MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

Why We Don’t Think Credit Suisse’s ‘Co-Cos’ Signal a Paradigm Shift

Editors’ Note: MarketMinder Europe doesn’t make individual security recommendations. Any reference to specific securities herein is incidental to our higher-level discussion.

Here is a thing we have observed about bank crises: It isn’t necessarily the actual bank failures that pose economic risks. We have seen enough banks fail during bull markets and economic expansions to indicate there is nothing inherently, automatically bearish about them for broader markets.[i] No, our research finds problems often arise when officials respond in a way people perceive as inconsistent, making it difficult for investors to identify and price risks. And so we come to Credit Suisse, which was sold to UBS for centimes on the franc Sunday after flirting with failure last week. The manner in which regulators imposed losses on Credit Suisse’s investors seemingly caught a lot of observers off guard—giving equity investors some (small) compensation whilst wiping out holders of a particular kind of bank bond. Bondholders usually outrank stocks in the event of a firm’s failure, so some claim this establishes a new and curious scenario across Europe. But we see good reason to think the Credit Suisse situation isn’t a new blueprint for European banks, not least because Switzerland isn’t in the EU and Credit Suisse therefore wasn’t subject to the EU’s strict (on paper) bank resolution rules. Nor would it logically be a blueprint for the UK, where the Bank of England (BoE) has its own procedures. However, we think the fear could impact banks’ funding costs in the near term, which could in turn slow lending and economic growth. More volatility wouldn’t surprise us as markets price this in.

To explain all of this, we will have to get a bit technical and use terms like additional tier one capital and contingent-convertible bonds. The former refers to a class of banks’ regulatory capital buffers, and most outlets abbreviate it as AT1. The latter refers to a specific type of bond banks will sell to raise AT1 capital. It is a bond that can convert to equity if certain conditions are triggered, and those conditions are typically laid out in the bond’s prospectus—and occasionally mandated by regulators. Its abbreviation is co-co.

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A Q1 US Growth Check-In

US retail sales and industrial production for February came out last week, and we don’t think they are anything to write home about. Like other indicators lately, we found them mixed. But they also don’t look to us like the US economy is on the precipice of recession, and closer inspection suggests economic reality entering March was better than commonly perceived amongst commentators we follow.

Headline results were, in a word, blah (to use a technical term), in our view. Retail sales fell -0.4% m/m, but that followed January’s big, upwardly revised 3.2% jump.[i] Both of those monthly moves were led by autos.[ii] After surging 7.8% m/m in January, car sales slipped -2.0% last month.[iii] We don’t think autos’ erratic swings in recent months—as supply chains get back in gear—reflect overall retail sales’ underlying trend. Hence, some economists try to isolate core retail sales, which excludes volatile autos, petrol, building materials and food services. This rose 0.5% m/m after January’s 2.3%.[iv]

Either way, we wouldn’t overrate US retail sales—headline or core—because they omit many services, which comprise most consumer spending.[v] They also aren’t inflation adjusted.[vi] But from the data, we don’t see February’s headline giveback—whilst steadier underlying components continued rising—as a sign things suddenly deteriorated.

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On French Pensions, Protests and No-Confidence Votes

Editors’ Note: MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their potential economic and market impact only.

With everything going on in the banking world right now, it hasn’t been easy to draw the attention of commentators we follow. But France managed it to an extent in recent days, as President Emmanuel Macron’s government advanced pension reforms without a parliamentary vote last week and narrowly survived two resulting no-confidence motions in Parliament on Monday, amidst widespread protests.[i] His government’s surviving the votes means the reforms are a major step closer to becoming law. But we think the episode really highlights how gridlocked the country’s government is, which we think is likely to prevent big change and keep political uncertainty low.

Raising the retirement age from 62 to 64 by 2030 has been a key component of Macron’s agenda since his first term.[ii] Then, the Yellow Vest protests over fuel tax measures and the pandemic jointly took pensions off the agenda.[iii] But pension reforms were back on his manifesto when he ran for re-election last year, and even when his coalition lost its majority in the National Assembly, he pledged to push them through.[iv]

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Don’t Overlook Chinese Property Stabilisation

China’s property markets, long a weak spot, are beginning to stabilise, in our view. Against 2022’s real estate freefall and hard landing warnings amongst commentators we follow, we think Chinese housing’s improved prospects are another sign the world’s second-largest economy—and, therefore, global growth—is likely to fare better than widely anticipated.[i]

Chinese real estate activity cratered last year, after Chinese property developerslongstanding debt woes came to a head starting in late 2021.[ii] Annual property sales measured in terms of floor area fell -24% in 2022.[iii] Property investment declined -10%, whilst construction starts dropped -39%.[iv] Many publications we read suggested the carnage was likely to continue in 2023, but the decline has slowed substantially, suggesting to us the worst may have passed.[v] In January-February, property investment’s contraction eased to -5.7% y/y, and new construction fell a milder -9.4%.[vi] (China combines the first two months’ data to reduce Lunar New Year holiday skew, as the holiday shifts between January and February.)

