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Will Fed Rate Hikes Shake Up EM Debt?

As noted in previous posts, a number of fears are driving concerns about the future returns of emerging markets (EM) sovereign debt in the midst of interest-rate…

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As noted in previous posts, a number of fears are driving concerns about the future returns of emerging markets (EM) sovereign debt in the midst of interest-rate hikes by the U.S. Federal Reserve (Fed).

Having examined two of those fears—that possibility that EM debt’s sensitivity to rising interest rates could hurt performance and the possibility that EM debt spreads could widen as interest-rate hikes hurt global growth—we now consider three more fears.

Could outflows accelerate as fixed-income and risk assets become less attractive? Could the U.S. dollar (USD) strengthen as interest-rate differentials between EMs and developed markets narrow? And could rate hikes could squeeze liquidity and accelerate EM debt restructurings?

Could Outflows Accelerate as Fixed-Income and Risk Assets Become Less Attractive?

The perception persists that as rates rise, fixed-income investments—particularly those with longer durations—become less attractive. This, common wisdom holds, leads to a cycle of outflow and underperformance.

It is hard to draw any conclusions about the first two rate-hiking cycles, because the data is unreliable. However, during the 2015-2018 rate-hiking cycle, inflows were solid. Assets managed against the EM hard currency benchmarks actually grew by approximately 20% on strong inflows without any period of appreciable negative drawdown. Assets then then grew again by another 10% in the year following the first rate hike (2016).

Our expectation is that as valuations continue to improve, flows will return to the asset class, which may act as a catalyst for higher prices. — Daniel Wood, Portfolio Manager

Our verdict: While flows are currently down, they should improve. This is supported by a 2021 International Monetary Fund (IMF) paper concluding that growth optimism is not a key driver of hard currency bond flows. These flows, the paper argues, have historically been more sensitive to global risk sentiment. Moreover, one of these factors is not necessarily a determinant of the other.

In recent years, flows into dedicated EM hard currency bond funds have been positive despite negative headwinds stemming from COVID-19. This year has been the exception. In 2022 we have already seen net outflows of reasonable size as global liquidity conditions have tightened. These have been quite persistent but fell in size as we entered May.

The outflows we have seen thus far this year repriced EM hard currency assets well ahead of those in other credit markets, resulting in lighter positioning from both dedicated investors (who are now holding very high cash balances) and crossover investors. Average bond prices in the benchmark J.P. Morgan EMBIGD are now around $85, which is below their COVID-19 lows registered in 2020.

Our expectation is that as valuations continue to improve, flows will return to the asset class, which may act as a catalyst for higher prices.

Could the USD Strengthen as Interest-Rate Differentials Between Emerging and Developed Markets Narrow?

The fourth fear driving concerns about the future returns of EM sovereign debt is that the USD could strengthen as interest-rate differentials between EMs and developed markets narrow.

Conventional wisdom holds that the ongoing Fed tightening cycle will magnify the strength of the USD, and with the USD trading persistently stronger, it is certainly understandable for investors to be concerned about the role of the USD in driving asset-price returns.

However, USD strength has not been a key historical driver of EM debt spreads. If anything, USD strength has a marginally positive correlation with tightening spreads.

Looking back at previous Fed tightening cycles, there is little information available about the impact of higher U.S. interest rates on USD strength and the subsequent impact on EM sovereign debt spreads.

1999-2000: USD Strong. During the 1999-2000 rate-hiking cycle, the USD did strengthen, but this was primarily due to speculation that the euro would collapse shortly after its launch.

2004-2006: USD Weak. The 2004-2006 rate-hiking cycle, meanwhile, was a weak period for the USD against the euro, given concerns about the U.S. trade deficit and investor focus shifting to monthly trade data. In this period, it was difficult to detect any positive impact on the USD from the rate-hiking cycle.

2015-2018: USD Mixed. In the initial part of the 2015-2019 rate-hiking cycle, currency volatility was quite low and the USD strong—until European Central Bank (ECB) President Mario Draghi gave his March 2017 speech in March 2017, which turned around the euro crisis and priced the euro sharply higher against the USD.

