Market Commentary: Increasing global inflation pressures | US earnings reports

10 February 2022

Watch Freddy Lim, co-founder and CIO, Philipp Muedder, Head of Financial Planning, and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  1. How has the market reacted to inflation? [1:00]
  2. What the US earnings season reports tell us about valuations [7:00]


Philipp | 00:01

Hello and welcome everyone to another market commentary from StashAway. With us, of course, our Chief Investment Officer, Freddy Lim. Hey, Freddy, how are you?

Freddy | 00:11 

Hey, Philipp, nice to see you again.

Philipp | 00:13 

Nice to see you as well. And our Deputy Chief Investment Officer, Stephanie, how are you?

Stephanie | 00:18 

I'm good. Hi, Philipp. Hi, everyone.

Philipp | 00:21

Yeah, it's good to see everyone. It's been 2 weeks and a lot has happened. And so we want to wrap it up as quickly as we can - but actually a lot of things happened, as I said. So to start it off, Stephanie and Freddy as well, there was a lot of talk about inflation, right? And we talked about how much of it is priced in with the Fed - they spoke, I think, 2 days after we had our last call together. So maybe you want to give it a little bit of an update, what has happened? What is the market doing at this point in time? Because we've been seeing a lot of volatile trading, right? Like it starts up, like the Dow and the S&P start up like 400 points and end up even, they start falling down, they end up even right? Not so much happening, but a lot of movement during intraday trading. So what's your view on that?

Stephanie | 01:15

Yeah, I guess year-to-date, you're right. I mean, US equities and bonds have been among the worst performing asset classes globally. And that's a lot due to the shift in policy stance of the Fed. If you remembered in December, they basically pivoted, saying that inflation is on their radar again and that triggered quite significant tightening of monetary conditions in the US. Chiefly, if you look at some of the US interest rates, particularly short rates, they have been rising quite a bit. And I think at the beginning of the year, the market was pricing in around 3 to 4 times of Fed hikes. Now, as of the latest today, the market is actually pricing in more than 5 times, actually closer to 5.5 times, 125 basis points of Fed hikes in 2022. So even without the Fed hiking, the market basically has done the tightening already. And that is, of course, due to high inflation, as we've been flagging for the past few months. And this inflation pressure we've seen is expanding like outside of the US as well. If you look at the latest PMI global survey, they ask all these purchasing managers how they feel about inflation pressures, both inputs and wages. And that index actually is sitting at a multi-year high. So we see this kind of persisting for quite a bit. So far in the US, if you look at core inflation, i.e. stripping out energy, most of that core inflation is actually in goods inflation, and that's due to disruption in supply chains like COVID shutdowns, etc. But if you look at the latest non-farm payroll report, which comes out every month in the US, the average hourly wages have also been starting to rise quite quickly in the US - in the past month, they've risen about 5.7% year-on-year, so that is also a multi-year high. So that's kind of what we're seeing in the US. Outside of the US, of course, there is a conflict in Ukraine. And the importance of that is, if there is an economic sanction on Russia, basically, Russia supplies 1/3 of the natural gas in Europe and 1/4 of the oil consumption in Europe. And so far, we've seen oil prices climbing, partly because of market concern on this economic sanction, particularly as Europe is running quite low on inventory. And also we're going through the winter season where demand for natural gas is, of course, naturally quite high. So this is something to watch out for as well. And with no de-escalation in Ukraine, energy prices are quite likely to stay high.

Philipp | 04:07

Freddy, anything to add from your point of view? So do you think the markets are fully pricing in these Fed rate hikes now, which the Fed is trying to combat that inflation number as well with those rate hikes, right?

