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Time for a full (medical) check-up

Equities held their ground in December despite being faced with two factors that could have led to sharp falls: The resurgence of Covid infections and US monetary policy becoming less dovish.   Concerns grew over the risks to global growth from the worsen

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Equities held their ground in December despite being faced with two factors that could have led to sharp falls: The resurgence of Covid infections and US monetary policy becoming less dovish.  

Concerns grew over the risks to global growth from the worsening pandemic, particularly with the Omicron variant leading to renewed lockdowns, quarantines and international travel restrictions.

While the data on the severity of the strain is still patchy and many unknowns remain, investors appeared optimistic that the latest outbreak would not cramp the global economy recovery.

China adopts a more supportive economic policy  

With the Chinese Central Economic Work Conference labelling ‘stable growth’ a priority for 2022, signs have emerged in the country of a more assertive economic policy to support investment and confidence.

Together with the People’s Bank of China’s (PBoC) easing of monetary policy in mid-December, the shift in Beijing’s stance appears to have reassured investors at a time when the country imposed strict lockdowns in cities hit by the virus, leading to a slowdown in consumer spending.

Growth and virus concerns meant Chinese equities were a major driver of emerging market underperformance in 2021. 

Central banks’ narrative is changing

While bond markets weakened on the prospect of lower central bank asset purchases and higher key interest rates (already seen in the UK and expected this year in the US), equities managed to post gains. The Bank of England’s rate rise was not surprising. Equally, signals from the US Federal Reserve that it, too, would move to tighten policy had been anticipated.

However, observers had not been expecting a precise roadmap from the ECB on the reduction of its asset purchases from March 2022. The central bank indicated that after the end of its pandemic emergency purchase programme (PEPP), its ‘normal’ asset purchase programme (APP), currently at EUR 20 billion a month, would be increased to EUR 40 billion in Q2 2022 and EUR 30 billion in Q3 before returning to EUR 20 billion a month in Q4.

In 2021, average monthly purchases under the PEPP had been EUR 80 billion, so the amounts in 2022 will be significantly lower. The figures announced by the ECB matched the most pessimistic economist forecasts.

Against this backdrop, given the large amount of bond issuance expected in the first few months of the year, ‘peripheral’ eurozone bond markets underperformed as long-term yields rose. Compared to the end of November, the yield on the Italian 10-year BTP rose by 21bp, while the spread over the German 10-year Bund widened to 135bp, the highest level in more than a year.

Equities held their ground

Global equities posted a monthly rise of 3.9% (MSCI AC World index in US dollar terms), taking the annual gain to 16.8%. Emerging markets, which are more exposed to the fallout of rising US rates, underperformed. The MSCI Emerging Markets index gained only 1.6% in December. Over the year, it lost 4.6%.

Within developed markets, eurozone equities outperformed in December (+5.8% for the EURO STOXX 50), followed by US equities (+4.4% for the S&P 500, which set a record on 29 December) and the Japanese indices (+3.5% for the Nikkei 225). Beyond the factors mentioned above, buoyant year-end data – particularly on employment – contributed to the gains.

Globally, utilities, consumer staples and real estate were the outperformers in December.

2022: Keep calm and carry on

The Omicron-led wave is driving renewed nervousness in equity markets, and even more so in bond markets where the implied volatility of US Treasuries (measured by the MOVE index) ended the year close to its highest level since the spring of 2020.

The change in tone from central banks, especially the Fed, and the prospect of reduced asset purchases (tapering) and higher key rates, yet to big moves in yield curves.

Equities benefited from a favourable medium-term scenario. Domestic demand, supported by improved employment and household incomes, has been solid. This should allow corporate profits to rise and economic growth to exceed its long-term trend rate in 2022.

The growing consensus view is that the Omicron outbreak will have a limited impact and be short-lived. While it could prolong supply constraints and stymie demand for services, the view of central banks is that it will only delay, not halt, the economic recovery.

While exceptional quantitative easing (QE) policies are likely to end in 2022, central banks are likely to tread cautiously when it comes to normalising policy rates and the size of their balance sheets.

Prolonged high inflation is the main risk. A possible de-anchoring of inflation expectations would translate into higher bond yields and expectations of faster monetary tightening, creating a much less favourable environment for equities, especially as valuations are already high.

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 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 specialized 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 Nathalie Benatia. The post Time for a full (medical) check-up appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Angry Shouting Aside, Here’s What Biden Is Running On

Angry Shouting Aside, Here’s What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union…

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38 mins ago

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March 8, 2024

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Angry Shouting Aside, Here's What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union address - in which he insisted that the American economy is doing better than ever, blamed inflation on 'corporate greed,' and warned that Donald Trump poses an existential threat to the republic.

But in between the angry rhetoric, he also laid out his 2024 election platform - for which additional details will be released on March 11, when the White House sends its proposed budget to Congress.

To that end, Goldman Sachs' Alec Phillips and Tim Krupa have summarized the key points:

Taxes

While railing against billionaires (nothing new there), Biden repeated the claim that anyone making under $400,000 per year won't see an increase in their taxes.  He also proposed a 21% corporate minimum tax, up from 15% on book income outlined in the Inflation Reduction Act (IRA), as well as raising the corporate tax rate from 21% to 28% (which would promptly be passed along to consumers in the form of more inflation). Goldman notes that "Congress is unlikely to consider any of these proposals this year, they would only come into play in a second Biden term, if Democrats also won House and Senate majorities."

Biden also called on Congress to restore the pandemic-era child tax credit.

Immigration

Instead of simply passing a slew of border security Executive Orders like the Trump ones he shredded on day one, Biden repeated the lie that Congress 'needs to act' before he can (translation: send money to Ukraine or the US border will continue to be a sieve).

As immigration comes into even greater focus heading into the election, we continue to expect the Administration to tighten policy (e.g., immigration has surged 20pp the last 7 months to first place with 28% in Gallup’s “most important problem” survey). As such, we estimate the foreign-born contribution to monthly labor force growth will moderate from 110k/month in 2023 to around 70-90k/month in 2024. -GS

Ukraine

Biden, with House Speaker Mike Johnson doing his best impression of a bobble-head, urged Congress to pass additional assistance for Ukraine based entirely on the premise that Russia 'won't stop' there (and would what, trigger article 5 and WW3 no matter what?), despite the fact that Putin explicitly told Tucker Carlson he has no further ambitions, and in fact seeks a settlement.

As Goldman estimates, "While there is still a clear chance that such a deal could come together, for now there is no clear path forward for Ukraine aid in Congress."

China

Biden, forgetting about all the aggressive tariffs, suggested that Trump had been soft on China, and that he will stand up "against China's unfair economic practices" and "for peace and stability across the Taiwan Strait."

Healthcare

Lastly, Biden proposed to expand drug price negotiations to 50 additional drugs each year (an increase from 20 outlined in the IRA), which Goldman said would likely require bipartisan support "even if Democrats controlled Congress and the White House," as such policies would likely be ineligible for the budget "reconciliation" process which has been used in previous years to pass the IRA and other major fiscal party when Congressional margins are just too thin.

So there you have it. With no actual accomplishments to speak of, Biden can only attack Trump, lie, and make empty promises.

Tyler Durden Fri, 03/08/2024 - 18:00

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International

United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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8 hours ago

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

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United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

More Travel:

"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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International

Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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8 hours ago

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March 8, 2024

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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