Investors who are worried that the strong USD is bad for EM debt spreads can take some solace in the possibility that it might weaken. — Marco Ruijer, CFA, Portfolio Manager

Our verdict is that it’s too soon to tell. But investors who are worried that the strong USD is bad for EM debt spreads can take some solace in the possibility that it might weaken. As we entered the 2022 rate-hiking cycle, the USD was already overvalued, with positioning one-sided, as the below chart shows.

Could Rate Hikes Squeeze Liquidity and Accelerate EM Debt Restructurings?

The fifth fear driving concerns about the future returns of EM sovereign debt is that rate hikes, and a subsequent reduction in the Fed’s balance sheet, could reduce access to the market for lower-quality EM debt investors, causing a flood of defaults and restructurings. We believe this risk is already overpriced in the market, for a number of reasons.

First, multilateral and bilateral support for EMs suffering economic difficulty is extremely high, with the IMF alone currently providing about $250 billion of support. And that is only a quarter of the IMF’s $1 trillion available lending capacity.

Second, aside from 2020, when EM sovereigns experienced a relatively high level of restructurings, historical defaults and restructurings in EM debt have been extremely low. This has been true even during previous Fed rate-hiking cycles, which have not caused a glut of defaults. Moreover, when restructuring has been necessary, recovery values have averaged 55 cents on the dollar,[1] a level far higher than that of corporate bonds.

We saw a shift away from bonds trading at a price of 100 or more at the end of 2021. The J.P. Morgan EMBIGD is also more diversified in 2022 than it was in previous Fed rate-hiking cycles, reducing the concentration risk of an isolated default.

Who Fears the Fed? Series

Post 1: Should EM Debt Investors Fear Fed Hikes?
Post 2: Watching for Widening in EM Debt Spreads
Post 3: Will Fed Rate Hikes Shake Up EM Debt?
Post 4: Why EM Debt Investors Shouldn’t Fear the Fed

Daniel Wood is a local currency portfolio manager on William Blair’s emerging markets debt (EMD) team.
Marco Ruijer, CFA, is a hard currency portfolio manager on William Blair’s emerging markets debt (EMD) team.

[1] Source: Moody’s and J.P. Morgan, from December 2000 to December 2020; refers to the J.P. Morgan Next Generation Markets Index (NEXGEM).

The post Will Fed Rate Hikes Shake Up EM Debt? appeared first on William Blair.

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Nike Escalates Design Battle Against Lululemon

The sportswear giant is accusing lululemon of patent infringement.

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The sportswear giant is accusing lululemon of patent infringement.

The Gucci loafers. The Burberry  (BBRYF) trench coat. When it comes to fashion, having a unique design is everything. This is why brands spend millions both creating and protecting their signature looks and the reason, as in the case of Adidas  (ADDDF) , extricating a brand's design from creators who behave badly is a costly and difficult process.

There is also the constant effort to release new styles without infringing on another group's style. This week, sportswear giant Nike  (NKE) - Get Free Report filed a lawsuit accusing lululemon  (LULU) - Get Free Report of infringing on its patents in the shoe line that the Vancouver-based activewear company launched last spring.

After years of selling exclusively clothing, accessories and the odd yoga mat, lululemon expanded into the world of footwear with a running shoe it dubbed Blissfeel last March. These were soon followed by training shoe and pool slide styles known as Chargefeel, Strongfeel -- all three of the designs (including a Chargefeel Low and a Chargefeel Mid design) have been mentioned in the lawsuit as causing "economic harm and irreparable injury" to Nike.

Nike's History Of Suing Lululemon Over Design

The specific issue lies in the technology used to build the shoes. According to the lawsuit filed in Manhattan federal court, certain knitted elements, webbing and tubular structures are too similar to ones that had been used by Nike earlier.

