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  • Belvedere Wealth Management

April 2023 Market Commentary

Updated: Oct 18, 2023

Developed Markets Update

Executive Summary

The earnings season in the United States for the first quarter of this year was a central focus in April as investors and other stakeholders digested the Q1 2023 top-line and bottom-line performance of major companies. This comes as global inflation remains at historic levels despite the continued interest rate policy stance by the Federal Reserve. The big banks in the US were of particular focus given the panic brought about by the collapse of Silicon Valley Bank (SVB) and the eventual spread of this crisis to other banks in America and across Europe. In this light, we believe that the earnings results from the banks and other bellwether companies in the consumer discretionary sectors such as P&G and Coca-Cola would shape investors’ sentiments for the economic health of Uncle Sam in the current fiscal quarter and into the long run for the rest of the year.

Markets Summary

Our monthly market update for the developed market saw the S&P 500 deliver a positive net return of 1.53%, which underperformed our benchmark comparison index, the FTSE 100, which returned 5.12% on a month-to-date basis. In a similar light, the FTSE 100 also delivered a better return of 11.88% on a YTD basis, which was higher than the 9% net return of the S&P 500 on a year-to-date basis.

Our market performance in April saw familiar blue-chip stocks dominate the top gainer’s chart on the S&P 500. Biotech company Eli Lily led the top contributors’ chart with a gain of 15.27%, Meta Platforms, the parent company of Facebook, closed the month in the green of 13.39%, while tech giant Apple rounded up the top five gainers chart with a positive return for last month of 2.90%.

Monthly Top Contributors to S&P 500 Return (April 2023)

Our further review of the developed markets covered an analysis of the monthly performance of the MSCI World Index, which delivered an impressive positive net return of 1.75%. This outperformed the MSCI Emerging Markets’ negative net return of 1.13% over the past month. Similarly, the developed markets surpassed emerging markets by around 700 basis points YTD, with returns of 9.62% and 2.78% respectively. In our 10K analysis, an investment of $10,000 over 10 years would deliver a return of $29,852 for the S&P 500, $14,415 for the FTSE 100, and $23,040 for the MSCI World Index. This shows us that the S&P 500 delivered a greater return on investment (ROI) to investors, compared to the benchmark indices in the developed market.

In our opinion, we believe that the Fed’s reaction to inflation has contributed to the increasing fears of earnings decline, and this would likely cause a decline in the US economy. We, therefore, advise our client against taking positions in cyclical stocks which could mean being defensive, because of the lingering fears of an economic recession this year. Specifically, companies in the information technology sector have more stable business models, the ability to cut costs effectively, and more flexibility to changes in the economic environment, amongst others. In addition, consumer discretionary remains another attractive sector as household spending continues to increase and as inflation in the developed market continues to trickle down. However, we believe that this sector is more favoured in emerging markets like China, which has been boosted by government stimulus, demand rebound from pandemic lockdowns, and a strong job market.

However, we maintain a hold stance on the financial sector as we expect regulatory agencies to take strict measures on the capital liquidity of banks and the increased competition amongst players for customer deposits. In addition, the lending standards from banks have been tightened and we expect this to continue as stakeholders in the industry strive to prevent another bank collapse following the winding down of Silicon Valley Bank and Signature Bank.

In the healthcare sector, biotech giant Pfizer reported that revenue for the first quarter declined due to the lower demand for the company’s Covid-19 vaccine, but the numbers still performed better than Analyst’s expectations. In its release, the company announced first-quarter sales of $18.28 billion, lower than 29% on a year-on-year basis, with its Covid-19-related products contributing $7.1 billion to those sales. We expect the healthcare sector in the developed market to be largely affected by the expected decline in Covid-19-related sales for the rest of the year, as Pfizer and other drug makers such as Johnson & Johnson and Moderna remain less optimistic about an increase in Covid-19-related sales this year, as the world continues to progressively rebound from the pandemic and less reliant on vaccines.

In our valuation metrics comparison of the developed market, the S&P 500 delivered a greater multiple on key ratios, relative to the FTSE 100 stock market index. We recognize the significant outperformance, particularly in the price-to-cash-flow metric (P/CF) which saw the S&P record a multiple of 13.26x while the FTSE 100 saw a multiple of 7.18x. However, the growth rate for the earning per share (EPS) is estimated to print at 10.80x for the FTSE in the next year, greater than the 6.09x forecasted to be reported on the S&P 500. Thus, we believe that it is important for clients to have diversified exposure to both markets to benefit from the upside we anticipate within the next year. This supports our thesis on staying invested to weather the storm of short-term volatility in the market.