Freddy | 04:20

Well, as you heard, Stephanie mentioned a couple of reasons why the fundamental core trend of inflation will persist throughout this year. Usually, you start hearing 5.5 times rate hikes of 25 basis point priced in, that sounds like a lot for people historically. But there's a chance that the Fed may just do its first hike with a 0.5% hike rather than a traditional increment. And that's why the market has to price in more, or perhaps even take it to 6 times for this year. And it's actually a good thing, because as long as the market is pricing close to what it should be fully priced in and yet equity markets reaction in all historical context, this is very benign. That means the resilience in the market remains. The growth momentum will remain strong, at least in the US, is much stronger than in the rest of the world. That actually means it's a pretty good news, or close to being a good news for financial markets again. Nonetheless, as Stephanie highlighted again, there are a lot of pressure points in various places, which is why portfolio should still sort of readjust slightly to fine tune your protection against inflation. It's not just like, as you know, we've done a reoptimisation this year, very early on in January, and one of the reason is that, it's to maintain the effectiveness of those inflation protection. What do we mean by that? Because something may benefit from higher inflation, but it's already fully priced in something and probably even overvalued. The effectiveness of the inflation protection instrument may be in doubt going forward, and hence we're making a lot of fine tuning to just maintain that effectiveness. So I'll probably jump ahead Philipp. But it's sort of the angle, all to do with inflation and valuations.

Philipp | 06:28

No, absolutely. I do want to get into that point, but I do want to talk a little bit about that reoptimisation that happened over the last 2 or 3 weeks in people's portfolios of the people listening to us and kind of get a little bit of a background on why we did certain things, right? So I do want to get into this in a second. But before we get there, because I think you just mentioned it already but earnings season in the US is in full swing, right? And we've seen some wild numbers as we go from, Facebook or Meta nowadays, having OK numbers from a revenue perspective. But user growth is stalling, right? Like they're having some issues on that side. But then you're also seeing some of the investment banks having a ridiculously good quarter as well. So what's your point of view on that? And then let's go further than that afterwards and see how our reoptimisation, looking at this, going forward, right?

Stephanie | 07:29

Yeah, I think the US earnings season is in full force. So far, more than half of the US companies have reported numbers. Apart from I guess, we all see Facebook or Meta in the headlines because of the outsized price reaction. But overall, the earnings season has actually been tracking quite well. So if you look at the number of companies that have beat the estimates, it's tracking at 76%. So this is quite in line with historical numbers. In terms of actual EPS growth, companies have been growing at close to 30% this quarter year-on-year, so that's also actually a very, very strong number. Of course, I mean, these are kind of numbers in the rearview and we have to look at guidance. And I think one of the reasons why I mean, Facebook's or Meta's stock price reaction was quite poor was because the guidance was actually very, very poor.

Freddy | 08:21

Yeah, completely. At the aggregate S&P level, for example, one year forward, I'm just looking at the chart right now. The one year forward earnings per share actually is very solid. Earning yield at around 5% points of the index price and in terms of P/E ratio, one year forward, we're close to 20x - it's still not very exaggerated. It's pretty healthy. The recent corrections make things a bit more attractive, but for the StashAway standpoint in terms of valuation, in addition to looking at these metrics, we value these metrics against economic factors and interest rate factors. And from that angle actually, the overall S&P index, it's not cheap. They are actually more expensive than economic trends and values. But it's not exaggerated. Tech is probably more exaggerated and making the bigger correction, right? However, there are places around the world - that's why the reoptimisation, because there are other countries which are relatively undervalued, there are other sectors which are relatively undervalued. So we're making those adjustments to maintain the efficiency of the portfolio.

Philipp | 09:33 

That's great and thank you Freddy for that explanation. Same to you, Stephanie. For today, that's it. But we do have quite a lot of webinars coming up, so I do want to mention them before everyone gets off, and there are some cool ones coming up in February and they're back to back webinars, actually. So if you go to the first one, make sure to also subscribe to the second one. The first one is She Invests by StashAway Personal Finance and Investing Basics. So this is not just for women, it's also for men. It's a great event - we're going to have it in all of our different areas that we are available. So that's on Tuesday, the 15th of February, and that's at 3pm in our MENA region, 6pm for Thailand, 7pm for Singapore, Malaysia, and Hong Kong. So you can join wherever you are. It's going to be super interesting. And then exactly a week later on Tuesday, the 22nd same time in each zone, we have She Invests by StashAway Investing in Your Beliefs with Thematic Investing. So if you want to learn about both of those topics, we look forward to having you. You can sign up in the links in the show notes below, as well as on our website, as well as on Eventbrite and wherever else you interact with StashAway. With that being said, hey, thank you so much, both of you. I'm looking forward to being with you both again in a couple of weeks and anyone else, if you have any questions or comments, please feel free to reach out to us at, as well as in the comment section below the video. Until then we're looking forward to speaking with you soon. Bye-bye.

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