low (slightly below MXN18.53). On January 31, Mexico reports Q4 GDP. The economy is expected to have expanded by 0.5% after 0.9% quarter-over-quarter growth in Q3 22. Growth is expected to slow further in Q1 23 before grinding to a halt in the middle two quarters. The following day, Mexico reports December worker remittances. These have been a strong source of capital inflows in Mexico. Remittances have a strong seasonal pattern of rising in December from November, which sees remittances slow. However, after surging for the last couple of years, they appear to have begun stabilizing. Also, the optimism around China is understood to be more supportive of Brazil and Chile, for example, than Mexico.  

We do not have a very satisfying explanation for the two-day jump in the dollar from about MXN18.5670 to MXN19.11 (January 18-19) outside of market positioning and the possibility of some large hedge working its way through. Still, it seemed like a transaction-related flow rather than a change in the underlying situation. The greenback has trended lower since then and has fallen in five of the last six sessions. It fell to nearly MXN18.7165 ahead of the weekend. Latam currencies, in general, did well, with the top two emerging market currencies coming from there (Brazil and Chile). The Mexican peso rose about 0.4% last week.   Last week, the Argentine peso's loss of almost 1.2% gave it the dubious honor of the worst performer among emerging market currencies. It is now off nearly 4.6% for this month. Mexican stocks and bonds extended their rallies. A firmer dollar ahead of the February 1 conclusion of the FOMC meeting may see the peso consolidate its recent gains.

 


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How far could UK property prices drop and should investors be concerned?

The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years.…
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The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years. Property prices leapt alongside most other asset classes over the long bull market that ran relatively uninterrupted over the 13 year period from the start of the recovery from the international financial crisis in 2009 and last year.

Average prices across the country almost doubled from £154,500 in March 2009 to just under £296,000 in October last year, when the market hit its most recent record high. Global stock markets had been in a downward spiral for almost a year while property prices kept climbing.

Source: PropertyData

However, a combination of rising interest rates, up from 0.1% in late 2021 to 3.5% in January 2023 and further hikes expected this year, soaring inflation putting pressure on household budgets and nerves around a recession has seen house prices ease. There still not far off their record highs of late 2022 but the trend is downward.

chart

Source: BankofEngland

The big question for homeowners and property investors is just how far could UK residential property prices drop over the next couple of years? How long prices might take to recover from a drop is another important unknown.

First time buyers struggling to get onto the property ladder may welcome a significant drop in UK house prices. Even if higher interest rates mean monthly mortgage costs don’t change much, lower sales prices should reduce the minimum deposits required to secure a mortgage.

However, for anyone who currently owns a home, especially if purchased in the past couple of years towards the top of the market, a significant drop in valuation would be extremely unwelcome. That is particularly the case for home owners at risk of falling into negative equity, which means the market value of their property is lower than the outstanding sum due on the mortgage.

Falling house prices, if the decline is steep, could also create a wider economic crisis and spill over into other parts of the economy and financial markets.

But not everyone agrees UK house prices will drop by anywhere near 30%. Let’s explore the factors that would affect the residential property market over 2023 and beyond and different opinions on how serious a market slump could be. As well as the wider potential consequences that could result if the dive in home valuations turns out to be in line with more negative forecasts.

How much will UK house prices fall by?

The short answer to that question is that we don’t know but the most pessimistic outlook is for drops of up to 30% over the next couple of years. However, there are a number of factors that mean there is a high chance valuations will slide by less. But let’s look at the negative scenario first.

A 30% drop in home valuations sounds like a lot and it is. However, against the backdrop of the last couple of years that kind of fall looks a little less extreme. Prices are up 28% since April 2019 and a 30% fall would take the average price of a home in the UK to around £210,000, where it was in 2016. A less severe 20% drop in prices would see the average price settle at around £235,000, where it was just before the onset of the Covid-19 pandemic and the Bank of England dropping interest rates to just 0.1%.

Mid-term interest rates are likely to have the biggest influence on house prices. At the BoE’s current 3.5% base rate, the best mortgage deals available are 2 years fixed at 4.8% compared to 1% deals available until recently. At an LTV of 60% on a £400,000 mortgage, that would push the monthly rate up to £2300 a month from £1500 a month.