Valuation Ratios Comparison (S&P 500 vs FTSE 100)

Earnings Season Takes Central Focus in April 2023

In the last trading week of April 2023, major oil companies Chevron and ExxonMobil announced their first-quarter earnings results, beating expectations amidst the oil price volatility witnessed since the start of the war between Russia and Ukraine in February 2022. However, oil companies are benefitting from the strong demand and cost-cutting measures tied to having a grip on the pandemic lockdowns three years ago.

These impressive numbers from the oil giants were rather still surprising as Brent crude, a global oil benchmark, has been down by around 16% relative to this period last year. However, Chevron and ExxonMobil were able to withstand these declining prices by cutting down spending which helped to strengthen the companies’ margins. Added to these, both companies enjoy a strong cash reserve at around $16 billion and $33 billion for Chevron and Exxon respectively.

Chevron reported a rise in its net profit of 5% to $6.57 billion as the company utilized its oil refining business to cushion the decline in global crude oil prices. Similarly, ExxonMobil saw a historic profit of $11.4 billion, compared to $5.48 billion one year ago. This was partly driven by the company’s increased output from its recently completed offshore developments. The largest contributor to the better-than expected results came from an increase in production growth, as Exxon’s quarter was impacted by new volumes of fuels and crude oil from new offshore developments and refining facilities.

Brent Crude Year-to-Date Return ($)

In our further review of Exxon’s earnings announcement, the company signalled that it would be open to deals that would take its cause to generate a positive return on investment for shareholders. However, the company mentioned its focus on increasing production in the Permian, in Guyana, and the Beaumont refinery expansion, among others, Thus, we can deduce that the company’s focus is in the areas of executing those organic opportunities within the oil and gas industry.

In our analysis, oil prices have been hard hit since the start of the year, as prices have headed south, no thanks to the increasing threats of global inflation and adverse impacts on demand. In the US, the rate hike by the Federal Reserve has helped to slow prices down but some cracks in the economy are still in sight with demand slowing, business investing plunging, and the housing market also struggling. We believe that these aggregated to be a factor that resulted in the economic slowdown in Uncle Sam to 1.1%, well below the Q4 2022 growth of 2.6%.

In other earnings news, beverage giant Coca-Cola reported better-than-expected numbers despite the company’s exposure to increased raw materials and shipping costs. The company was able to cushion the effect of these high costs by increasing prices as a countermeasure. To its gain, the company’s loyal customers were still willing to spend big on the soft drink, as Coca-Cola still saw its sales increase by 3% despite the price surge in its products. However, Coca-Cola’s positive number was an outlier to the consumer staples sector, as other competitors such as Procter and Gamble saw a drop-in demand in its latest earning results. Thus, we affirm that Coca-Cola’s secrets to success lie in its strong economic moat in the soft drink industry, which includes its brand name and consistency in the payment of dividends to shareholders.

Emerging Markets Update

Executive Summary

• The earnings season has presented a combination of results, with leading IT companies reporting Q1 earnings that fell short of expectations, while banking and other financial companies posted strong numbers. Investors, including institutional and retail investors, closely monitored the fourth-quarter results of Adani Group companies during the earnings season. This heightened scrutiny was due to the Hindenburg Research report, which had raised concerns about the debt status of Adani group companies.

• China's official manufacturing purchasing managers' index (PMI) dropped below the 50-point threshold that distinguishes monthly expansion from contraction, declining to 49.2 in April from 51.9 in March, as reported by the National Bureau of Statistics. This is the lowest level recorded since the country's reopening after the pandemic last year. The global economy is expected to experience slower growth due to the implementation of tightened monetary policies. However, we predict that emerging economies will continue to grow, thanks to China's recovery and India's resilient growth. In the last quarter of 2022, India's economy grew by 4.4%, and its Gross Domestic Product (GDP) has increased tenfold since 1990, reaching 3.2 trillion USD by the end of the 2022 fiscal year.

Market Summary

The Emerging market index pulled back by 1.13% for the month of April 2023. The index underperformed compared to the previous month which climbed 3.03%. Developed market equities outperformed emerging markets due to the weaknesses seen in Chinese shares. Despite positive macroeconomic data, including better-than-expected Q1 GDP growth and export performance, China, and Taiwan experienced notable weakness, with China being the worst-performing market in the EM index.

