Weekly house view | FAANGs' Moment
Although US banking system stress looks to be stabilising and Q1 earnings have been generally better than expected, there are still grounds to be cautious about US banks, including increasing regulatory pressure and competition for deposits as well as the risk of recession. This week, the big US-related tech stocks (FAANG) will be in the spotlight. We believe they are richly priced, leaving them little margin to disappoint. Economic indicators remain consistent with the US economy entering a recession soon. And with some high-profile corporate failures announced and concerns surrounding commercial real estate, we believe accidents will happen. A sharp rise in sovereign CDS spreads shows that it is becoming more expensive to insure against the risk of the US defaulting on its debt. Indeed, spreads are higher than in 2011, when the standoff over the federal debt ceiling was last so intense. For now, the base case is that the US federal government will reach its debt ceiling sometime between July and August... but the US Treasury could run out of cash as soon as early June, depending on tax receipts. The fractious political debate has caused distortions in the Treasuries market, with the one-month T-Bill yield falling sharply despite widespread expectations that the Federal Reserve will raise rates again next week.
European Central Bank officials remain concerned about elevated and sticky core inflation, although the final consumer inflation report for March showed moderation in some underlying metrics for the first time in 21 months. We expect a 25bp hike from the ECB in May, although a 50bp move cannot be completely ruled out. The euro area economy continues to fare relatively better than the US, justifying our preference for European equities. While the Q1 earnings season is more advanced in the US, we expect to see more positive surprises in Europe than in the US, where some companies are opting to reduce prices to stimulate volumes at the expense of profitability. In the UK, core and headline consumer inflation for March came in above expectations. Along with stronger-than-expected wage growth, this has led markets to re-price Bank of England (BoE) rates higher. While our expectation remains that the BoE will be constrained by weak economic growth, we continue to expect a final 25bp hike from the BoE in May.
Chinese GDP growth for Q1 came in at 4.5%, well above expectations, leading us to revise up our 2023 full-year GDP forecast for China to 5.5% from the previous 5.0%. In Chinese equity markets, real estate continues to underperform: while stabilising, we think recovery in the sector could be muted. Elsewhere, the biggest initial public offering since 2018 (Rakuten Bank) suggested there may still be life in the Japanese equity market. And in South America, Chile’s decision to nationalise its lithium mines underlines that this is the age of scarcity.