For some borrowers, that is likely to prove problematic. It is also likely to mean lower demand for properties from buyers who might have otherwise decided to move up the property ladder and first time buyers. A drop in demand at higher price brackets due to affordability thresholds being passed will see property prices fall.

Will demand drop enough to lead to a 30% fall? That depends on factors that are currently unknown. How high interest rates go will have a huge influence and that will depend on inflation. There are signs inflation is easing and today the Fed’s preferred gauge for inflation, the personal consumption expenditures (PCE) price index, rose 5.0% in December from a year earlier. That was slower than the 5.5% 12-month gain as of November and the lowest level since September 2021.

In the UK, inflation has also eased from 11.1% year-on-year in October to 10.5% in December. It’s still much higher than in the USA but will hopefully now maintain a consistent downward trend helped by easing energy prices.

There are hopes the Fed will pull back on further interest rate rises from March and that would set a tone that the Bank of England may well follow with a slight delay. The Fed’s base rate is also already higher than in the UK at 4.25% to 4.5%.

If interest rates and, more importantly, mortgage rates do not rise by more than 1% from where they are today it is unlikely valuation drops of as much as 30% eventuate. But if they did what would the consequences be?

What happens if UK house prices fall 30%?

The good news is that even a house price fall as extreme as 30% would be unlikely to lead to systematic issues in the UK’s financial services sector. More people own their homes outright than have a mortgage – 8.8 million to 6.8 million homes. Lloyds Bank, one of the UK’s biggest mortgage lenders recently reported the average LTV of its mortgage portfolio is just 40%.

Even if average LTV is a little higher for other banks, a wave of defaults is unlikely to threaten their stability and infect other areas of financial markets or the wider economy. Mortgage lenders are also reluctant to repossess homes they’ve lent against as it’s an expensive process for them. They will do as much as they can to work with borrowers who are struggling to meet increased mortgage payments.

What does falling property prices mean for investors?

For property investors, it’s really a case of if rental income will continue to cover mortgage payments, or get close enough to mean the investment still adds up. If mortgage payments are likely to exceed realistic rental income over the next few years investors may consider selling up. Unless the property was purchased in the last 2-3 years, that could still mean walking away with a reasonable return.

For investors in the wider financial markets, it seems unlikely that falling property prices, even if up to 30% is knocked off valuations, will see serious contagion spread and spark a crisis.

It’s not impossible that UK property prices could fall by as much as 30% over the next couple of years as a result of higher interest rates and tighter household budgets but the likelihood is the average drop will be less. And in the worst case scenario, wider fallout should be limited. A repeat of the systemic crash that led to the 2008 financial crisis does not seem like a real prospect. Lenders are well capitalised and the system looks strong enough to cope.

The post How far could UK property prices drop and should investors be concerned? first appeared on Trading and Investment News.

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Visualizing Remittance Flows & GDP Impact By Country

Visualizing Remittance Flows &amp; GDP Impact By Country

The COVID-19 pandemic slowed down the flow of global immigration by 27%.

And,…

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Visualizing Remittance Flows & GDP Impact By Country

The COVID-19 pandemic slowed down the flow of global immigration by 27%.

And, as Visual Capitalist's Richie Lionell details below, alongside it, travel restrictions, job losses, and mounting health concerns meant that many migrant workers couldn’t send money in the form of remittances back to families in their home countries.

This flow of remittances received by countries dropped by 1.5% to $711 billion globally in 2020. But over the next two years, things quickly turned back around.

As visa approvals restarted and international borders opened, so did international migration and global remittance flows.

In 2021, total global remittances were estimated at $781 billion and have further risen to $794 billion in 2022.

In these images, Richie Lionell uses the World Bank’s KNOMAD data to visualize this increasing flow of money across international borders in 176 countries.

Why Do Remittances Matter?

Remittances contribute to the economy of nations worldwide, especially low and middle-income countries (LMICs). 

They have been shown to help alleviate poverty, improve nutrition, and even increase school enrollment rates in these nations. Research has also found that these inflows of income can help recipient households become resilient, especially in the face of disasters.

