Managing Partner
Carlsquare weekly market letter: In China, something big is happening
24 jan 2024
- China is the world’s second largest economy. We all tend to underestimate the importance of what happens in China. They tend to be half a year ahead of the US and Europe. It looks like the Chinese stock market is about to implode. Either the state will allow it, which would be an embarrassment for the Chinese government. Otherwise, we will see a huge injection of capital that will lift the whole stock market.
- The US earnings season is in full swing. It is starting off weaker than usual. If this continues, it could have an impact on the equity market. But we don’t expect a correction before the tech companies start reporting.
It was very telling when the Chinese government stopped publishing statistics on youth unemployment. The overall unemployment rate is reported to be 5 percent. But among young people (16 to 24 years old), it started to skyrocket to 21.3 percent in July 2023. After that, the National Bureau of Statistics stopped publishing the figures.
A new figure was released last week. It was reported that the unemployment rate in December 2023 was 14.9 percent. This figure excludes students and should be compared with 21.3 percent in June, before the NSB stopped publishing such data for five months. The argument is that students concentrate on their studies and should not be included in the statistics. Since the NSB does not provide backward comparisons for the new measure, the statistic is of course very strange, to say the least.
It can still be argued that 14.9% is a high number, so it will be very interesting to follow this trend to see if China can show a turnaround.
As we all know, revolutions tend to start in universities and among young people who don’t feel included in society.
Chinese people are generally good consumers, but with the current economic headwinds, savings rates are rising and spending is slowing. For an economy that is heavily dependent on consumers, this is a behaviour that the government needs to change. One way to do this is to protect savings in the stock market and make people feel richer by getting the market to change its trend from down to up.
The US is leading the stock market. China is the real loser and seems to have more or less decoupled from the other markets. This is, of course, a sign of massive capital outflows from China.
As you can see from the chart above, the Chinese index for the Hong Kong stock market has been on a downward trend since 2015. Over the past month, there have been many reports of the Chinese government injecting liquidity into the market, but to no real effect. To change the current direction, the injections need to be much larger.There are a lot of rumours on this topic in the market now.
We will see how it ends. But if the Hong Kong market falls below 4900, it could trigger a new wave of selling in China. This will be an event that will force an even bigger stimulus. All the new money will eventually be distributed in the global capital market and act as new liquidity.
The S&P 500 continues its winning streak. It needs some consolidation though. Our general theme from last week’s weekly letter is still valid: the US presidential election could make 2024 a good market for the stock market. We expected some weakness ahead of the report season until tech was to be released. Tech is still leading, with Nvidia at the drivers seat.
Netflix reported yesterday after closing and went up 1,3 percent to 534 USD. Todays trading can be telling for the whole market. Tesla will report tonight after closing.
Happy trading!
Q4 2023 reporting season
S&P500 stocks in the US
As of Friday 19 January 2024, around 50 S&P500 companies have reported their fourth quarter results. 62% of S&P companies have reported a positive EPS surprise and 62% have reported a positive revenue surprise. This is weak by historical standards. Typically, around 77-80 percent of companies are better than expected at this point in the reporting season. But again, we will have to wait until the tech companies start reporting before we can say anything meaningful about the season.
For Q4 2023, the earnings decline for S&P500 companies is currently minus 1.7%. Seven out of eleven S&P500 sectors are expected to report lower earnings today compared to 31 December 2023. Utilities, Information Technology and Communication Services are expected to have the highest earnings growth in Q4 2023. Meanwhile, Health Care, Materials and Energy are expected to have the lowest earnings growth in Q4 2023.
After a setback in Q3 2023, the trend of declining net profit margins for S&P500 companies is expected to continue in Q4 2023, falling to an estimated 10.7%.
Source: Factset Earnings Insight
The table below shows 14 major US companies that have reported quarterly results for Q4 2023 so far, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise is 7.4% and the median is 5.0% for twelve reporting companies since 1 January 2024. The post-announcement price movement is minus 0.5% on average and minus 1.0% on median.
Below we have listed the market’s earnings per share expectations for each company and the date of each interim report for the coming week.
Week Ahead
Reports on Wednesday, 24 January: Swedbank, Epiroc, Gjensidige Forsikring, SAP, ASML Holding, AT&T, Tesla, IBM, Abbott Research, Elevance Health, Kimberly-Clark, LAM Research, The Progressive and ServiceNow.
Japan’s December trade balance and January PMI are due at 0.50 and 1.30 CET respectively. Otherwise, Wednesday will be dominated by the January PMIs from France, Germany, United Kingdom and United States. From the UK we also get the CBI industrial trends for January. From the US, the DOE weekly oil inventories report are due. The Bank of Canada also makes an interest rate announcement.
Reports on Thursday, 25 January: Billerud, Essity, Intrum, SEB, Gränges, Sandvik, Atlas Copco, Nokia, Netcompany, Pareto Bank, Tryg, LVMH, Intel, Visa, Blackstone, Comcast, NextEra Energy, TMobile US and Union Pacific.
Statistics Sweden presents the December PPI at 8.00 CET. 45 minutes later we get the French industrial expectations for January. Germany’s IFO index for January is due at 10.00 CET. The ECB makes an interest rate announcement at 14.15 CET. From the United States, we get durable goods orders, wholesale inventories and new home sales for December, Q4 GDP, initial jobless claims and the Kansas City Fed index for January.
Reports on Friday, 26 January: Telia, Volvo, SCA, Autoliv, Hexpol, Elisa, Kone, American Express and Colgare Palmolive.
Statistics Sweden publishes December trade balance, household credit and unemployment at 8.00 CET. Germany contributes with the GfK consumer confidence for February, also at 8.00 CET. The French Household Confidence Indicator for January is due at 8.45 CET. From the United States, we get Private Consumption and Inflation (PCE) and Pending Home Sales, both for December 2023.
Reports on Monday, 29 January: Philips, Ryanair and Nucor.
First up on Monday is Statistics Sweden with Q4 GDP and December Retail Sales at 8.00 CET. From the United States the Dallas Fed index for January is due at 16.30 CET.
Reports on Tuesday, 30 January: Arjo, Tele2, JM, Nordnet, Kesko, Chubb Ltd, Advanced Micro Devices, Alphabet, Caterpillar, Danaher, General Motors, HCA Healthcare, Microsoft, Pfizer, Starbucks, Stryker, United Parcel Services and Whirlpool.
First up in the morning is Japan with December unemployment at 0.30 CET. France’s Q4 GDP is due at 7.30 CET. Sweden’s NIESR releases its barometer indicator for January at 9.00 CET. Shortly after, but before lunch, Q4 GDP figures from Spain, Italy and the eurozone will be released. From the US, we get weekly Redbook retail data, S&P/CS and FHFA house price index for November, JOLTS job openings for December and weekly oil inventories (API).
Disclaimer:
The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.
The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.
