‘Positively surprised’ on US growth: JPMorgan Asset Mgt’s Maharaj | The Pulse 04/23

“The Pulse With Francine Lacqua” is all about conversations with high profile guests in the beating heart of global business, economics, finance and politics. Based in London, we go wherever the story is, bringing you interviews and market-moving scoops. Today’s guest: JPMorgan Asset Management Multi-Asset Solutions Strategist, Thushka Maharaj.
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Newsmakers and Market Movers. This is The Pulse with Francine Lacqua. Good morning, everyone, and welcome to the pulse of Francine Lacqua here in London with the conversations that matter. And here is what’s coming up on today’s program. European earnings season gets underway. Swiss pharma giant Novartis raises its forecast, says sales of its blockbuster drugs outperform. France also exceeds expectations. Well, Apple falls to number three in China smartphone market after iPhone sales plummet 19% and driven private sector activity grows for the first time in ten months, adding to signs that a recovery is slowly taking root in Europe’s biggest economy. April’s euro area PMI data is also out shortly. And then at 930, we’ll have a special deep dive on commodities with just Korea. The chief strategy officer for energy pathways at the Carlyle Group will look at the impact of geopolitical risks on oil and metals and what, of course it all means for inflation. So don’t miss our half hour special. But first thing is first, let’s take a look at the European markets map. Now, a lot of the indication, of course, comes from earnings. We’ve had a couple of sectors that have really beat expectations and stocks on the back of that are actually gaining. If you look at US futures, they’re pretty much flat. Now. There is optimism that a lot of the big tech companies will deliver some pretty strong earnings this week. If you look at some of the other things we’re watching out for, the focus on corporate earnings comes after a rout fueled by geopolitical fears. But also we have had a lot of signals from the Fed that it will be in no rush to lower rates. If you look at the US ten year yield 46189, there is there are quite a lot of auctions as well for treasuries. Euro dollar 12675. Alan Gold holding around 2307. I also want to watch out. So gold actually extending some of the losses after this biggest daily decline in almost two years. That’s again on the back of the Middle East. And the Fed will also talk about oil nudging higher traders again, weighing some of the next steps between Israel and Iran. Now, we’re also getting a little bit of data out of the euro area, Euro area April services, PMI rising to 52.9. The forecast is a touch below that at 51.8. Anything above 50 actually indicates expansion. And then that April manufacturing coming in at 45.6, a touch below expectations. So it’s interesting to see the two halves on whether you’re in services or manufacturing. Now let’s get more on these markets and the path ahead from JPMorgan. MORGAN Multi-Asset Solutions strategist Tushar Maharaj, as always, thank you so much for joining us. Now, I know I think you’re staying quite constructive in these kind of markets. Are you worried that we’re expecting too much from US growth? We are pretty optimistic and constructive, as you say. Francine? Yes, thank you. Thank you for having me on. If we are correct this week, we’re going to see the seventh consecutive quarter of above trend growth in the US. So when we get that data later this weekend, I think two things we’ve realized about the US economy in the last 12 months. One, population growth. Immigration has a price to the top side. We are now seeing immigrants entering the US on the order of 300 K per month, whereas the forecasts were less than half of that about 12 months ago. So that’s been a positive boost to the labor market. And the second is the resilience of the consumer. I would even call it a robust consumer outlook. And so we’ve been positively surprised on the growth front. And for us, that’s a very constructive environment for risk taking. We have a preference for both US equities as well as credit markets. Given this view that recession risk is pretty low and actually moderating further and growth is very robust. So what does that mean on how you’re constructive on portfolio? No, you’re you’re pretty overweight, actually, on credit. How long does that remain for? Well, well, essentially, we in this view, we are of the view that we we’re seeing an extension of the US cycle. We prefer carry, as you mentioned, high quality parts of high yield, the shorter end of of the credit spectrum. What’s been interesting in the last, let’s say 3 to 4 months is even though issuance has picked up in the space, we’ve seen very strong demand. And the second is even as default rates rose at the end of last year, spreads continue to tighten and this is partly a structural point, but also we seeing it play out cyclically where the average credit quality, the median credit quality and high yield is now a much higher quality than it was previously. So it’s it’s on average double B instead of single B, and that’s now helping that market stay resilient. I know there’s been quite a lot of, you know, thoughts on repricing given what we heard from the Fed. I’ve been spending