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The economic week ahead: Major US banks have kicked off the Q3 2022 earnings season, high inflation being stickier than expected and the ongoing 20th Party Congress in Beijing. What does this mean for investors? Discover the views of our experts in this Research Weekly.

Key take-aways

• US banks have kicked off the earnings season. The results so far suggest that consumers and businesses are still in good shape.
• The slower-than-expected inflation slowdown makes it impossible for the US Federal Reserve to reduce the pace of rate hikes at its next meeting.
• China: President’s Xi’s report is largely in line with expectations.

US banks: Credit in check, net interest income accelerating

The major US banks have kicked off the Q3 2022 earnings season. Their earnings have beaten expectations as higher interest rates have fed into their business model. Credit costs remain benign, as consumers and businesses seem to be in a better shape than feared. Most major banks seem to be well prepared for a slowdown this time, as capital ratios remain healthy and share buy-backs have been postponed more for regulatory than for economic reasons. This week, many more results will come in from other parts of the economy. The many profit warnings we have seen so far suggest that there are more disappointments in store for us.

US inflation: Steadfast hawkish Federal Reserve

The overarching concern remains sticky inflation and the consequent willingness of the US Federal Reserve (Fed) to increase the federal funds target rate, even at the expense of economic growth. The latest print failed to show the expected improvement – at least not to the extent that would warrant the Fed to slow down its pace of interest-rate hikes. We have therefore adjusted our forecasts and now expect another 75bps hike in November, followed by another 50bps hike in December. This makes a more pronounced slowdown in economic activity inevitable. At a projected 0.5% growth rate in 2023, we are not far away from stagnation.

The big impact of past interest-rate hikes on inflation is still yet to come.

David Kohl, Chief Economist

China: 20th Party Congress offers no relief to economic risks

Despite the risks right ahead of us, we need to keep an eye on the longer-term picture as well. The 20th Party Congress in Beijing gives us plenty of ideas about where China would like to be in five years time. The composition of the new cabinet, which will be unveiled this week, will give us more clues about the policy priorities going forward.

For equity investors, we believe Xi’s report continues to support our thematic preference for environment, mass consumption, and smart manufacturing.

Magdalene Teo, Fixed Income Research Asia & Richard Tang, Equity Research Asia

The main goals of the 20th Party Congress seem to be the continuation of a previous policy stance. President Xi articulated his vision for China, with the primary objective of building China into “basic socialist modernisation” by 2036 and “a strong socialist modern country” by the middle of this century through “highquality development’. There are no clear definitions for the terms he used, but we believe they suggest that China will still focus on economic growth and emphasise sustainable development more than a numerical target. Xi also urged his people to remain vigilant against external risks. Economic development remains a high priority, which is a relief for all. At the same time, national security is now given higher priority – as expected. We believe that there will be more policies on securing energy, goods, and supply chains in the future.

Copper: A story of shortages and surpluses

We will also keep an eye on the energy transition, this time from the perspective of copper demand, which will receive a major boost (see the ‘Number of the week’). The copper market has experienced one of its steepest sell -offs ever this year, with prices down as much as 35%. It reflects the shift from fears of supply shortages due to the war in Ukraine to concerns about demand destruction amid China’s property plunge and rising global recession risks. The mood in the copper market has turned from bullish to bearish. Looking beyond the current cyclical environment, we see four structural forces shaping the copper market during the next two to three decades: the energy transition, China’s demographics, slowing mine supply, and accelerating scrap supply.

Conclusion for investors

In the meantime, we remain engaged in the markets, preferring large caps over small caps. 

As earnings season is still watched closely, leadership in the UK has changed yet again. Meanwhile, investors have been capitulating throughout the year. But is it enough? What do current conditions mean for you? Discover the views of our experts in this Research Weekly.

