Newsletter - February 21, 2022
Oil / Commodities
- Oil gave up early gains in Asia, along with gold after France said that the U.S. and Russian presidents have agreed to a summit meeting over Ukraine. WTI plunged as much as 0.8%, reversing a more than 2% advance. Renewed warnings from the U.S. on a potential Russian invasion of Ukraine over the weekend had initially pushed up oil prices on Monday, following the first weekly decline this year on signs of an easing stand-off and hopes of a revival of Iran’s nuclear deal. Meanwhile, gold fell back below $1,900 an ounce after earlier hitting an eight-month high. Global commodity markets have been in thrall to the prolonged standoff over Ukraine, which comes at a time of already robust demand, surging prices and concern over fast-depleting inventories. Raw materials are trading close to a record, boosting inflation and complicating the task for central banks as they seek to tame the pace of inflation without derailing economic recovery. Paired with ongoing talks to save the 2015 Iran nuclear accord, geopolitics continue to hog the limelight on the immediate future of commodity markets, making volatility the main theme for now. Oil could be set for a prolonged period above $100 a barrel this year, with world demand poised to expand to a record.
- Gold advanced to the highest level in more than eight months as concerns over heightened geopolitical tensions stoked demand for haven assets. The geopolitical concerns have outweighed bearish sentiment from a potential rate rise, which could damp demand for the non-interest bearing precious metal. However, bullion gains pared slightly this afternoon following reports this afternoon that the U.S. and Russian presidents have agreed to a joint diplomatic summit.
- Oil’s surge to its highest level in seven years, along with strong demand for natural gas is driving renewed interest in fuel trapped in underground rocks known as shale. Fracking shale has made the U.S. the world’s biggest producer of oil and gas, giving America the energy independence its leaders have sought for decades and upending the geopolitics of the world energy trade. Recent oil busts, exacerbated by the pandemic, drove many producers to bankruptcy, but the rebound under way since early 2021 is transforming the economics of the shale industry again. Some oil producers start seeing profit when oil trades at $40 a barrel, but the whole interest is better off at $60 a barrel. With oil now at $100 a barrel, shale producers are raking in cash like in 2014 when oil prices soared to similar heights. At the time, Saudi Arabia retaliated by flooding the market with crude to drive prices down and hurting shale producers who need higher oil prices to breakeven. Exxon Mobil and Chevron are now planning to increase Permian Basin production of shale in 2022 by 25% and 10%, respectively. However, other shale players are sticking to a disciplined-growth strategy to woo Wall Street investment back to the energy sector after years of poor returns when oil prices traded under $40-$60 a barrel. However, shale still faces heavy political and environmental opposition amid growing public concern over climate change. Fracking requires an average of 11 million gallons of water per well, threatening local freshwater supplies. Fracking and the injection of wastewater into disposal wells have also been linked to a rising number of earthquakes in the Permian Basin. Methane leaks and the routine flaring of natural gas has also contributed to global warming. A trillion cubic feet of natural gas has been flared in the Permian Basin since 2013 according to the EIA.
o https://www.bloomberg.com/news/articles/2022-02-19/how-rebounding-oil-is-making-u-s-shale-more-viable-quicktake?srnd=premium-asia
Tech
- There is a lot of attention on Apple’s upcoming slew of upgrades this year, especially the Mac. It will mark Apple’s entrance to part three of its end-to-end computer overhaul – a move that includes dumping Intel chips in favour of Apple-designed silicon. The transition started in 2020 with M1 versions of the MacBook Pro, Mac mini and MacBook Air. It continued in 2021 with the M1 iMac and with the M1 Pro and M1 Pro Max MacBook Pros. This year, the transition to Apple Silicon will shift into high gear with several new Mac models based on the following processors: a new M2 chip, last year’s M1 Pro and M1 Pro Max chips, and super-powered version of the M1 Pro Max chip. The third round of Mac updates is likely to kick off on March 8th, when Apple is planning to hold its first media event of the year. The presentation is likely to focus on the 5G iPhone SE and iPad Air, and potentially a new Mac. Recent filings support the idea that a new Mac is coming soon. Apple has listed three new Mac models, with at least one of them labelled as a laptop, in the database of the Russian equivalent of the FCC. Given the two oldest Apple Silicon Macs in the segment’s line-up are the entry-level MacBook Pro and Mac mini, those would likely be next for an upgrade. And with the M1 Pro and M1 Pro Max chips already on the market, the iMac Pro launch is not too distant either. Apple is likely already in preparation for another round of Mac releases around May or June. Just a few years ago, the Mac business had seemed to be waning with less frequent updates at the time, and the MacBook Pro update being a disaster, which drew demand to the iPad and iPhones instead. It is safe to say that now Apple Silicon has turned the segment around – from fiscal 2011 through 2020, the Mac generated around $21 billion to $28 billion per year, while fiscal 2021 Mac revenues surged to $35 billion to exceed iPad sales.