Nike is keeping the amount it hopes to receive from lululemon under wraps but is insisting the company infringed on its patent when releasing a shoe line too similar to its own. Lululemon had previously talked about how its shoe line "far exceeded" its leaders' expectations both in terms of sales and ability to expand.

In a Q1 earnings call, chief executive Calvin McDonald said that the line "definitely had a lot more demand than we anticipated."

Nike has already tried to go after lululemon through the courts once before. In January 2022, it accused the company of infringing on six patents over its at-home Mirror Home Gym. As the world emerged out of the pandemic, lululemon has been billing it as a hybrid model between at-home and in-person classes. 

The lawsuit was also filed in the U.S. District Court in Manhattan but ultimately fizzled out.

When it comes to the shoe line lawsuit, Lululemon has been telling media outlets that "Nike's claims are unjustified" and the company "look[s] forward to proving [their] case in court."

Lululemon

Some More Examples Of Prominent Design Battles

In the fashion industry, design infringement accusations are common and rarely lead to high-profile rulings. While Nike has gone after the technology itself in both cases, lawsuits more often focus on the style or pattern on a given piece.

Shein, a China-based fast-fashion company that took on longtime leaders like H&M  (HNNMY)  and Fast Retailing  (FRCOF) 's Uniqlo with its bottom-of-the-barrel pricing, has faced numerous allegations from smaller and independent designers over the copying of designs -- in some cases not even from fashion designers but artists painting in local communities.

"They didn't remotely bother trying to change anything," U.K.-based artist Vanessa Bowman told the Guardian after seeing her painting of a local church appear on a sweater on Shein's website. "The things I paint are my garden and my little village: it’s my life. And they’ve just taken my world to China and whacked it on an acrylic jumper."

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10 Top Penny Stocks To Watch With High Short Interest This Week

More short squeeze penny stocks to watch before February 2023.
The post 10 Top Penny Stocks To Watch With High Short Interest This Week appeared first…

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This week could bring some fluctuations to the stock market. Whether you’re investing in penny stocks or more expensive shares, several key factors will shape the year’s first quarter. Economic data releases, earnings announcements, and the highly anticipated January FOMC meeting are just a few of the things that will play a role. However, it’s worth noting that penny stocks often behave independently of broader market trends.

There has recently been a growing interest in cheap stocks with high short interest. Why does that matter? A short squeeze occurs when investors who have bet against a stock by borrowing shares are forced to buy back those shares at higher prices to cover their losses. This phenomenon can result in a rapid surge in the stock price. Where can you start searching for short-squeeze stocks?

Short interest data is a good starting point. There are no guarantees that stocks with a high level of short interest will squeeze. But they are usually the first ones people will take a closer look at. This article focuses on a list of penny stocks that meet these criteria. Additionally, we will try to find any potential catalysts to provide you with a better understanding of the current market conditions surrounding these companies.

With this information, you can decide whether they are worth adding to your watch list. This is also a continuation of our list of short squeeze stocks from the article “Penny Stocks To Buy: 5 Short Interest Stocks To Watch Now.” The complete list will be provided at the end of the article.

Short Interest Stocks To Watch

Faraday Future Intelligent Electric Inc. (FFIE)

Short Data: Fintel – 18.35%, TDAmeritrade – 29.20%

Faraday Future has been on our list of penny stocks to watch for months, and during that period, FFIE stock has continued climbing. A mix of new milestones, speculative trading action, and support from the Fintwit community have helped breed optimism in the stock market for the EV company.

Faraday Future is a smaller EV upstart that has progressed forward in launching its flagship product, FF 91 Futurist. A rework of its leadership and funding seems to have brought more reassurance to traders watching the company. Most recently, Faraday appointed its GLobal Executive VP of Global User Exosystem, Tin Mok, to the Board of Directors.

The news comes just a few weeks after signing a deal with the City of Huanggang Province in China to relocate its future FF China Headquarters to support the US-China “dual home market” and dual “DNA strategy.” Now, attention is likely on Faraday’s production commencement of the FF 91 Futurist. The company set the end of March to begin production and the end of April (or before) to start rolling out deliveries.