Key take-aways

• Investors first capitulated on energy price spikes, then in equities, and now in China and in bonds. This creates room for countermoves, but not all of them are likely to last.
• The bottoming out of risk assets is proceeding as expected. We see our more constructive stance on Europe’s handling of the energy crisis confirmed.
• In the UK, following the resignation of Liz Truss, former Chancellor Rishi Sunak is the latest British Prime Minister.
• A Sunak government could introduce more feasible fiscal plans that help restore confidence in the UK’s fiscal policy, stabilising the pound and eventually reducing the risk premium on gilts.

Earlier this year, investors capitulated in commodity markets and bought into the ‘commodity super cycle’. Yet six months later, commodity indices have turned in a ‘death cross’ (a technical signal indicating ‘more downside ahead’).

This is particularly noteworthy for Europe, where the political and media arenas engaged in apocalyptic storytelling all summer long. Yet despite all the doom and gloom ahead of the feared winter of 2023/2024, gas spot prices in Europe are currently well below anything seen so far during the energy crisis. Some of them are even below pre-crisis levels.

There are clearly special factors at work too. Yet it is worthwhile acknowledging that our more constructive view on Europe’s handling of the energy crisis is materialising.

What impact has this had?

After the summer, investors started capitulating in equities too. Bourses panicked over the relentless monetary tightening by leading central banks, triggering another massive selloff in September 2022. Still in capitulation mode, investors then turned to bond markets. Hence, bond yields spiked above the 4% level in the 10-year US Treasury market last week. This marks the highest level since the Great Financial Crisis.

If it were as easy as buying into anything where investors have capitulated, you could leave investing to algorithmic trading altogether.

Christian Gattiker, CFA, CAIA, Head of Research at Julius Baer

And after the weekend, the capitulation moved to China, where foreign investors pulled the plug on their long-term positions in the Middle Kingdom after recent announcements about political leadership. Yet just to be clear: capitulation alone will not do. If it were as easy as buying into anything where investors have capitulated, you could leave investing to algorithmic trading altogether. But as an investor legend put it, “Investing is simple but not easy”.

Hence, these capitulation signals must be taken one by one to assess the odds of a more sizeable countermove. For now, we view the bottoming out in risk asset prices as confirmed. This means stock markets and corporate bonds have further to go. In contrast, we see continuous downside in commodity prices. For China, we do not view the landslide in stock prices as a long-term buying opportunity.

What’s happening in the UK with GBP?

On 20 October 2022, UK Prime Minister Liz Truss resigned after only 45 days in office, the shortest tenure in history. The damage done by the ‘mini budget’, which eroded voters’ and financial markets’ trust in the UK’s fiscal policy, was simply too large. Watering down the tax cuts and replacing Chancellor Kwarteng with Jeremy Hunt, who then called off most of the plan’s measures, did not help Truss to restore the backing from her party. Given the reputational damage, the Conservatives confronted a huge loss in voter support and have fallen far behind the Labour Party.

The task for the next party leader and PM, Rishi Sunak, is huge: restoring confidence in the UK’s fiscal policy and battling high inflation while spurring growth and winning back voters.

The new government will surely be prudent about elevated sensitivity on fiscal policy and not repeat Truss’s mistakes. A Sunak government has particular potential to restore confidence, as he had already competently sailed through the coronavirus crisis as Chancellor. In his past campaign, Sunak promised to expand direct support to households to mitigate the cost-of-living crisis and to cut the VAT on energy bills but not to endeavour on more risky tax-cutting operations as Truss had attempted.

Therefore, we see the potential that Sunak could further calm markets, which would keep the pound more stable going forward. More visibility will be needed for markets to price out the risk premium on UK gilts, but the chances of gilt yields softening further are rising.

In this month’s True Connections Podcast, Alan Hooks is joined by Rutu Buddhdev, Founder and Managing Director of Amara Property, a luxury home builder in North London. In this episode, Rutu discusses creating more sustainable homes, welcoming women into the industry, and the principles she stands by as a leader.