- NBA star Giannis Antetokounmpo has signed a long-term deal with WhatsApp to promote the brand around the world. The agreement is the first celebrity endorsement deal for WhatsApp. WhatsApp, which competes with the likes of Apple’s iMessage and Google Messages, has more than 2 billion users worldwide and has established itself as the primary messaging method in countries like India and Brazil. The service has boosted marketing in sports this year, including airing its first U.S. ads in January during the NFL playoffs.
- Roku shares tumbled Friday by as much as 27% - the biggest intraday drop on record – the wake of a fourth quarter results miss and an outlook that was seen as weak. At least one analyst has already extended a downgrade on the stock after it has plummeted by more than 75% off a peak hit in July, trading at its lowest since June 2020. Roku was among the stay-at-home winners amid the pandemic that shuttered cities for months on end. The stock gained nearly 150% in 2020 as COVID accelerated a shift toward streaming video among consumers. Investors are now reassessing the valuation it had received, as they rotate out of high growth tech names. The collapse in Roku reflects what has become a familiar theme this earnings season as other pandemic favourites have also swiftly fallen out of favour. Netflix, which also benefited from the boon in at-home entertainment, collapsed more than 20% after it gave a disappointing forecast for new customers in January.
- Over its life as a publicly traded company, Facebook parent Meta Platforms has repeatedly demonstrated an ability to rebound after earnings disappointments or various controversies that have weighed on the stock but not this time. Shares are coming off their lowest close since May 2020 and are down more than 45% from its September peak. The decline is unmatched among other big U.S. tech stocks in recent years. The slump has pushed Meta out of the top 10 of largest global companies by market value, yet also left it trading at its cheapest on record. In additional to impacts from Apple’s newest privacy changes, Google’s announcement this week that it would bring a privacy initiative to Android phones has added further pressure to Meta’s core digital advertising revenues. Management now needs to show investors over the next few quarters a path to grow. Meta’s growth woes stand in stark contrast to other tech behemoths, which reported strong results this season, helping limit declines in their stocks amid a mostly negative start to 2022. Apple has not had a 40% drawdown since 2013. For Microsoft, Amazon or Alphabet, the last time they had a peak-to-trough drop of this scale was around the financial crisis. The weakness in Meta’s stock has made it attractive in terms of traditional valuation metrics. The stock’s forward PE ratio is now under 14x, its lowest on record, and well below its five-year average of 20.9x. The forward PS ratio is about 4.2x, also a record low. Meta is trading at its biggest-ever discount to the Nasdaq 100 index as well. Nearly three-fourths of the analysts who cover the stock recommend buying the stock still, while the average analyst price target points to upsides of more than 60%. However, the turnaround may be a long-term process as investors continue to look for concrete evidence of long-term sustainable growth. Because of Meta’s recent tumble, Tencent has found itself once again in the list of the world’s 10 largest company by market value.
- Cybersecurity stocks have yet to surrender its pandemic-era gains. The resilience in Zscaler, Crowdstrike and Fortinet is a display of bright growth prospects for cybersecurity firms amid simmering geopolitical tensions, more employees adopting hybrid working models and the ongoing digital shift. Zscaler has fallen 25% from a November peak, but remains up more than 300% over the past two years, while Crowdstrike and Fortinet are still up more than 160%. The need for security has differentiated these stocks from any other pandemic play like Peloton and Netflix which have plummeted in recent weeks in light of dwindling pandemic-era growth. Anytime there is a new threat announced or there is a hack or ransomware attack, that is effectively an advertisement for cybersecurity as something that companies and other organizations need to be investing in. Even though cybersecurity stocks are not fully immune to fears about Federal Reserve tightening that has weighed on those with high valuations, a Nasdaq index of cybersecurity related firms has outperformed the Nasdaq 100 index by two percentage points this year. That is despite boasting a PE ratio that is more than 40% richer. Cybersecurity earnings have also remained robust across the board this season. While the Fed driven risk-off environment remains, the underlying growth stories around cybersecurity are unmatched from what has been observed in the last decade.