quite a lot of time trying to find our plus, and I know you’ve been spending quite a lot of time looking at the neutral rates. What does that suggest in terms of what the Fed does in 2020 for this year and then beyond? Yeah, Francine, that definitely is a question in motion at this point. We had previously expected the Fed to be delivering between two and three cuts this year, starting in the middle of the year. I’d say that’s now moved to 1 to 2 cuts. And I think, as you say, the question is about the timing of when they start easing, but also where do they end up. And our view is that, yes, they could start cutting rates purely as inflation modulates further, but it’s uncertain and the terminal rate has shifted higher. Markets are now pricing the terminal rate two years forward around 4%. That was previously around three and a half percent. So it has moved up in market terms. The Fed’s long term date at 2.5% still looks too low to us, but it is fair to say that the near term measure has has moved higher. Very hard to put a number on it, but this is very positive for us both in terms of growth but also in terms of the equity market or risk market outlook. And it seems the ECB is really intent on actually cutting possibly most probably on June six, at least that’s what the markets are pricing in. How do you play this divergence between the Fed, the ECB, frankly, the Fed and everyone else? Yeah, good point, Francine. I mean, we’ve talked a lot about the US. It has been exceptional in that economy and we are expecting more divergence between the US and the rest of developed markets, whether that’s the Bank of Canada, whether that’s the ECB, and whether that’s the Bank of England. And yes, we are expecting the ECB to diverge from the from the US Fed. It has happened in the past. We’ve had the precedent in 2017, 2016, 2017 where they moved in actual opposite directions. Right. So it’s not unusual for this to happen. We do expect the ECB to be cutting on the order of 2 to 3 times this year. I think what the market is grappling with today is, yes, we have conviction they’re going to start easing, but how quickly they ease, how fast, what’s the pace of those cuts and where’s the terminal rate I think is in flux. Today’s PMIs gives you a sense that growth data is bottoming out, but it’s still not not consistent with trend growth. There’s a difference between the soft data improving, but the hard data still lagging. And so, yes, we have been playing that divergence theme more in the bond market where we preferring Italian bonds and German bonds over US treasuries rather than playing it through the currency. I mean, it’s the number one, of course, geopolitical event, but frankly, political event is a US election. I know it’s difficult to read China given, you know, the change in possible tariffs coming from the US. Where’s China right now? Is it still deporting deflation or could it actually be or source of comfort of central banks across the world? Are you seeing an uptick in growth that could only become sustained from now on? Yeah, I think we have a positive view on the US economy. We are seeing a bottoming out in the euro area. But I would say in China it’s harder to get constructive at this point. So you will see this divergence in our views where we have quite a, you know, spread out views across different regions. We like Japan for many reasons, cyclical and structural factors, but we struggling to find those catalysts for a strong, fundamental driven rebound in the Chinese equity market. What’s been notable is that while the economic data has been relatively stable, our view on the forward expectations for fiscal stimulus are moderating, and without consumer confidence returning, it’s hard to turn more positive in that in that in that in that market. So yeah, you will see that difference in in expressions of our views where we prefer the US, the euro area and Japan over parts of parts of emerging markets. Do you think earnings will actually drive markets in the next couple of weeks? Yes, Francine, we’ve already seen that in the price action. We’ve had a big rerating. So over 70% of the returns between October and, let’s say the end of March have come from multiple expansion. And we you know, our view is that even at these valuations, it’s now time for earnings to take over. That pattern of driving returns. And earnings up to now have been constructive. They are realising in positive terms, but it’s those forward expectations, those 12 month forward expectations, can they beat these already elevated market consensus views? And I’d say we have started to see some technical wobbles in, in, in equity markets. That to us was a healthy sign. It’s not something that turns us necessarily negative on markets from here, but it’s a well-made point that from here to expect valuations to drive this market, I think that’s harder to see. It’s going to have to come from earnings, earnings delivery and margin margin protection. Essentially, our view is that nominal growth will be robust, you know, over 5 to 6% in the US and that’s going to drive that earnings growth. So as always, thank you so much for joining us. That’s a search card. Maharaj Jp morgan Multi-Asset Solutions strategist Now earnings season I was just discussing the search got really, truly well underway. Let’s