At the same time, it’s worth noting that these transfers aren’t a silver bullet for recipient nations. In fact, some research shows that overreliance on remittances can cause a vicious cycle that doesn’t translate to consistent economic growth over time.

Countries Receiving the Highest Remittances

For the past 15 years, India has consistently topped the chart of the largest remittance beneficiaries.

With an estimated $100 billion in remittances received, India is said to have reached an all-time high in 2022.

This increasing flow of remittances can be partially attributed to migrant Indians switching to high-skilled jobs in high-income countries—including the U.S., the UK, and Singapore—from low-skilled and low-paying jobs in Gulf countries.

Rank Remittance Inflows by Country 2022 (USD)
1 India

$100,000M

2 Mexico $60,300M
3 China $51,000M
4 Philippines $38,000M
5 Egypt, Arab Rep. $32,337M
6 Pakistan $29,000M
7 France $28,520M
8 Bangladesh $21,000M
9 Nigeria $20,945M
10 Vietnam $19,000M
11 Ukraine $18,421M
12 Guatemala $18,112M
13 Germany $18,000M
14 Belgium $13,500M
15 Uzbekistan $13,500M
16 Morocco $11,401M
17 Romania $11,064M
18 Dominican Republic $9,920M
19 Indonesia $9,700M
20 Thailand $9,500M
21 Colombia $9,133M
22 Italy $9,000M
23 Nepal $8,500M
24 Spain $8,500M
25 Honduras $8,284M
26 Poland $8,000M
27 Korea, Rep. $7,877M
28 El Salvador $7,620M
29 Lebanon $6,841M
30 Israel $6,143M
31 United States $6,097M
32 Russian Federation $6,000M
33 Serbia $5,400M
34 Brazil $5,045M
35 Japan $5,000M
36 Portugal $4,694M
37 Ghana $4,664M
38 Jordan $4,646M
39 Czech Republic $4,539M
40 Haiti $4,532M
41 Ecuador $4,468M
42 Georgia $4,100M
43 Kenya $4,091M
44 Croatia $3,701M
45 Peru $3,699M
46 Sri Lanka $3,600M
47 West Bank and Gaza $3,495M
48 Jamaica $3,419M
49 Armenia $3,350M
50 Tajikistan $3,200M
51 Nicaragua $3,126M
52 Kyrgyz Republic $3,050M
53 Senegal $2,711M
54 Austria $2,700M
55 Switzerland $2,631M
56 Sweden $2,565M
57 United Kingdom $2,501M
58 Hungary $2,404M
59 Bosnia and Herzegovina $2,400M
60 Slovak Republic $2,300M
61 Moldova $2,170M
62 Azerbaijan $2,150M
63 Tunisia $2,085M
64 Zimbabwe $2,047M
65 Luxembourg $2,000M
66 Netherlands $2,000M
67 Myanmar $1,900M
68 Algeria $1,829M
69 Albania $1,800M
70 Somalia $1735M
71 Congo, Dem. Rep. $1,664M
72 Malaysia $1,620M
73 Kosovo $1,600M
74 Denmark $1,517M
75 Latvia $1,500M
76 Bolivia $1,403M
77 Belarus $1,350M
78 Cambodia $1,250M
79 Bermuda $1,200M
80 South Sudan $1,187M
81 Uganda $1,131M
82 Mali $1,094M
83 South Africa $1,019M
84 Sudan $1,013M
85 Argentina $966M
86 Montenegro $920M
87 Finland $880M
88 Bulgaria $850M
89 Slovenia $800M
90 Australia $737M
91 Madagascar $718M
92 Turkey $710M
93 Canada $700M
94 Lithuania $700M
95 Togo $668M
96 Greece $665M
97 Costa Rica $654M
98 Estonia $626M
99 Qatar $624M
100 Iraq $624M
101 Gambia, The $615M
102 Tanzania $609M
103 Norway $600M
104 Panama $596M
105 Burkina Faso $589M
106 Hong Kong SAR, China $571M
107 Paraguay $554M
108 Mozambique $545M
109 Niger $534M
110 Cyprus $527M
111 Lesotho $527M
112 Mongolia $500M
113 Rwanda $469M
114 Fiji $450M
115 North Macedonia $450M
116 Guyana $400M
117 Cabo Verde $375M
118 Kazakhstan $370M
119 Cameroon $365M
120 Cote d'Ivoire $360M
121 Liberia $351M
122 Afghanistan $350M
123 Ethiopia $327M
124 Samoa $280M
125 Mauritius $279M
126 Saudi Arabia $273M
127 Malta $271M
128 Malawi $267M
129 Zambia $260M
130 Tonga $250M
131 Comoros $250M
132 Ireland $249M
133 Suriname $221M
134 Benin $209M
135 Lao PDR $200M
136 Timor-Leste $185M
137 Sierra Leone $179M
138 Guinea-Bissau $178M
139 Trinidad and Tobago $172M
140 Mauritania $168M
141 Iceland $164M
142 Eswatini $148M
143 Belize $142M
144 Curacao $131M
145 Uruguay $127M
146 Chile $78M
147 Vanuatu $75M
148 St. Vincent and the Grenadines $70M
149 Grenada $69M
150 Botswana $56M
151 St. Lucia $55M
152 Bhutan $55M
153 Djibouti $55M
154 Dominica $52M
155 Burundi $50M
156 Aruba $44M
157 Namibia $44M
158 Guinea $41M
159 Solomon Islands $40M
160 Oman $39M
161 Antigua and Barbuda $35M
162 St. Kitts and Nevis $33M
163 Marshall Islands $30M
164 Kuwait $27M
165 New Zealand $25M
166 Macao SAR, China $17M
167 Angola $16M
168 Kiribati $15M
169 Cayman Islands $14M
170 Sao Tome and Principe $10M
171 Seychelles $9M
172 Maldives $5M
173 Gabon $4M
174 Palau $2M
175 Papua New Guinea $2M
176 Turkmenistan $1M
Total World $794,059M

