Investment Insights Notes from the Kitchen

Company Earnings Offset Inflation Angst

  • Apr 20, 2022
  • Andrew Gillham

(Cover Source Image: Max Bender)

The recent sell-off in global stocks slowed last week as a mostly positive start to the quarterly corporate earnings season offset concerns over higher inflation. The blue-chip S&P 500 and technology focussed Nasdaq edged 0.5% and 0.6% lower respectively during the Easter holiday shortened week.

LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury group, beat analyst forecasts, reporting first quarter revenue grew 23% to reach €18 billion, driven by strong sales of its Louis Vuitton and Dior branded products. It provided some welcome relief to luxury stocks which have endured a difficult start to 2022 on the back of disrupted supply chains, store closures in Russia and Covid-19 lockdowns in their key Chinese market. LVMH shares fell 11% in the first quarter.

Airline stocks have also been buffeted by challenging conditions, including multi-decade high fuel prices, pilot shortages and Covid disruptions. Against this backdrop, Delta Air Lines reported a net loss of $784 million for the first quarter but it was much lower than expected. The third-largest airline in the US revealed bookings in March were the highest in its history and it plans to fly 84% of its 2019 schedule this quarter. Its upbeat CEO Ed Bastian asserted people are “done investing in their homes and their gardens and want to go see someone else’s garden for a change”. Delta shares climbed 6% on the day.

After building up a 9% stake in Twitter, Elon Musk announced an unsolicited bid on Thursday to take the social media platform private for $43 billion, or $54.20 a share. However, Twitter’s board isn’t taking the hostile approach lightly and responded by launching a poison pill takeover defence to thwart the billionaire.

The strategy, popularised in the 1980s to block corporate raiders, enables companies to issue new stock to other investors at a discounted price if a single investor acquires a 15% stake without board approval. An acrimonious battle lies ahead and Musk, a self-described free speech absolutist, has made a head start in the PR contest, actively drumming up support over the weekend from his 82 million followers on the platform.

Inflation continues to accelerate to new multi-decade highs due to soaring food and energy costs. Consumer prices in the US and UK rose 8.5% and 7.0% respectively from a year earlier in March. Price pressures have been amplified by the conflict in Ukraine and central banks around the world are scrambling to catch up.

The Reserve Bank of New Zealand hiked its official interest rate by half a point to 1.5% last week and the Monetary Authority of Singapore raised the midpoint of its exchange rate policy band for the first time in 12 years.

Higher interest rates and inflation are causing much angst in bond markets. UK government bonds have returned -9.7% year-to-date and Sterling investment grade corporate bonds are 8.3% lower. In an inflationary environment, other defensive asset classes such as property and infrastructure are more appealing.

Brent crude briefly dipped below $100 a barrel before snapping back sharply higher to $113. Saudi Crown Prince Mohammed bin Salman and Vladimir Putin reiterated their commitment to the OPEC+ production pact in a weekend phone call and Libya shut down its largest oil field, adding to supply side constraints.

The impact of higher energy costs has been felt far and wide around the world. Sri Lanka, which has struggled to import fuel due to depleted foreign currency reserves, has suspended payments on its US Dollar denominated government bonds and requested emergency financial assistance from the IMF and neighbouring India. It was due to pay $78 million of interest payments on Monday.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.