Is FFIE a short-squeeze penny stock? According to Fintel & TD Ameritrade data, the FFIE stock short float seems to be sitting between 18% and 29%.

Sientra Inc. (SIEN)

Short Data: Fintel – 122.36%, TDAmeritrade – 124.06%

Sientra stock has one of the group’s highest listed short float percentages. According to Fintel and TD, that figure is between 122% and 124%. Like all types of data, the accuracy of the actual reporting can come into question at such extremes. Nevertheless, it doesn’t discount the figures shown by these outlets today.

7 Top Penny Stocks To Watch With Big News This Week

SIEN stock has only recently begun catching attention after hitting fresh 52-week lows last week. The stock slipped following a reverse split earlier this month. Now, however, it looks like traders are starting to speculate on the company’s next move. The medical aesthetics company won approval from the United Arab Emirates Ministry of Health and Prevention to market its smooth surface, High-Strength Cohesive (HSC and HSC+) silicone gel breast implants in the United Arab Emirates.

But the news may be secondary to market data. That doesn’t only include the short interest. Thanks to the reverse split, it could also put SIEN on the list of low-float penny stocks to watch. Lower floats mean less supply in the market and can translate into higher volatility. Keep this in mind if SIEN is on your watch list.

short squeeze penny stocks to buy Sientra Inc SIEN stock chart

Gossamer Bio Inc (GOSS)

Short Data: Fintel – 35.22%, TDAmeritrade – 30.21%

Last year, Gossamer announced Phase 2 trial data in its study of seralutinib for treating pulmonary arterial hypertension. Among several points of focus was a serious adverse event in the seralutinib arm of the study. Overall treatment-emergent adverse events were reported in 86% and 93% of patients in the placebo and seralutinib arms.

Even with that as the case, there was optimism regarding efficacy results. Pulmonary Hypertension Division head at the University Hospital in Giessen explained, “highlit compelling potential differentiation for seralutinib as an anti-proliferative, anti-inflammatory, and anti-fibrotic therapeutic candidate with possible reverse remodeling effects.”

Earlier this month, State Street Corporation and Millennium Management filed Schedule 13Gs showing stakes in GOSS stock ranging from 5.1% to 29.47% (State Street). While those reports have been out for weeks, it may be something traders are paying attention to if GOSS is on their list of penny stocks to watch. In addition, short data from TD and Fintel have the short float percentage on GOSS stock sitting between 30% and 35%.

short squeeze penny stocks to buy Gossamer Bio GOSS stock chart

Pardes Biosciences Inc. (PRDS)

Short Data: Fintel – 24.88%, TDAmeritrade – 8.12%

The short data between Fintel and TD varies right now. Of the two, Fintel’s is the highest, with a PRDS stock short float percentage of nearly 25%. One thing Pardes has experienced that some of the others on the list haven’t is a more prolonged uptrend that began late last year.

The biotech company has been developing its PBI-0451 platform as a potential oral antiviral drug candidate to potentially treat and prevent COVID-19. Despite easing concerns, the virus still exists, and companies are still looking to “build a better mouse trap,” so to speak. In a quarterly update, CEO Thomas Wiggans explained that Pardes “made significant progress in our pursuit to bring a stand-alone, easily administered oral treatment to patients suffering from COVID-19, highlighted by the commencement of our PBI-0451 Phase 2 trial in September 2022,” and that the company looks forward to “sharing the preliminary results from this study in the first quarter of 2023.”

As the clock ticks on this quarter, some speculation has begun to form. Multiple analysts have set price targets much higher than current levels, and the short data has come into focus this week. JMP Securities and SVB Leerink have set $9 price targets for PRDS stock.