bring you a roundup with Joe Easton from our equities team. So, Joe, good morning. What stood out for you? Morning, Francis. We’re going to start with Rana because it’s been a really volatile open to trading in Paris this morning. The headlines initially from their earnings looked really positive, revenue beating expectations that €11.7 billion above the analysts estimate. And electric vehicles still the star of the show. Around 48% of their sales now comes from EVs. But you remember they recently scrapped the IPO of their EV business, citing a slowdown in demand. And when you look deeper into the statement and in the analyst notes, there are still concerns around demand for EVs at the moment. As such, that stock was declining over in Paris a few moments ago, has had a good run into the earnings release as well. So potentially some analysts booking some profits on that down around 1% at the moment. They did gain around 40% from the back end of last year. So as I say, bookings and profits is that rally on that screen there. Not a surprise maybe that it’s coming down very slightly in terms of that one that we’re going to go over to Germany. We got A.S.A.P.. Now, this is all about cloud sales. Cloud software really strong for the company. Revenue in cloud up 25% in the latest quarter. And they say that order backlog is at a record high. So really positive on cloud. The only real negative is wage costs and other expenses coming up, and that is trimming some of that a bit numbers, according to analysts over at Morgan Stanley. But nonetheless, we saw a decent gain out of that stock this morning. The cloud business is now their biggest part of their unit. According to the latest numbers. We brought up a pie chart here. We can say software and software licenses before were a bigger part of the business, but now it’s all about cloud. And as such, we’re driving a stock gain. And that one today, I believe it was up around 4%. There it is, up 4%. The best performing stock on the DAX index this morning that we’re going to go over to fast fashion. Take a look at AB focus. This is, of course, the owner of Primark. And look at that, a 9% jump for the company saying strength across the business. Every region and their market is actually reporting growth and every unit in the company as well. AB Foods also has groceries. It owns Twinings Tea and some of the bread brands as well that you see in shops and also importantly, sugar. Now they say that the agricultural trends in sugar have been better than year this year and that is boosting the sales there. But Primark will take the focus, those sales continuing to drive high and drive the stock higher. That’s the best stock we’ve got in London today. Front Abbey food is up 9% this morning. Joe, thanks so much for the terrific roundup of some of the earnings we had. Bloomberg’s equities reporter Joey said. Now Apple iPhone sales in China also fell 19% during the March quarter. It’s their first or actually their worst decline since COVID struck around 2020, another sign of cooling demand for its flagship product. Now, according to the estimates from Counterpoint Research, Apple has now fallen to third place in China, roughly on par with Huawei. Coming up, we’ll have more on Tesla’s chaotic year next. This is Bloomberg. Now, Novartis shares are up after the Swiss drugmaker raised its forecast for the year as sales of its blockbuster medicines for heart disease and Soliris outpaced expectations. Now, Novartis is pushing for growth after years of successive revamps as the chief executive cuts jobs and spin off units. Now joining us now, Sam Pacelli, our senior pharmaceutical analyst from Bloomberg Intelligence. And finally, thank you for joining us. Finally, it’s working out Novartis. Yeah, it looks like, you know, I mean, the guidance first they beat, but they did that last year to pretty much every quarter they beat and raised. And what we’ve also got is the significant upgrade to guidance for for the full year, especially on the core operating margin, profit margin. And that to us looks like it’s jumped to steps. Normally companies go from high single digits to low double digits. These guys are gone high single digit to low double digits or mid-teens, which is significant. But but this is what mainly on, you know, cost cutting. There’s there’s there’s not a new drug discovery that’s a game changer. This isn’t driven by any of the pipeline. I mean, the pipeline drugs and the drugs that are on the market are doing fine mostly. And but this is we think, the main difference here. What has changed is perhaps their confidence in how they’ll protect these products, the two products that are going off patent. So that’s Promacta, which is a cancer drug and interest there, which is a cardiovascular drug. And these two each quarter that it can protect it or stop a generic coming in, obviously very high margin drugs, it really impacts the operating line. So how’s the Vertis doing, you know, compared to some of their competitors? Yeah. I mean, in terms of pipeline, they’re doing a great job. They’ve been one of the more acquisitive companies which all pharma have to be because they can’t just make these drugs all by themselves. And they have an interesting pipeline of drugs coming up that I think will be driving the growth. The question is, how