- Intel expects revenues to rise by just under 2% this year, with growth picking up in later years as CEO Pat Gelsinger pursues a turnaround of the once-dominant chipmaker. Sales will amount to $76 billion in 2022, before climbing by a mid- to high-single-digit percentage by 2023 and 2024. Analysts have predicted growth of 1% this year to $75.1 billion, with sales ticking up 3% in 2023 and 8% in 2024. Intel called for EPS of $3.50 for 2022, while analysts are predicting $3.44. Intel has struggled to capitalize on booming demand for chips fuelled by the work-from-home trend and the spread of semiconductors into a wider range of devices. While the chip industry’s sales gained 26% last year to a record total of $556 billion, Intel posted a 4% decline. Rival AMD’s sales grew 68% in 2021, while Nvidia posted a 61% gain. The biggest chunk of Intel’s sales still comes from the PC market, where its processors remain the most important component of the majority of laptops and desktops in the market. Last year, PC shipments climbed back to levels not seen for a decade helped by the shift to remote work. But analysts have expressed concern of a post-pandemic slowdown in this trend, especially as Intel faces fiercer competition from AMD and other customers switching to in-house designed chips. Intel is now targeting a return to market leadership by 2025, marked by a shift to new markets like graphics chips and a pivot back to its roots in foundry, with 10% to 12% growth by 2025 and 2026 once the investment phase is over. The chipmaker expects its graphics chip business to approach $10 billion by 2025.
o https://www.bloomberg.com/news/articles/2022-02-17/intel-sees-sales-picking-up-in-coming-years-as-it-makes-comeback?srnd=technology-vp
Electric Vehicles
- BMW is rolling out its four-door i4 sports coupe in Japan where consumers are showing signs of greater willingness to buy EVs. The i4 is currently available for orders with deliveries as soon as March. While Japan EV adoption has lagged behind the U.S., Europe and China, there are signs that local drivers are starting to embrace them. Registrations for imported EVs totalled 8,610 units in 2021, up from 3,2,38 in 2020 fuelled by a price cut for Tesla’s Model 3.
- Saudi Arabia’s sovereign wealth fund has been transforming almost as quickly as the country itself. In 2015, the Public Investment Fund (“PIF”) was a sleepy holding company for government investments that hardly anyone outside the Kingdom had heard of. Now, it is closing in on $1 trillion in assets as it snaps up everything from soccer clubs to EV makers and bankrolls new cities in the desert. The shift continues to underscore its urgency to prepare for a post-oil future. The PIF’s holdings include local businesses such as the Saudi National Bank, Saudi Telecom and national projects like Neom, a $500-billion city-state that would run entirely on renewable power and export green energy. The PIF has also committed $45+ billion to SoftBank’s technology-focused Vision Fund since 2016. A 2019 investment in EV maker Lucid has soared in value to almost $40 billion. It also has stakes in video game makers like Activision Blizzard and Electronic Arts, as well as digital services and retail businesses of Indian billionaire Mukesh Ambani. In February, the government transferred an $80 billion stake in Saudi state oil giant Aramco to PIF to boost its assets as the fund prepared to tap the international bond market for the first time. The PIF’s job continues to support the Kingdom’s goals of simulating inward investment, developing new industries, bringing access to new technologies through foreign investments, and creating jobs. The PIF’s investments in luxury resorts, cinemas and entertainment complexes has also helped to lure more visitors in recent years. While traditional sovereign funds in Saudi Arabia has typically invested excess national wealth to generate profits, the PIF was repurposed as a global investor while the Saudi budget was in deficit. As a result, borrowing has been a core part of its plans to hit aggressive growth ambitions. The PIF is now eyeing green bonds to support its environmental projects and targets. Saudi Arabia is crafting its tourism strategy around eco-tourism and the fund is the main backer of most of Saudi Arabia’s renewable energy projects. Through Neom, it is funding the world’s largest project to produce hydrogen fuel without creating any harmful emissions. The PIF looks to oversee assets of $2 trillion by 2030, which would be bigger than Norway’s, currently the world’s largest at about $1.4 trillion. The PIF’s assets are now worth around $580 billion.