Mexico and China round out the top three remittance-receiving nations, with estimated inbound transfers of $60 billion and $51 billion respectively in 2022.

Impact on National GDP

While India tops the list of countries benefitting from remittances, its $100 billion received amounts to only 2.9% of its 2022 GDP.

Meanwhile, low and middle-income countries around the world heavily rely on this source of income to boost their economies in a more substantive way. In 2022, for example, remittances accounted for over 15% of the GDP of 25 countries.

Rank Remittance Inflows by Country % of GDP (2022)
1 Tonga 49.9%
2 Lebanon 37.8%
3 Samoa 33.7%
4 Tajikistan 32.0%
5 Kyrgyz Republic 31.2%
6 Gambia, The 28.3%
7 Honduras 27.1%
8 South Sudan 24.8%
9 El Salvador 23.8%
10 Haiti 22.4%
11 Nepal 21.7%
12 Jamaica 21.2%
13 Lesotho 21.0%
14 Somalia 20.6%
15 Comoros 20.1%
16 Nicaragua 19.9%
17 Guatemala 19.8%
18 Armenia 18.9%
19 West Bank and Gaza 18.5%
20 Cabo Verde 18.2%
21 Kosovo 17.3%
22 Uzbekistan 17.0%
23 Georgia 16.2%
24 Moldova 15.4%
25 Montenegro 15.0%
26 Ukraine 13.8%
27 Marshall Islands 11.0%
28 Guinea-Bissau 10.9%
29 Bosnia and Herzegovina 10.1%
30 Albania 9.8%
31 Senegal 9.8%
32 Jordan 9.6%
33 Philippines 9.4%
34 Fiji 9.2%
35 Liberia 9.0%
36 Dominican Republic 8.8%
37 Dominica 8.6%
38 Serbia 8.6%
39 Togo 7.9%
40 Morocco 7.9%
41 Pakistan 7.7%
42 Vanuatu 7.6%
43 Timor-Leste 7.5%
44 Suriname 7.3%
45 St. Vincent and the Grenadines 7.3%
46 Kiribati 7.2%
47 Egypt, Arab Rep. 6.8%
48 Ghana 6.1%
49 Mali 5.9%
50 Grenada 5.8%
51 Zimbabwe 5.3%
52 Croatia 5.3%
53 Belize 5.3%
54 Sri Lanka 4.8%
55 Madagascar 4.7%
56 Vietnam 4.5%
57 Bangladesh 4.5%
58 Tunisia 4.5%
59 Cambodia 4.4%
60 Sierra Leone 4.3%
61 Mexico 4.2%
62 Nigeria 4.1%
63 Rwanda 3.8%
64 Ecuador 3.8%
65 Latvia 3.6%
66 Romania 3.6%
67 Niger 3.6%
68 Kenya 3.5%
69 Bolivia 3.2%
70 Burkina Faso 3.2%
71 Myanmar 3.1%
72 North Macedonia 3.1%
73 Mongolia 3.1%
74 Eswatini 3.1%
75 Azerbaijan 3.0%
76 Mozambique 3.0%
77 St. Kitts and Nevis 2.9%
78 India 2.8%
79 St. Lucia 2.7%
80 Guyana 2.6%
81 Colombia 2.6%
82 Congo, Dem. Rep. 2.6%
83 Solomon Islands 2.4%
84 Luxembourg 2.4%