will that fit with with these two drugs specifically going off patent? How quick can you really fill the gap or will it be a year or two of of treading water before you see the the upswing again? Okay, Sam, thank you so much. Sam facility there, senior pharmaceutical analyst for Bloomberg Intelligence. Now engulfed in turmoil over the last week. Tesla is set to report fourth quarter results later today with shares down some 43% year to date. Elon Musk is making a big bet on the autonomous vehicles with the robotaxi taking priority. Joining us now from Berlin is Bloomberg’s Oliver Crook. Ali, good morning. So there’s so many threads to follow at Tesla. What are investors most focused on? Yeah, so many threads. And even in the last week, other news flow has been absolutely terrific. I mean, listen, in terms of the numbers themselves and what we’re expecting, we already got the first quarter sales. They were down for the first time in four years. So we know that that is not going to look great. We are expecting a revenue decline, which would be the first since the pandemic. All of these are sort of first for Tesla and significant operating profit could be down as much as 40%. And that’s really the sort of numbers story there. But I think what’s more important for investors and for many people is what is this business going to be going forward? There was an answer to that at the beginning of this quarter, and that was a cheaper car. That answer seems to have changed over the last couple of weeks with Elon Musk saying basically we are potentially shelving the cheaper car, we’re actually going to focus all of our energy into the robotaxi, something that apparently there has been a lot of disagreement. And in terms of the strategy within Tesla and we saw some senior executives leave. We obviously saw the job cuts. 10% of the entire workforce is going to be cut. We got that news out just the weekend before last. Apparently, Elon Musk wanted to cut 20%. He had to cancel his trip to India. So you have all of this is absolutely huge volume of flow. But what the investors want to know is what is the focus going to be going forward and what is going to drive the growth? Is it going to be autonomous driving as Elon Musk promises, or does he really need to focus on that Uber car to compete with these Chinese automakers and many of the other EV players that are coming to its launch, basically? Oh, he thinks so much so that all eyes, of course, are on. Exactly. You know, one of the big seven and Tesla will be doing a little bit later. Oliver Crook coming up after months of wrangling, Rishi Sunak’s flagship RAW under the protection Bill is set to become law. So we take a look at what happens next. This is Bloomberg. Welcome back everyone, to the UK Prime Minister Rishi Sunak’s flagship law to deport asylum seekers to Rwanda has cleared its final hurdle in Parliament. The Government says the first flights are planned by July. Well, I’m glad now to be joined by Alvaro with the very latest. I mean, to a lot of people it’s it’s amazing how much political will actually the Prime minister spent on this. Does the deal actually mean that deportations are now a done deal? No. I mean, they are much more likely to days than they were yesterday now that this has passed parliament. But there are still some logistical issues which the government are hoping that they can fix by the time this is due to happen in July. So just some things behind the scenes, getting air lines, getting the staff. And I think then they are expecting some legal challenges, but they’re trying to bolster the legal teams to to make sure that that doesn’t affect it. So why did the prime minister spend so much time on this? Well, he’s struggling in the polls, and we know that immigration is an issue that really matters to the voters that the Conservatives and Labour are fighting over the most. So it’s not actually the top issue for the UK population in general. The economy and health care are sort of about that for the population in general. But in the key seats, the red wall where Boris Johnson won in 2019, immigration and illegal immigration in particular is the burning issue. And with these crossings across the channel rising in recent years, the government has felt it has no choice but to crack down on this in a sort of big policy like this. But as so, what’s the calculation actually of the PM that he’s just not he’s trying to, you know, basically shorten that gap with Labour or are they actually thinking that they can win at the next election? I think that’s exactly right. The right question, because they’re really just at this point, frankly, trying to stem the level of defeat that they suffer. They’re 25 points behind in the polls. They’re losing a lot of their base or a lot of their core voters might just stay at home, losing a lot to Labour, but also to reform the Nigel Farage and right wing party. So they’re just trying to build back a little bit of that, save some seats. But I don’t think privately in the Conservative Party they’re not really expecting a win in the next general election at this stage. So interesting. Our thanks so much, Salvatore there with the very latest on the UK. Coming up, we discuss the oil and energy outlook with top commodities analyst Jeff Currie, now at Carlisle. This is Bloomberg.