- Tesla faces a review in Germany over an Autopilot feature as regulatory scrutiny intensifies into the carmaker’s driver-assistance technology. Tesla’s automated lane-change function is now being investigated on whether it is approved for use in Europe. The German watchdog is also in contact with the Netherlands’ vehicle agency, which is responsible for approving Tesla cars in Europe. The latest development in Germany adds to the regulatory hurdles Tesla is facing in the country. Progress at its first European factory in a site near Berlin has been slower than expected amid a backlash from environmental groups concerned about water use and wildlife.
- India has installed more than 650 EV charging stations in key cities in the four months ended January 31st as it seeks to boost the production and use of EVs. The nation added 180,000 new EVs to its roads from October 2021 to the end of January. India, the third biggest emitter of GHG on the planet, has set a goal to reach net-zero carbon emissions by 2070. This would require a huge shift to EVs, which make up just 1% of overall annual auto sales, compared with 30% in some parts of China, due to high cost and sparse charging infrastructure. India currently has 1,640 operational public EV chargers, 940 of which are concentrated in nine major cities including Bengaluru, Delhi and Mumbai. State-run oil marketing companies have also announced they would set up 22,000 EV charging stations in prominent cities and on national highways across the country.
- Ford is looking at ways to separate its EV operation from its legacy business to earn more investors’ respect like Tesla and other EV pure-plays have enjoyed in recent years. A spinoff of Ford’s EV unit could generate the kind of earnings multiples that have given Tesla a market value approaching $1 trillion. However, Ford has denied rumours of a spinoff and remains focused on its Ford+ plan to transform the company and thrive in the new era of electric and connected vehicles.
- Tesla has sunk toward the bottom of Consumer Reports’ newest annual auto brand rankings, weighed down by poorly received design changes and reliability problems. Tesla placed no. 23 out of 32 brands on the 2021 list, down seven spots from the year before. Tesla Model 3 was also beaten out as top pick for 2022 by Ford’s Mustang Mach-E.
- The U.S. NHTSA has opened its second defect investigation related to Tesla’s Autopilot, subjecting more scrutiny to the carmaker’s driver-assistance technology. The investigation is launched on the unexpected braking by Tesla’s Model 3 sedans and Model Y SUVs. The investigation covers about 416,000 vehicles and said it has received 354 complaints related to phantom braking in the past nine months. The mounting Autopilot probes continue to pose risks to Tesla’s commercialization of the automated vehicle technology.
o https://www.bloomberg.com/news/articles/2022-02-17/tesla-phantom-braking-complaints-spurs-formal-nhtsa-probe?srnd=hyperdrive
Consumer / Retail
China Market
- A pile-up of inventories suggests that China’s metal consumption remains on the back foot after disruptions to industrial activity during the Winter Olympics and Lunar New Year. How quickly demand recovers now that the festivities are over and whether consumers will accept relatively elevated prices will help set the direction for markets in coming days and weeks. Although the central bank kept its benchmark lending rates unchanged on Monday and declines in new home prices eased last month, there seems little doubt that Beijing stands ready to buttress demand against the backdrop of wider distress in the property sector and other indications like slumping car sales. The recovery in consumption has been slower than expected, with copper rod producers operating at just 59% of capacity last week. A resurgence of COVID cases in eastern China has also affected purchases. Copper held in warehouses tracked by the Shanghai Futures Exchange surged 28% last week and have more than quadrupled this year. Inventories of aluminum and zinc also extended gains. The Yangshan premium, an indicator of import demand for refined copper, is at its lowest since July.
- China’s home price declines eased for a second month in January, offering a rare glimmer of hope to the embattled property sector. New home prices in 70 cities, excluding state-subsidized housing, fell 0.04% last month from December, when they dropped 0.28% according to the National Bureau of Statistics. Prices in large cities rose. Sentiment in China’s home market has been dented by a worsening liquidity crisis among real estate developers following a regulatory clampdown on excessive leverage. Chinese authorities have recently been tweaking some of their tightening measures in a bid to arrest the property slowdown, which has been hurting growth in its economy. Banks in several Chinese cities have cut mortgage down payments for some homebuyers in a move that may boost flagging housing demand. Even with home values showing signs of stabilizing, a slump in sales is continuing to add pressure on builders’ cash flows. The top 100 developers saw sales drop by 40% in January from a year earlier.