The weak index performance in China was attributed to the poor performance of major companies such as Alibaba Group, Tencent, Baidu, and On the 24th of April, the benchmark Shanghai index closed at 2,928.51 points, a drop of 5.13% percent. This led to around 300 stocks hitting their daily limits, while over 3,000 stocks fell by more than 7 percent.

Investor sentiment towards Taiwan has been weakened as Taiwan Semiconductor Manufacturing, one of the country's main companies, experienced a decline of 0.44%. This is partly due to ongoing tensions with the US and other Western nations over Taiwan. Additionally, weaker growth in other parts of the world has led to a decline in demand for semiconductors, which is one of Taiwan's primary exports.

As of April 30th, 2023, the MSCI Emerging Markets Index had a one-year net return of -6.51%, a five-year annualized return of -1.05%, and a 10-year annualized return of 1.80%. This suggests that an initial investment of $10,000 made 10 years ago, on April 30th, 2013, would have grown to $11,957.

The emerging market is currently facing some short-term challenges such as the Chinese government crackdown, weak external economy, and tensions with the Western countries. Despite these challenges, we believe that the tech giants in this market will continue to move upward in the longer term. Therefore, we remain cautiously optimistic about the prospects of stocks in this market over the next few years.

When comparing valuation metrics between the emerging market and the MSCI world, we observed that the MSCI world had a higher multiple on key ratios. Specifically, the MSCI World had a significantly higher price-to-earnings (P/E) ratio of 18.33x compared to the MSCI Emerging's ratio of 11.13x. This signifies how cheaply priced EM stocks are, and investors may potentially benefit from this value opportunity associated with a lower P/E ratio in EM.

Earnings Season

During the Q1 earnings season, investors, including institutional and retail investors paid close attention to the fourth quarter results of Adani group companies. This is the case following the Hindenburg Research report, which raised doubts about the debt status of Adani group companies at the beginning of Q1.

Why is the result of the Adani group important?

The fourth quarter 2022 results of Adani group companies were significant due to the recent sell-off triggered by allegations made by a US-based short seller. These results would provide a factual and comprehensive overview of the company's financial status and performance.

Therefore, investors would be able to make informed decisions about investing in Adani group companies based on the outcome of these results. The results would offer insights into the company's capacity to manage its financial obligations and debts, which is crucial for restoring investor confidence after the negative publicity caused by the short seller's allegations.

China's Official Manufacturing Purchasing Managers' Index (PMI)

China recorded its fastest expansion in a year in the last quarter, fuelled by consumer spending after the easing of Covid-19-related restrictions. As a result, several major banks have raised their annual growth forecasts to 6% or higher, with the expectation that the economy will exceed Beijing's target of approximately 5% growth.

In a surprising turn of events, China's manufacturing sector experienced a contraction in April, indicating that the country's economic recovery may be facing difficulties in maintaining its momentum. The National Bureau of Statistics revealed that the official manufacturing purchasing managers' index dropped from 51.9 in March to 49.2 in April, which was below the expected average forecast of 51.4 in a Bloomberg survey of economists.

Moreover, the gauge measuring activity in the services and construction sectors outside of manufacturing also saw a decline, with the index dropping to 56.4 in April from 58.2 in March. Economists had expected the index to reach 57. Although the expansion persists it was below analyst expectations.

What does this mean?

Although the US has been a hindrance to China's economic growth, global demand for China's manufactured goods remains strong, including in the US. As a result, China's manufacturing sector has experienced significant growth, contributing over 10% to its GDP in the final quarter of 2022.

The Chinese economy is not heavily reliant on imports of manufactured goods for domestic consumption. Therefore, any decline in China's manufacturing sector would have a significant impact on its economy, as well as the regions that heavily rely on the production of manufactured goods.

Tightened monetary policy is expected to result in slow growth for the global economy. Nevertheless, we anticipate that the growth of economies in the emerging region will be propelled by China's recovery and the resilient growth in India. India’s economic growth reached 4.4 percent in the last quarter of 2022. India's Gross Domestic Product (GDP) has grown tenfold since 1990 and reached 3.2 trillion USD by the end of the fiscal year in 2022.


The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your individual circumstance. Please seek financial advice from a professional before acting on investment decisions.

As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.


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