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Market Update
February 22, 2021

Companies Adapt To The Virus & Lockdowns

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Thoughts Of The Week

Earnings

As companies become smarter at dealing with the virus and lockdowns, they have been able to keep the production cycle running. This became apparent during the end of 2020 and bodes well for when worldwide lockdowns begin to ease on the back of vaccinations. A good example of this is Germany where, despite severe restrictions, industry has kept the pumps running boosting exports. From here – barring any catastrophes – the earnings outlook is set to get stronger as the wider industries pickup. With plenty of earnings data already out, below is a quick summary of how it’s shaping up.

S&P500: 83% of companies have reported actual results for Q4 2020. Of these, 79% have beaten estimates by +14.6%. Importantly, 63% of companies have issued positive EPS (earnings per share) guidance for Q1 2021. Q4 2020 EPS is 2.5% higher year-on-year with losses concentrated in the energy, transportation, capital goods (mostly Boeing) and consumer services industries. Excluding these groups, EPS growth is up 12.3% year-on-year. The pattern of these results are consistent with the pattern of the lockdowns witnessed so far. As the easing follows, we should see a big lift into other sectors

Eurostoxx 600: 148 companies have reported Q4 2020 earnings, of which two-thirds beat estimates. On a blended basis, Q4 2020 EPS is expected to fall 20% year-on-year. Energy, financials and industrials have been the biggest decliners while basic materials and consumer cyclicals have shown strong upturns. By country, Austria (+154%), Poland (+50%) and Belgium (+41%) have led the way for Q4 EPS; Ireland (-450%), UK (-62%), Italy (-59%) and Finland (-50%) are the really big laggards.

MSCI Asia Pacific (ex-Japan): From the 50% of companies that have reported, 47% have beaten estimates. Overall Q4 2020 EPS growth rate was up 1% quarter-on-quarter; for 2020 it was 44% higher with Korea (+151%) and Malaysia (+364%) the star performers. Malaysia delivered 60% gains for Q4. By sector, energy, real estate and industrials declined heavily for 2020. Real estate bounced back the strongest in Q4 (+65%) followed by Consumer Discretionary (+47%).

Yields

Government yields have been soaring. This week alone we have seen quite a rise. Rising yields mean declining bond prices. Why are Government bonds falling? Risk on! Markets are effectively pricing the future, with a keen eye on the vaccination programme, which is picking up speed by the day. This in turn boosts the likelihood of bringing forward easing and opening up the economy.

In China, the economy has already opened up. Latest US data showed a strong lift in retail sales, while the full force of the US consumer is still to be felt. Households have amassed $1.5trn in excess savings and this is set to rise to $2trn by early March post the new stimulus package. Between the US and China, that’s almost half the world’s GDP. This is driving higher input prices (inflation), energy prices are rising (in spite of the extreme weather conditions in Texas), earnings are improving and are set to go higher, and consumers are poised to unload. It’s no wonder yields are up so strongly. In fact, even the poor weekly jobless numbers on Thursday did nothing to dislodge the rise in Government bond yields.

The Week That Was...

President Trump was acquitted of inciting Capitol Hill insurrection. Despite 7 Republican Senators voting to convict him, the attempt failed by 10 votes.

In Australia, the Government’s move to make Tech companies pay for the media content posted on their platforms has escalated. Facebook has shut down access to its App while Google has signed deals with various companies (e.g. a worldwide licensing deal with News Corp.)

Inflation in the UK for January rose to +0.7% y/y as consumers spent on new sofas, duvets, more on food, video games and other home entertainment.

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Market Overview.