3 Hot Penny Stocks Under $1 To Watch For February 2023

short squeeze penny stocks to buy Pardes Biosciences PRDS stock chart

SmileDirectClub (SDC)

Short Data: Fintel – 20.17%, TDAmeritrade – 20.15%

The beaten-down medtech company has faced plenty of headwinds due to its mixed performance. The most recent update from SmileDirectClub prompted a bit more optimism in the stock. It gave an update highlighting a plan to drive profitability and positive cash flow. It also issued preliminary Q4 revenue guidance, which came in below estimates. Even with that as the case, shares of SDC stock woke up after the company presented its cost-saving strategy for the year.

“SmileDirectClub has taken decisive steps over the past year to embed rigorous financial discipline throughout the business and ensure we are positioned to capitalize on the investments we have made to place our company on the leading edge of innovation in oral care technology,” said CEO David Katzman.

Ahead of the official year-end results coming in February, traders are looking at the SDC stock short data. Right now, Fintel and TD both show this at around 20%.

short squeeze penny stocks to buy SmileDirectClub SDC stock chart

List Of Short-Interest Penny Stocks To Watch

  1. Faraday Future Intelligent Electric Inc. (NASDAQ: FFIE)
  2. Sientra Inc. (NASDAQ: SIEN)
  3. Gossamer Bio Inc (NASDAQ: GOSS)
  4. Pardes Biosciences Inc. (NASDAQ: PRDS)
  5. SmileDirectClub (NASDAQ: SDC)
  6. Tattooed Chef (NASDAQ: TTCF)
  7. Aemetis Inc (NASDAQ: AMTX)
  8. Blue Apron Holdings Inc. (NYSE: APRN)
  9. Vroom Inc. (NASDAQ: VRM)
  10. Biora Therapeutics Inc. (NASDAQ: BIOR)

The post 10 Top Penny Stocks To Watch With High Short Interest This Week appeared first on Penny Stocks to Buy, Picks, News and Information | PennyStocks.com.

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Australian small companies outlook for 2023

Having not long finished the festive season and commenced a new year, many of us take the moments shortly after to reflect on the year that was, and also…

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Having not long finished the festive season and commenced a new year, many of us take the moments shortly after to reflect on the year that was, and also consider what we would like to see in the year ahead.

With that in mind I thought I would take a look back at 2022. Last year will likely be remembered for three key events, firstly it generally saw the world exit the pandemic cloud of COVID-19. Secondly, we saw the commencement of the war between Ukraine and Russia. Thirdly, we saw inflation return with a vengeance being quickly followed by one of the fastest tightening cycles in history by Central Banks. The official cash rate in Australia increased from 0.1 per cent in April 2022 to 3.10 per cent by the December meeting of the RBA.

This mix of events led to one of the strongest risk-off years we have seen since the Global Financial Crisis, there are few places for investors to find sanctuary with losses occurring across both growth and defensive assets alike.

Investor sentiment was broadly very negative during 2022, it is always a challenge for any growth (or risk) asset to perform well when the market doesn’t have an appetite for risk of any kind. 

 If we look specifically at the Australian small ordinaries index, its return for the calendar year of 2022 was negative 20.7 per cent. To give this context the ASX 100 declined by 3.9 per cent and the ASX 300 return was negative 6.1 per cent. It is fair to say that the risk on trade in Small Companies over the last few years moved into reverse in 2022. This was a consequence of the above macro factors, coupled with a more bearish investor and market.

What to consider for 2023?

In moving to our outlook for 2023 we need to initially consider the 3 points above and ask where we see them today and where they may evolve to over the next 12 months. With the final question being what impact this will have on equity market performance?

As a starting point it is fair to say that the impact of COVID-19 continues to pass and become more of a memory than a current issue. Even China who were the final strong hold have now moved to accept an existence with COVID-19 and they cope with re-opening and reintegrating with the rest of the world. As it stands today, we would expect the impact of COVID-19 to continue to diminish from here. One datapoint that has been interesting to follow over the pandemic has been a UBS Composite Supply Chain Indicator which is now in a strong downward trend and moving closer to pre-pandemic levels.

