One of the underpinnings behind the continued increase in share prices is the surge in earnings, even in Europe. Yet there are also some signs that these earnings numbers are being greeted with some skepticism by increasingly cautious investors. Take this news from Morgan Stanley today for instance: they report that one talking point for the Q3 earnings season has been “the disappointing price action even for beats”. They note that there’s increasingly a gap “between the outperformance of earnings beats on the day of results, relative to the underperformance from earnings misses, has been very negatively skewed in a historic context. Weak price action has also been a theme in the 5D post results and may imply that the hurdle rate to positively surprise the market is very high.” Or to put it another way – no one really believes that an earnings surprise is really an earnings surprise if the numbers had been guided lower.
Next up, a repeat from my column for Citywire last week: the really big win for climate change targets – and investors – is India and renewables. Although most observers were ever so slightly underwhelmed by Modi’s ‘net-zero by 2070’ pledge it is worth noting that “India was on-trend to produce a tenth of global emissions by 2030” according to analysts at HSBC. They note that “despite India’s per-capita emissions being less than half the world average, the nation has taken proactive steps to tilt its energy mix towards clean energy. Indeed, 40 per cent of power generation capacity installed this year has come from hydro and renewables. With 1.4 billion people, the opportunity for clean-tech investments is massive.”. And what’s true for India is doubly true for the wider Asian opportunity. The chart below shows the size of the infrastructure funding gap in emerging markets.
Sticking with emerging markets, the chart below is from a recent report by Stone X’s Vincent Deluard. It shows a big trend that is oft-quoted but not always visualized. It shows the coming demographic transition currently underway in China. Whether this is deflationary or inflationary s up for debate but the transformation is astonishing. The source is Gavekal.
Then again as demographic transformations go, the next chart below is equally startling. The equivalent of 40% of the US working age population is now in receipt of either pension payments or disability benefits. Deluard’s key observation is that this group of welfare beneficiaries is insulated from inflationary trends. “ Social Security payments are indexed on the CPI-W index and the 2022 Cost-of-Living Adjustment (COLA) of 5.9% will be the largest in 40 years. Many economists argue that a return to the 70s-style wage-price spirals is impossible because of the deunionization of the US workforce. Granted, few workers have built-in inflation adjustments in their labor contracts, but social security recipients represent 41% of the U.S. workforce, a bigger share than union membership at its peak of 34% in the 60s.” If we’re looking for an inflationary spiral, this one is hiding in plain sight.
My last graphic is for reference – it’s Morgan Stanley’s commodities thermometer. Note what’s at the top: battery commodities and uranium. Hat tip to Ocean Wall.