Meanwhile, January-February property sales by floor area slipped -3.6% y/y.[vii] As Exhibit 1 shows, though, January-February property sales in yuan rose 3.5% y/y, stabilising from a -48.6% decline last April. Now, that gain is off a low base, but we find that is how recoveries often start. And this is as average home prices rose in February for the second consecutive month (per a separate report, which doesn’t combine January and February data).[viii] After January’s 0.1% m/m gain, they accelerated to 0.3% in February.[ix] Price recovery is also broadening, with 55 of 70 cities appreciating last month versus 36 in January.[x]

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What to Make of a Popular Forward-Looking Indicator Today

Global think tank The Conference Board’s US Leading Economic Index (LEI) fell -0.3% m/m in February—its 11th straight monthly decline.[i] The gauge has a solid reputation as a forward-looking economic indicator amongst observers we follow, spurring warnings that its extended slide is proof a US recession (a decline in broad economic output) may be underway—or is coming soon. Considering America is the world’s largest economy and comprises close to 70% of global developed markets, its economic developments have global implications, in our view.[ii] Whilst a US recession is possible, it is by no means a foregone conclusion, as we will explain—nor is it assuredly predictive for stocks.

The US LEI has been around for over 70 years, and today’s version has 10 underlying components.[iii] With a handful of exceptions—e.g., a couple of labour measures, which our research shows are late-lagging economic indicators—most of the constituents are forward-looking, in our view. They include three sets of factory orders, the spread between the US Federal Reserve’s policy rate and 10-year Treasury yields (aka the interest rate spread), and the Leading Credit Index (LCI, a Conference Board-created gauge of loan availability and demand).[iv] Of LEI’s 10 components, 8 were negative or flat in February, extending recent trends.[v] The interest rate spread has now detracted for three straight months, whilst the LCI has weighed for seven.[vi] Accordingly, US LEI’s weakness has provided evidence for those arguing a US recession looms.

But we see some caveats worth considering. For example, LEI features goods production over services, even though the latter represent over 70% of US GDP.[vii] (Contrast that with the components that relate directly to factory orders, which comprise less than 20%.)[viii] In our view, LEI’s weakness isn’t consistent with services spending’s persistent growth over the past year. (Exhibit 1) 

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Britain’s New Budget Is on the Hunt for Business Investment

Editors’ Note: MarketMinder Europe is politically agnostic, favouring no party nor any politician. We assess developments for their potential economic and market impact only.

15 March, as Shakespeare wrote in his play Julius Caesar, is traditionally a day for political betrayal and misfortune … so we found it interesting UK Chancellor of the Exchequer Jeremy Hunt chose the ides of March to release his Spring Budget, given the opposition we have seen to some of his plans within his Conservative Party. At any rate, we think the UK’s twice-a-year tinkering with spending and tax rates goes a long way toward showing why stocks benefit from political gridlock. In our experience, inactive legislatures tend to keep fiscal policy relatively static, making it easier for businesses to calculate return on investment. In the UK, our analysis found fiscal policy more of a moving target which we think helps explain why, regardless of whether business taxes rise or fall, investment growth’s long-term trend doesn’t change much.[i] Commentators we follow often deride what they call low-investment Britain, but on the bright side, our study of history suggests the latest tax hikes aren’t likely to be some massive negative for stocks.

The Spring Budget, according to most publications’ coverage we read, was a damp squib. No major tax hike reversals.[ii] Household energy subsidies will now drop in July instead of April, in hopes of wholesale electricity costs falling below the subsidy ceiling by then.[iii] Income tax bands won’t rise—leaving people with higher bills as wage growth lags inflation (broadly rising prices across the economy)—but the government claims new spending on childcare and other social initiatives will leave many households better off.[iv] That program, along with pension changes, aims to get more people in the labour force, on the (in our view, flawed) theory that this will raise economic growth. Meanwhile, the corporation tax rate will rise from 19% to 25% next month as scheduled, but it will come with new investment deductions and other incentives.[v] Some publications we follow have pointed out that, all together, the tax burden will soon be the highest since World War II.[vi] Yet Hunt claims this is “the most pro-business, pro-enterprise regime anywhere.”[vii]

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Putting the Regional Bank Scare Into Perspective

Editors’ Note: MarketMinder Europe doesn’t make individual security recommendations. The below merely represent a broader theme we wish to highlight.

One week after American regional financial firm Silicon Valley Bank (SIVB) first roiled markets with plans to raise capital and book big losses on its US Treasury bond portfolio, talk of a banking crisis hasn’t died down. SIVB officially failed Friday, when the US’s Federal Deposit Insurance Corporation (FDIC) took over.[i] Another regional bank, Signature Bank, followed suit Saturday.[ii] On Sunday, the Federal Reserve (Fed) pumped liquidity to smaller regional banks and guaranteed all SIVB and Signature deposits above the FDIC’s $250,000 deposit insurance ceiling (£206,250).[iii] But talk of contagion and the hunt for the next domino to fall continued, sending US bank stocks sharply lower this week.[iv] But our research suggests the American banking system is overall quite healthy, and we think this storm too should pass before long, with stocks likely rebounding faster than most commentators we follow deem possible now.

