LIVE MARKETS-Targeting growing profits in Asia
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TARGETING GROWING PROFITS IN ASIA (1150 GMT)
While the impact of rising yields on equities remains the hot topic, we could use some indications about what are expected to be the most profitable areas for stock investors.
The chart below shows the asset allocation snapshot of Columbia Threadneedle.
Its strategy “has been to concentrate risk exposures in equity markets with smartly growing profits, like emerging Asia and Japan, that are highly operationally levered to an improved global outlook,” Maya Bhandari, Multi-Asset Portfolio Manager at Columbia Threadneedle says in a research note.
The asset manager says it is optimistic on the upper end of the consensus on growth in U.S. and Japan in 2021, while it edged higher 2021 European growth forecasts.
Separately, here is her take on rising yields and equities.
“Gently rising nominal bond yields tend to be associated with rising economic growth” and this is “a ‘sweet spot’ for stock markets,” that is basically what happened between March 2020 and February 2021, according to Bhandari.
If real yields start rising, as it happened in recent weeks, the big picture is inclined to change.
But, “on balance, as life returns to normal, helped by the huge additional policy stimulus and vaccine roll outs, real yields could quite easily rise in a reflationary, risk-positive setting,” she says.
EUROPEAN AUTOS: RECOVERY HIGHWAY VS ENDLESS SLIPPERY SLOPE (1055 GMT)
There's quite of optimism lifting the European automotive sector this morning with Volkswagen shares at highs not seen since 2015 before the infamous emission scandal torpedoed the German car maker's prospects for a few years.
Boosted by a warm reception of its results and guidance, Volkswagen is up 5%, the best performing stock among euro zone blue chips .STOXX50E.
The European autos and parts index is also the best performing sector, up 1.8% on the day and a whopping 140% above where the COVID 19 March 2020 crash sent it to a year ago.
That's one nice way to look at it.
Another less rosy one is to look at how European car makers have recovered from the 2015 'dieselgate' and the short answer is actually that they haven't:
Of course, the industry has completely switched course with car makers racing to go electric while Tesla has snatched the title of global leader in a fast changing industry.
So while shareholders of European car makers can rejoice about the bounce back since last year's crash, they could also picture what a gap there is with the fate of Tesla in the last 6 years:
Volkswagen looks to electric vehicles, cost cuts for profit recovery nL8N2LE0WX
WHAT ABOUT UK AND SPANISH BANKS? (1020 GMT)
Yields are on the rise and financial stocks too.
After Morgan Stanley and BofA both suggested buying bank stocks, Credit Suisse keeps its overweight on financials, mentioning that it forecasts a further rise in U.S. bond yields to 1.75-2.00%.
"Banks have 15% potential upside on Credit Suisse model (80% of their performance can be explained by PMIs, Bund and Euro) rising to 28% potential upside using year-end forecast," Credit Suisse analysts say.
“Banks are much more cyclical than normal, via loan growth and dividend distribution. In addition, three of the four secular headwinds – rates, capital regulation and litigations – are largely behind us,” they add.
Besides the favourites BNP Paribas BNPP.PA, ING INGA.AS UBS UBSG.S, they say they like “retail banks in economies with the biggest bounce back potential, such as UK and Spain.”
Looking elsewhere, CS believes it’s not the time to be underweight on basic materials stocks despite their recent rally.
The “sector may pause but we avoid taking our weightings down further because the medium-term cyclical and structural support is solid,” they add.
Meanwhile the investment bank is benchmark on non-financial cyclicals, which are already “pricing a PMI of around 71, implying a 6% GDP growth versus consensus of 4.2%".
They note that non-financial cyclicals outperformed defensives by 50%, while the previous rally right after the financial crisis was 47%.
In the chart below the recent outperformance of European bank stocks and miners, which seem to have started a correction.
VOLATILITY AT PRE-PANDEMIC LEVEL, STOXX UP (0840 GMT)
European shares are off to a positive start this morning as investors are hopeful the Fed will stick to its very dovish policy stance, while being more upbeat on the macro outlook.
Gains are broad-based and spread across different sectors from banks to tech stocks and that's helping push the STOXX 600 regional benchmark up 0.5% in early deals.
What really stands out though is volatility.
The Euro STOXX 50 volatility index .V2TX has fallen below 18 for the first time since late February 2020, just before the darkest days of the COVID-19 scare roiled global markets.
In single stocks, German biotech firm Morphosys is down 10% on a disappointing outlook, while upbeat indications from Zalando are pushing the online fashion retailer up 5%.
In the snapshot, the volatility index.
PRE-FED CALM SETTING IN (0759 GMT)
Exactly one year ago when the S&P 500 fell 12% for its worst day since 1987, markets were busy pricing the COVID-19 recession. Nowadays the V-shaped recovery from that downturn is the main driving force behind price action.
U.S. equities notched another record close, Germany's DAX is just below its latest all-time peak and even airline and travel stocks have mostly reclaimed pre-pandemic levels.
There are potential pitfalls of course, above all the risk of an overheating U.S. economy and inflation forcing policymakers to turn less accommodative. But even if Wednesday's Fed meeting delivers a hawkish surprise, segments of the equity markets are coping quite well with higher yields.
The Dow index of "old economy" stocks, for example, gained for a seventh straight session even as 10-year Treasury yields topped 1.6% - levels deemed worrisome only a few weeks ago.
But typical pre-Fed caution has set in: U.S. yields are down just below 1.6% mark and the dollar index is flatlining. An auction of 20-year Treasury bonds bears watching.
In Europe, facing further vaccination delays due to the AstraZeneca ruckus, stocks look set to edge up.
In corporate news, focus on Credit Suisse which warned it might incur charges following the collapse of its Greensill-linked supply chain finance.
Key developments that should provide more direction to markets on Tuesday:
Minutes of Australia's central bank said commodity price increases were unlikely to cause a sustained rise in inflation
Bank of Japan Governor said it was important to keep long-term interest rates "stably low"
UK economic growth will fall by 4% in the first quarter from the same period last year, the BoE governor said
Volkswagen is confident that cost cuts will help it raise profit margins in the coming years
Japan industrial output, trade, Tankan survey
German wholesale prices February, March ZEW
EUROPE SEEN EDGING UP (0631 GMT)
European shares look set to open slightly higher, supported by positive sessions in Asia and Wall Street overnight, as the focus turns to central banks meetings, starting from the Fed.
The typical caution that sets in before a Fed policy decision however means markets will likely stay in a holding pattern and futures on main euro zone benchmarks were up just 0.1% at the time of writing.
Futures for the S&P 500 were flat after ending the previous session at a record high, while over in Asia, the MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.6%.