Weekly View - Shoppers on strike
The effects of the continued deterioration of the US labour market have started to come through in data, with both industrial and retail activity in the US collapsing in April. The US consumer, previously the champion of the US economy, stopped spending by even more than analysts predicted, with US retail sales falling by over -16% last month. Meanwhile, unemployment in China hit its highest rate ever in February, when the government shut down the economy to contain the coronavirus. Recent data reveal that retail sales in the world’s second largest economy fell by over -20% in the first two months of the year, again by even more than analyst expectations. The UK economy is officially in recession, as bad noises around Brexit negotiations continue and the pound down -2% last week. A reversion to a WTO rules scenario look increasingly likely now that the new Labour leader has a more relaxed stance against a hard Brexit.
The Chinese central bank has made efforts to support its economy through monetary policy. The Fed, its US counterpart, has also lent tremendous support to the US economy. It may, however, ask US banks to forgo dividend payments as a condition. Without further detail on this potential constraint, it could be motivated by the Fed’s more negative economic assessment compared to the initial estimates. US banks fell by -7% last week before chairman Powell declared that the Fed will not move into negative rates territory, sending a sharp rally across US banks. We prefer to invest in companies in unregulated sectors over those in regulated sectors like banks.
As the Q1 earnings season comes to a close, US and European companies’ earnings have declined by -13% and -25% over 2019, respectively. Estimates suggest that US and European earnings could fall by -21% and -25%, respectively, in 2020. The US tech sector’s earnings are expected to grow by +3.1%, while the rest of the market’s contract by -24%. This means that the average US stock is in bear market territory, whereas the average European stock is only -2% below the weighted index. We continue to prefer structural growers in this environment and as large institutional investors like the Norwegian Sovereign Wealth Fund fully exit from certain investments in sectors like mining and utilities, we favour ESG (environmental, social and governance) strategies.