Breaking news: markets are calming down after banking turmoil as BlackRock think it’s early to relax.
Alibaba reorganization: why is it good for investors?
Fed rate peak close
Breaking news: markets are calming down after banking turmoil as BlackRock think it’s early to relax
▪️ US stocks mostly up on Monday
The S&P 500 gained 0.2%, the Dow Jones 0.6% and the high-tech Nasdaq shed 0.5%. Investors’ fears about the banking sector continue to decline. This is because regulators offer various measures to support the industry. Against this background, even the index of regional banks in America – S & P Regional Banks – rose yesterday by 0.9%.
▪️ Asia-Pacific stocks predominantly up
Asia’s broadest index (excluding Japan) MSCI AC Asia ex Japan Index rose about 0.5% today, South Korea’s Kospi added 0.6%, Singapore’s STI rose 0.4%, Hong Kong’s Hang Seng and China’s Shanghai Composite rose by 0.7% and 0.1% respectively, while the Japanese Nikkei remained virtually unchanged. All – due to the decrease in investors’ fears about the recent turmoil in the banking sector.
▪️ BlackRock: Markets are wrong about US rate cuts
The world’s largest asset manager predicts that the Federal Reserve will continue to raise interest rates. This, according to experts, will happen, even though investors, amid fears of a banking crisis, expect the opposite. BlackRock predicts a phase of slightly softer containment of inflation, but still no interest rate cuts this year. Realize market expectations, according to BlackRock, the Fed will only be able to if there is a more serious banking crisis, which is likely to cause a deep recession.
▪️ Shares of energy companies rise in price against the backdrop of rising oil prices
The industry index – S&P 500 Energy – rose 2.1% yesterday. Growth leaders include Schlumberger (+5%), Hess (+3.6%), Targa Resources (+3.5%), Marathon Petroleum (+3.4%) and Devon Energy (+3.2%). U.S. energy stocks traded higher on Monday as oil prices continued to rise. This was facilitated by the weakening of concerns about the banking crisis, as well as the reduction in oil exports from Iraq. As a result of yesterday’s trading, Brent futures rose 4.1% to $78.12 per barrel, while WTI contracts added 5.1% to $72.81.
▪️ Private equity deals in Asia fell 44% in 2022
In 2022, the total value of transactions in the private equity market in Asia fell to $198 billion, compared with $354 billion a year earlier, according to Bain & Company. The authors of the study attributed the decline in direct investment to a decrease in investors’ willingness to take risks against the backdrop of high inflation and geopolitical tensions. Continued macroeconomic uncertainty, along with rising costs and deteriorating financial performance of companies, will continue to weigh on investors in Asia well into 2023, according to Bain & Company.
Alibaba reorganization: why is it good for investors?
Alibaba shares are up 10% today on news that the world’s largest e-commerce player will split into 6 separate companies.
❓Why this decision was made
This announcement was preceded by the return of head Jack Ma to China. Recall that he disappeared from the public field and was shown only abroad (outside of China) after the Chinese authorities banned the IPO of his fintech ANT Group in 2020. The authorities were unhappy with the fact that large IT corporations have too wide access to the personal data of the population and create the risks of a monopoly in consumer markets. Jack Ma most likely decided to solve this problem, so he came to China, and Alibaba announced the division of business.
❓How the holding will be divided
We have indicated the reorganization process in the table. The public structure of Alibaba Group itself will continue to own the largest asset – Taobao Tmall Commerce Group (this includes Taobao and Tmall marketplaces). It operates in China and generates the main operating income of the holding.
The remaining 5 companies will be private, which may go on IPO in the future. Now is not the best time to enter the primary market. The only one of the 5 segments that consistently earns operating income is the cloud segment. The rest are unprofitable. However, the logistics division and the international e-commerce segment may soon become profitable, since the holding previously distributed a lot of losses to these structures, and now they will become independent. Therefore, in the future they may be attractive for investment.
❓What’s good for Alibaba and its shares
Separation of assets significantly reduces the risk of regulatory interference from the Chinese authorities. He has hung over Alibaba for the past few years and continues to threaten other major Chinese corporations. The arrival of Jack Ma is most likely connected precisely with negotiations with Chinese regulators and other large investors in Alibaba. So far, there are no legal details about the unbundling deal, but the reduction of regulatory risk will have a positive impact on the holding’s shares.
It should be noted that regulators express claims to large corporations not only in China, but also in the US and the EU. Alibaba could become the biggest asset-sharing example of the 21st century, and the practice could be followed by corporations in other countries, including the US. Therefore, the news of Alibaba’s asset split is generally positive for global equity markets.
We confirm our trade idea to buy Alibaba stock and maintain our 12-month target of 120 HKD/share. Growth potential – 29%.
Fed rate peak close
On March 22, the Fed raised the key rate by 25 bp. (up to 4.75-5%). This decision of the regulator was prompted by persistent inflationary risks. At the same time, Fed Chairman Jerome Powell said that the option of keeping the rate unchanged was also considered (against the background of the recent collapse of two American banks). He also hinted that the current promotion could be the last. Meanwhile, the reduction in the Fed’s balance sheet (quantitative tightening, QT) will continue.
❓What the regulator said about banks
The regulator reassured that the US banking system is resilient and recent events are likely to tighten credit conditions for households and businesses. This will put pressure on economic activity, hiring and inflation, which is, in essence, the equivalent of a rate hike.
❓What forecasts does the regulator give
The Fed kept the median rate forecast for 2023 at 5.1% and raised its forecast for 2024 from 4.1% to 4.3%. Expectations for 2025 have not changed – 3.1%. Thus, the regulator is planning another increase of 25 bp. and is not going to cut the rate until the end of this year.
The Fed also lowered its GDP forecast for the current year from +0.5% to +0.4% y / y, while lowering expectations for the unemployment rate from 4.6% to 4.5%. Inflation at the end of 2023 is expected at 3.3% (December forecast: 3.1%), and core inflation at 3.6% (December forecast: 3.5%).
❓How did the markets react
After the meeting, the yield on ten-year US Treasury bonds fell by 0.106 percentage points, dropping to 3.497%. The S&P 500 fell 1.6% and gold rose 1.5% to $1,970 an ounce. We still expect the growth of gold quotes as more and more regulators will be forced to move on to easing monetary policy. This year we can see gold at the level of about $2020-2040 per ounce.
❓What will happen next
The moment has come when the Fed has to simultaneously fight inflation and financial instability, which was partly caused by tightening policy. As recently as a few weeks ago, Jerome Paeull argued strongly that a rate hike above 5.25% might be needed, as economic data pointed to an acceleration in economic growth with persistently high core inflation. However, problems in the banking system have changed the situation. Now the regulator is waiting for the rate to peak at 5.25%. In turn, the market believes that the Fed rate has already reached its peak and there will be no more increases. Moreover, investors are waiting for the first rate cut at the meeting at the end of July.
We believe that the regulator will be able to quickly cope with the difficulties that have arisen in the banking system and the Fed will still bring the rate to 5.25% at the upcoming meeting in May. At the same time, we expect the regulator to start lowering the rate in the second half of 2023. So far, everything is in line with our December market forecasts for 2023.
