Weekly Market Wrap | 24 April 2023

#BankResults #ChinaGrowth #SamsungBing

Topic #1: Major banks release their Q1 results

Major US Banks return comparison in their earnings week (Source: Google Finance)

What happened?

Major US banks continue to report their earnings for the first quarter of 2023, with Bank of America and Bank of New York Mellon both reporting better-than-expected earnings results. 

Bank of America reported an earnings leap of 17.5% to 94 cents per share, while Bank of New York Mellon’s earnings spiked by 30% to $1.12 per share. Goldman Sachs, on the other hand, reported a decline in earnings of 18% to $8.79 per share and Morgan Stanley saw earnings retreat by 15.8% to $1.70 per share.

While net interest income has increased for some banks, average deposits have fallen for Bank of America, Bank of New York Mellon, and Morgan Stanley. Analysts predict that adjusted earnings will rise roughly 5% for Bank of America in fiscal 2023, 7% for Goldman Sachs, and 6% for Morgan Stanley. 

What does it mean for the investors?

Investors have been eagerly awaiting for the bank results to determine if the recent bank runs and unrealized losses in the fixed income portfolios would lead to further worsening of the crisis that the industry is currently facing. 

The results indicate a similar trend that is typically observed when interest rates rise, which is a slowdown in growth. However, the results do not suggest that the banking crisis will worsen, which is a positive development. Governments and central banks globally are collaborating with banks around the world to prevent the situation from deteriorating. If all goes well and the global economy improves, we can anticipate growth to pick up and improve conditions within the banking industry.

Topic #2: China growth beats expectations

Chine YoY growth (Source: Wind, National Bureau of Statistics)

China’s economy saw a sharp rise in the first quarter, with its gross domestic product (GDP) growing by 4.5%, the National Bureau of Statistics reported on Tuesday. This is the highest growth rate since the first quarter of 2022, which was 4.8%. Retail sales increased by 10.6% in March, with online sales of physical goods seeing a significant uptick. Goldman Sachs’ Chief China Economist, Hui Shan, stated that China’s Q1 4.5% growth supports the company’s expectation for the economy to grow by 6% throughout the year.

China’s consumer inflation rate reached an 18-month low earlier in April, which could prompt the People’s Bank of China to marginally lower its one-year loan prime rate if inflation continues to slow down. The government has set a 2023 modest growth target of “around 5%.”

Experts believe that China’s economy is likely to experience another boost from government stimulus later in the year. Helen Zhu, managing director of NF Trinity, predicts that the country will surpass its 5% growth target for Q2 and that policy stimulus will kick in by Q3. Iris Pang, the Chief China Economist at ING, also expects the Chinese government to release additional stimulus to enhance its infrastructure investments and consumption.

It is believed that in order to maintain the 5% growth target for 2023, the government needs to push infrastructure investments, particularly constructing metro lines and increasing the number of 5G towers. Giving stimulus in this uncertain environment can be perceived as calling for inflationary pressure but the Chinese government has to make the difficult decision and prioritize one over the other. 

Topic #3: Samsung replacing Google with Bing?

Alphabet weekly price chart (Source: Google Finance)

Alphabet Inc is facing challenges to its search engine business from Microsoft’s Bing, which has gained popularity due to the integration of artificial intelligence technology. Reports suggest that Samsung Electronics may replace Google with Bing as the default search engine on its devices, which could result in the loss of an estimated $3 billion in annual revenue. 

Google’s dominance in the search market, with a share of over 80%, has been challenged by Microsoft which is making strides in the fast-moving AI race. Moreover, the potential costs of maintaining Google Search’s dominant position compared to AI-powered Bing could also be a cause for concern. Investors are increasingly worried that Google may have become complacent as a monopolist in the search market.

The recent loss of $100 billion in value has further intensified concerns among investors after Alphabet’s new chatbot, Bard, shared inaccurate information in a promotional video and failed to impress investors. The company’s focus on bringing new AI-powered features to Search may help it to maintain its dominant position in the search market.

Furthermore, with Alphabet’s results coming up very soon, investors should also keep a lookout on the advertising revenues as well. The uncertain economic outlook due to the cyclical nature of the advertising market could result in corporates pulling back on advertising spending, which might impact Alphabet’s revenue negatively. Investor confidence will boost if Alphabet is able to beat its estimates in this environment.