85 Mauritius 2.4%
86 Sudan 2.3%
87 Uganda 2.3%
88 Malawi 2.3%
89 Belgium 2.2%
90 Sao Tome and Principe 2.0%
91 Afghanistan 2.0%
92 Slovak Republic 2.0%
93 Antigua and Barbuda 2.0%
94 Bhutan 2.0%
95 Cyprus 1.9%
96 Portugal 1.8%
97 Thailand 1.7%
98 Belarus 1.6%
99 Mauritania 1.6%
100 Estonia 1.6%
101 Malta 1.5%
102 Peru 1.5%
103 Czech Republic 1.5%
104 Djibouti 1.4%
105 Burundi 1.3%
106 Paraguay 1.3%
107 Hungary 1.3%
108 Slovenia 1.2%
109 Aruba 1.2%
110 Lao PDR 1.2%
111 Benin 1.1%
112 Israel 1.1%
113 Poland 1.1%
114 Lithuania 1.0%
115 France 1.0%
116 Bulgaria 0.9%
117 Algeria 0.9%
118 Zambia 0.9%
119 Costa Rica 0.9%
120 Palau 0.8%
121 Panama 0.8%
122 Cameroon 0.8%
123 Tanzania 0.7%
124 Indonesia 0.7%
125 Spain 0.6%
126 Iceland 0.5%
127 Trinidad and Tobago 0.5%
128 Austria 0.5%
129 Cote d'Ivoire 0.5%
130 Seychelles 0.4%
131 Korea, Rep. 0.4%
132 Italy 0.4%
133 Germany 0.4%
134 Sweden 0.4%
135 Denmark 0.3%
136 Malaysia 0.3%
137 Namibia 0.3%
138 Switzerland 0.3%
139 Finland 0.3%
140 Botswana 0.3%
141 Greece 0.2%
142 Ethiopia 0.2%
143 Qatar 0.2%
144 Russian Federation 0.2%
145 Brazil 0.2%
146 China 0.2%
147 South Africa 0.2%
148 Iraq 0.2%
149 Guinea 0.2%
150 Netherlands 0.2%
151 Uruguay 0.1%
152 Kazakhstan 0.1%
153 Hong Kong SAR, China 0.1%
154 Argentina 0.1%
155 Norway 0.1%
156 Japan 0.1%
157 Maldives 0.08%
158 Turkey 0.08%
159 United Kingdom 0.07%
160 Macao SAR, China 0.07%
161 Ireland 0.05%
162 Australia 0.04%
163 Oman 0.04%
164 Saudi Arabia 0.03%
165 Chile 0.02%
166 United States 0.02%
167 Gabon 0.02%
168 Kuwait 0.01%
169 Angola 0.01%
170 New Zealand 0.01%
171 Papua New Guinea 0.01%
172 Turkmenistan 0.001%

Known primarily as a tourist destination, the Polynesian country of Tonga banks on remittance inflows to support its economy. In 2022, the country’s incoming remittance flows were equal to almost 50% of its GDP.

Next on this list is Lebanon. The country received $6.8 billion in remittances in 2022, estimated to equal almost 38% of its GDP and making it a key support to the nation’s shrinking economy.

Tyler Durden Fri, 01/27/2023 - 23:25

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