Weekly Market Wrap | 27 January 2023

Topic #1: China’s Lunar New Year Rebound

Data out on Wednesday showed that Chinese families celebrated the Lunar New Year in high style.

What does this mean?

While the lifting of Covid restrictions alone will not immediately revive China’s economy, recent indicators suggest that the country is beginning to recover. For example, during the Lunar New Year holiday, a significant number of Chinese citizens traveled by various means to be with their families, and box office and hotel bookings exceeded pre-pandemic levels. These positive developments indicate that the economy may bounce back faster than anticipated, after experiencing its second-lowest growth rate in decades last year.

Why should I care?

The recent increase in outbound travel and overseas hotel stays by Chinese holidaymakers has led experts to believe that China’s pent-up demand could drive a global economic recovery. China’s strong financial position, with Chinese households adding a massive $2.6 trillion to their savings accounts last year, suggests that the country has the means to fuel this recovery. This positive sentiment in China is also reflected in various markets, as assets such as shares in mining companies and stock markets in popular tourist destinations have seen an upward trend since restrictions have been lifted. Additionally, research from Bank of America shows that investors have poured a record-breaking $12.7 billion into emerging-market debt and equity funds in a single week earlier this month.

Topic #2: Will Tech Lead The Way to an earnings recession?

This chart illustrates the projected decline in quarterly earnings for US tech stocks listed on the S&P 500. The forecasted 9.2% drop in the fourth quarter of 2022 is the steepest decline since 2016, and it’s worth noting that just three months ago, analysts were projecting flat profits for the same period, avoiding the classification of an “earnings recession”. 

Last week, we discussed big tech layoffs amid recession fears. This week, it appears that the decline in profits is the next challenge for US tech stocks. Investors received a glimpse of the expected decline in earnings when Microsoft, a leading tech company, reported a 12% decrease in profits for the last quarter compared to the previous year. The decline in profits was partly due to the $1.2 billion cost from the company’s decision to lay off 10,000 employees, but even without that factor, there was still a 7% decrease in earnings. The CEO of Microsoft had previously acknowledged that the tech industry is experiencing a slowdown following the increased spending during the pandemic.

The overall performance of the S&P 500 index will be significantly influenced by the tech sector’s performance during this earnings season, as the information technology sector represents over 25% of the index. Therefore, the trajectory of the S&P 500 could continue to be negative if the results of other major tech companies such as Meta, Apple, and Amazon mirror those of Microsoft.

Topic #3: LVMH’s stock surprises investors

LVMH Moët Hennessy Louis Vuitton, the luxury goods seller, has consistently performed well in the stock market over the past decade, delivering a significant 500% return for investors. On Thursday, the world’s leading luxury goods group, recorded revenue of €79.2 billion in 2022 and profit from recurring operations of €21.1 billion, both up 23%. 

The company currently has strong prospects, such as China, which accounts for 15% of its sales, has relaxed its Covid-19 restrictions, releasing pent-up consumer and travel demand. Analysts at Goldman Sachs predict that this, along with other factors, will drive growth in LVMH’s biggest product line, fashion and leather, forecasting an 11.5% increase in 2023. Additionally, LVMH’s leadership in the luxury market gives it significant pricing power and its scale of production allows for low costs and high profit margins. 

Is it just LVMH, or the luxury goods industry?

Many of the world’s best-known luxury brands have been able to raise prices steadily through the pandemic. Shoppers, many of whom had saved up money as they stayed indoors during lockdowns and other restrictions, have let loose. High-end shoppers have also proven more resilient to the steep inflation that Covid-19 restrictions gave way to. However, the industry does face some risks, such as the potential for travel disruptions and store closures if there is another resurgence of Covid-19. 

Top Earnings at a Glance:

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)4,0702.32%7.60%6.44%
Nasdaq 100 (US Tech Stocks)12,1664.42%13.93%12%
CSI-300 (Chinese Stocks)4,1812.54%8.01%7.55%
Bitcoin (in USD)23,0530.58%39.38%38.83%

Source: Google Finance, as of 28th January, 2023

Previous articleWeekly Market Wrap | 20 January 2023
Next articleBracing for uncertainty? Key trends to lookout for in 2023