Listen to the podcast

Click on the player below to hear Alan and Rutu’s conversation:

Rutu Buddhdev grew up in an entrepreneurial household. Overhearing her parent’s business discussions from an early age and seeing the success that could come from sheer perseverance and grit was a huge source of inspiration, she explains.

I take my inspiration from looking back into my family and seeing how far they’ve come.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Thanks to this early entrepreneurial itch, Rutu went on to start her business, Amara Property, in 2011. Offering the full life cycle of property development, the business has since grown and now employs over 10 people. Rutu hopes the company will one day be the largest luxury developer in North London. By focusing in on one area, Rutu believes the business creates more successful builds, as none of the sites are more than 45 minutes away from where her team are based.

We have such a strong connection to our homes, to the spaces we live in with our loved ones.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Jack of all trades

Back when she started the business in 2011, Rutu jokes that she was a ‘jack of all trades and master of none’. Over the years she learned her passion lies in developing the overall growth strategy of the business. She explains that this comes down to finding the right people to take the business in the right direction. Despite leading the company, Rutu believes in granting employees autonomy when it comes to decisions, allowing each team member to be their own boss.

I think it’s so important to let each team member be their own boss.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Pausing for reflection

When reflecting on some of the toughest challenges she has faced as an entrepreneur, Rutu unsurprisingly mentions the pandemic, of which supply chain shortages were one of many disruptions to business.

A positive side effect of the pandemic, however, was the opportunity to reflect and reevaluate. Viewing most challenges as valuable lessons, Rutu explains that the pandemic allowed Amara Property to reinspect their practices as a business and better align themselves with what clients felt was most important. Amara Property began to design homes with an emphasis on creating space for families to spend time with one another, something even more important to people post-pandemic.

As the pandemic went on people started re-evaluating. Family, home, happiness – these were the things that mattered the most.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Despite ongoing turbulence both politically and economically, Rutu explains that culturally people continue to place importance on property thanks to the strong connection each of us have to our homes.

Welcoming women into the industry

It is hardly surprising that in all her years in the property development industry Rutu has only ever seen one woman on a construction site.

There are very few women in the industry.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Rutu is passionate about encouraging more women to enter this traditionally male-dominated sector. Especially with the skills shortage and increased demand for houses in the UK, Rutu believes the industry is missing a trick by ignoring the female workforce.

Despite larger companies trying to address this imbalance through apprenticeship programmes, Rutu insists more must be done to initiate substantial change so women see more female role models within the sector.

We find that when we have a house we are selling, its always a woman that ends up making the decision.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Interestingly, although outnumbered within the industry, Rutu has noticed that women commonly make the final decision when it comes to home-buying. Rutu believes that being a female founder therefore gives Amara Property a slight advantage when it comes to making their homes desirable to that key clientele.

Homes for good

In order to reduce the company’s carbon footprint, Amara Property implements sustainable practices not only into the building process but also the product itself. This goes all the way from ensuring structures are airtight to installing solar panels, so energy used is collected from a sustainable source.

The real value of the sustainable measures comes into play over the life of a home.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Rutu is keen to fill her supply chain with quality, longer-lasting products to ensure that every Amara development incorporates sustainable measures in one way or another.  

Keeping goals front of mind

Rutu explains that whether completing a site or a sale, Amara are a goal-oriented team. Therefore, keeping goals front of mind and teamwork are key to success. Rutu encourages her team to get to know one another and spend time together outside of the work environment. Not only does this establish a strong company culture, she explains it also fosters deeper understanding and cohesion amongst the team when working on projects.

The reality is, for growth to be achieved, there is no shortcut.

Rutu Buddhdev, Founder and Managing Director of Amara Property

Rutu’s advice for other entrepreneurs is to stick to your principles. She admits that as an entrepreneur your business can be all-consuming. Therefore, it is important that entrepreneurs create businesses in line with the principles they live by. For Rutu these include hard work, integrity, trust, and discipline.