Supply chain stress

Source: UBS

A second example where we can see this is in spot indexes for international container freight costs which are now off roughly 80 per cent from their peak 18 months ago. This is interesting as it was one of the early contributors to the increase in inflation. As a leading cause it is positive to see this returning to more normal levels.

Next, we move to the war in Ukraine, which continues to grind along, and will no doubt continue to influence energy prices and broader speculation. Having said that, although the outcome is unknown, this is what at times in markets is called a known unknown. We are all aware of what is happening, many governments and countries are working around it. This is best seen in Europe where they continue to diversify their sources and supply of Energy, along with continued fast tracking of non-Russian dependent infrastructure. Short of a shock surprise, this event we can largely say has been priced into markets.

Finally, inflation and interest rates have been a biproduct of the above two events. These two arguably caused the most disruption to equity markets in 2022. At the time of writing the most recent inflation data for Australia was released last week and came out higher than consensus expectations with trimmed inflation (removing the most volatile items) coming in at 6.5 per cent against an expectation of 6.1 per cent.

At this point most major market commentators have the belief that we are likely to see two further interest rate increases in the first quarter of this year. Post this timeframe the speculation begins to grow; a portion believe inflation is going to be more stubborn and require further effort from Central Banks. Other market commentators believe that the remaining two expected rate increases will be sufficient to manage inflation, particularly given the delayed transmission mechanism we have here due to the nature of Fixed Rates and their term to reset.

Some also believe we may see interest rates start to fall in late 2023, which would become a tailwind for equities, in particular some of the growth names which had the toughest performance over 2022.

What can we expect from small caps?

Looking through all of this noise and to our outlook for Australian Small Companies for 2023 we think as always the starting point is important. At a market level we started 20 per cent cheaper than the same point in the prior year. Further to this we have seen some earnings downgrades in some parts of the market, where others have proven to be far more resilient than expected. Sectors like the Resource sector managed to grow their earnings over 2022. So in some pockets, we find valuations from a fundamental perspective to be very attractive.

While there is a belief that interest rates have further to go, we still see some significant risks in the more speculative parts of the market. This is mainly around companies that will have little control over their earnings power in the next 12 months, or are less mature and as a result less capable to weather the economic conditions ahead. Increasing interest rates are also not favourable for building stocks, or some consumer stocks (although some of the high-quality names will be resilient and based on valuation look interesting).  

Any companies that missed the market’s expectations on earnings were punished, if the company had to go as far as an earnings downgrade the market showed little mercy. We think this trend will likely continue into the February 2023 reporting season. These are risks we are aiming to avoid by assessing the quality of our investments and their earnings streams.

Looking further out, there is an argument that Australian Small Companies offer a significant investment opportunity for investors over 2023 if they wish to add some risk to their portfolios. They were the most sold down part of the market in 2022 so the valuation of this sleeve of the market looks attractive.

History tells us that once the economy has reached peak inflation, the peak of interest rates is usually not too much further into the future. If we do in fact only see two further rate rises from the RBA and inflation is contained then we will start to have a foundation that would be more solid and look to underpin a backdrop that would be conducive to a rally in equity markets.

As always we are not out of the woods and do expect some earnings challenges to come to the fore in February’s interim reporting season. Stock selection and active management will be critical to navigate this.

Should we see an improved outlook and also a reduction in interest rates later in the year we may start to see an improvement in investor and market sentiment. This is likely the final ingredient needed to see capital flows return more strongly to equities and in particular Small Companies.

Overall we continue to have a meaningful exposure to the Resource sector as we think that with China reopening and supply shortages still an issue for Europe in the medium term, coupled with the continued drive of decarbonisation that 2023 should be another supportive year for the sector.

We have quality exposures to structural growth companies that over a medium term investment horizon represent excellent value and are growing quality businesses. We believe we are closer to the end than the beginning of the inflation and interest rate story which over the course of 2023 we think will provide a favourable foundation for the market and the Montgomery Small Companies Fund.   

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