- As default risks surrounding troubled issuers like China Evergrande Group rocked the nation’s markets last year and left global investors nursing losses, a handful of little known hedge funds swooped in. Shenzhen Qianhai Guoen Capital Management, Fuhui Juli Wealth Management, and Shenzhen Qianhai Jiuying Asset Management pocketed gains of 319%, 104% and 96%, respectively, under their high-yield strategies, after scooping up distressed debts issued by property firms and local government financial vehicles. But top performing fixed-income hedge funds in the nation are now turning more cautious as they see risks rising further. While last year’s gains were outliers and often boosted by concentrated bets, the price swings helped China’s private bond funds – the local equivalent of hedge funds – garner an 8.9% average return overall, the best in five years. But now, funds like Jiuying Asset Management is lowering its risk appetite toward debts linked to local government financial vehicles and diversifying its portfolio, fearing that defaults may finally happen as pressures on the financing vehicles mount, despite liquidity support extended by authorities to stem an economic slowdown.
o https://www.bloomberg.com/news/articles/2022-02-20/hedge-funds-that-won-big-in-china-s-bond-meltdown-now-see-risks?srnd=premium-asia
- China’s provincial governments are bracing for a tough year, predicting income growth from taxes and land sales will slow or even decline, putting them under severe fiscal pressure as they try to spend more to support a faltering economy. Some local authorities are predicting their general revenue this year to be significantly weaker than the expected national economic growth target of at least 5%. In addition, the housing market slump will likely continue to take a toll on income from land sales in large swathes of the country, with the wealthiest provinces among the worst hit. The deteriorating situation means provinces will struggle to pay for infrastructure spending to drive up economic growth and be forced to borrow more to fund new projects, boosting debt levels that they have been ordered to curb. Of the budget reports released, 28 provinces expect fiscal revenue growth to slow this year compared with 2021, with 15 forecasting general fiscal income will rise at half the pace of last year or even slower. That includes regional economic powerhouses Beijing, Zhejiang, Jiangsu and Chongqing, whose per capital GDP are among the highest in the country.
- The U.S. added Chinese messaging platform WeChat and online marketplace AliExpress to its list of notorious markets for counterfeiting and piracy, an annual compilation of the worst intellectual-property abusers and counterfeiters. The list also includes Pinduoduo, Taobao, Baidu Wangpan, and DHgate.
o https://www.bloomberg.com/news/articles/2022-02-17/u-s-adds-wechat-aliexpress-to-list-of-notorious-piracy-markets?srnd=technology-vp
Market Update
- U.S. President Joe Biden and Russian President Vladimir Putin have accepted in principle a French proposal for a diplomatic summit, potentially offering fresh hope for a peaceful solution to pull Russia and Ukraine back from the brink of war. The meeting would occur only if Russia does not invade Ukraine. The discussion would focus on security and strategic stability in Europe, followed by a second summit with relevant stakeholders. Russia has continued to deny it plans to invade Ukraine while the U.S. has disputed such claims. The U.S. has told allies that any Russian invasion of Ukraine would potentially see it target multiple cities beyond the capital Kyiv and include Kharkiv in the northeast and Odessa and Kherson in the south.
- U.S. equity futures rose Monday as traders evaluated the possibility of a summit on Ukraine between President Joe Biden and President Vladimir Putin; Nasdaq 100 and S&P 500 contracts erased earlier falls and turned higher, while an APAC equity index came off its lows but stayed in the red as markets continue to be whipsawed by Russia’s troop build-up near Ukraine and efforts at diplomacy to bring both sides back from the brink of an escalating conflict
- Demand for havens eased a bit, taking gold below $1,900 an ounce and sapping the dollar
- Oil gave up gains and edged lower as investors continue to assess what might happen to energy, grain and metal supplies if the Ukraine situation worsens
- The Ukraine standoff, along with the worry that tightening Federal Reserve monetary policy could choke growth in the U.S. raises the likelihood of more swings in the markets in an already volatile year
- While Federal Reserve officials have unanimously backed a March lift-off on interest rates in panel talks last week, bets on an aggressive, 50 bps increase next month have diminished
- S&P 500 futures rose 0.4%, while the S&P 500 fell 0.7% on Friday
- Nasdaq 100 futures rose 0.1%, while the Nasdaq 100 fell 1.1% on Friday
- 10-year Treasury yield declined 3 bps to 1.93% on Friday
- WTI crude fell 0.2% to $90.90 a barrel
- Gold was at $1,896.93 an ounce, down 0.1%