Very few commentators we follow argue the failures of SIVB and Signature alone will cause a deep downturn. Though described as the second- and third-largest bank failures in history, this is accurate only if you don’t adjust for inflation or scale relative to the size of the economy.[v] Great Depression-era failures were far, far larger once you do these maths.[vi] No, the main item on the world’s radar now is contagion—the potential for bank runs to spread to other similarly sized institutions, culminating in a national or even global financial meltdown. Tellingly, smaller regional banks have taken a disproportionately large hit over the last week, and credit ratings agency Moody’s put six on notice for a potential downgrade.[vii] Deposits are reportedly fleeing for the four largest, so-called too big to fail US banks.[viii]

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Checking In on Japan

With all the high-profile events in America and Europe hogging headlines in publications we follow, Japan may be easy to overlook. But we think it remains an important consideration for global investors as the world’s third-largest economy and because of its sizeable chunk of developed markets.[i] Take a look at how Japanese inflation (economy-wide price increases), monetary policy and gross domestic product (GDP, a government measure of national output) are faring in the Land of the Rising Sun.

Wages Lag Inflation in Japan, Too

Japan’s annual spring shunto wage negotiations between labour unions and management show rising labour costs are an aftereffect of inflation, in our view, not necessarily a prelude to an escalating wage-price spiral. Last Thursday, UA Zensen, the country’s largest union organisation representing 240,000 workers, secured a 5.28% wage hike to keep pace with 4.4% y/y inflation—following similar deals major automakers made with their workers.[ii] This year’s hike followed last year’s 2.2% raise, which was the first increase in four years.[iii] For some broader context, consider: Before this year, annual raises didn’t exceed 3% since 1997—with no base-pay hikes until 2013.[iv] Consumer prices were deflationary much of this time, so meagre nominal wage gains were enough to pump real (meaning inflation-adjusted) wages.[v]

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UK GDP Surprises Forecasts, Not Stocks

Editors’ Note: As always, MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their potential economic and market impact only.

UK gross domestic product (GDP) grew more than economists expected in January, and we observed an interesting occurrence: Many economists we follow started rethinking all those UK recession forecasts.[i] Not long ago, the Bank of England (BoE) and a host of others projected the UK would enter recession late last year and contract through 2023 (a recession is a broad decline in economic activity).[ii] Now we know that in addition to eking out a flat Q4, UK GDP grew 0.3% m/m in January—beating analysts’ consensus expectations for 0.1% and starting the year on a strong note.[iii] Seems to us people are starting to catch on to what UK stocks appear to have been signalling for months.[iv]

It may be tempting to dismiss January’s growth as the product of a few one-off factors. The English Premier League, which took a lengthy break during the World Cup, was back in full swing—boosting all the activity that comes with match attendance and general revelry.[v] The transit strikes that hobbled several industries in December eased up a bit, and falling absenteeism boosted educational output.[vi] We saw some analysts note that without these one-off contributions, growth would have been flat. Fair enough, but UK monthly GDP has suffered skew from a host of one-offs since the late Queen’s death and funeral pushed some activity from September to October last year.[vii] Similarly, December’s drop stemmed partly from the aforementioned Premier League break and labour action.[viii] We think the main lesson here is not to get hung up on monthly GDP regardless of whether it is good or bad. Monthly data have too much short-term variability to glean a meaningful takeaway, in our experience.

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Auto Loans Aren’t Likely to Tank America’s Economy

Do America’s rising auto loan delinquency rates make consumer debt trouble automatic, with potential global reverberations? Commentators we follow suggest they are an early tell an economic wreck awaits. However, we think putting the data in proper context shows why consumer debt isn’t about to make the US economy’s engines sputter out—making this a brick in global stocks’ proverbial wall of worry, in our view. Take a look under the bonnet with us!

Those commentators seeing a looming credit crisis say the recent uptick in auto loan delinquencies is a sign of strapped American households—a canary in the coal mine for other consumer debt like credit cards and mortgages. We find this stems from long-running concerns that auto lending has become the new subprime (a category of borrowers with poor credit history) mortgage—echoing the mid-2000s’ boom in loans to US homebuyers with questionable creditworthiness, on which most coverage we read pins the global financial crisis in 2007 – 2009.[i] The alleged data signalling credit chickens coming home to roost: Used automobile trade-ins show a rising trend in negative equity—where the amount of debt left on a car exceeds its value.[ii] Because of the combination of sky-high car prices’ cooling and rising auto loan rates, more people are underwater on their cars.[iii] Buyers have taken out bigger loans to finance their vehicle purchases—sometimes stretching them out to seven years, versus an average of six—but with used car prices now sliding, they increasingly owe more than their car is worth.[iv]

Delinquency rates on these loans are now rising.[v] Cox Automotive reports loans 60+ days past due were up 20.4% y/y in January to 1.89% of all auto loans, the highest rate since 2006.[vi] Some reports we see argue this indicates outsized car payments are more unaffordable, competing with other household demands—e.g., food eating into budgets—and higher delinquency rates are evidence the strain is showing.[vii]

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.