Nordea AM: The week ahead: Dispersion in financials, US/China tensions

Nordea AM: The week ahead: Dispersion in financials, US/China tensions

4 augustus 2020

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By Sébastien Galy, Senior Macro Strategist at Nordea AM 

Dispersion in financials 

One lesson from this earnings season is the great degree of dispersion in financial results amongst banks. US banks have generally done quite well, BNP Paribas’s trading was spectacular while the likes of Societe Generale and HSBC have had a difficult time. Some, such as Societe Generale, have suffered from the structure of the trading books as companies cancelled dividends; others, such as HSBC, have been hit more by worsening loan losses. Different business exposures among the banks – whether they are specializing in equity derviatives like Societe Generale, or have a highly diversified book of business, like JPMorgan – are generating a wide range of outcomes. The banks did profit through derivatives and flow from clear trends, though bouts of volatility also typically are very good for their market-making businesses. As trends in the financial markets become more complex in the next few months, the trading outlook darkens for the sector, a point several banks have made.

Implications

With dispersion set to increase amongst financials and other mature sectors, the role of the portfolio manager and her analysts increases significantly. They allocate amongst countries, sectors and banks studying products, balance sheets, guidance and have discussions with management and often enough engage them on ESG issues. A more complex environment is one of greater analysis as well as patience to wait for value to come through.

US/China tensions

US/China tensions are ratcheting up as we expected given poor polling by the President. The Secretary of State Pompeo seems to suggest sanctions potentially similar to those put on China by India by banning a wide swath of Chinese apps, though Microsoft is pursuing talks to buy TikTok in the US, Canada and Australia. One should note that the Chinese government bans many Western apps such as Facebook and already wanted to reduce foreign content from its network and economy even while encouraging foreign investment. Potential Chinese retaliations will likely hurt US software producers but it is very difficult to replace the likes of Microsoft. A side effect of these tensions is that phase one compliance has likely fallen sharply. Tensions with China will most likely come back and fall away again repeatedly. The market is in large part already reflecting expectations of a Democratic government, where tensions should fall significantly, though both countries will stay in a conflict.

What does it mean?

We are moving through the expected rise of tensions but it does not deter from our expectations of a China-led rebound for Asia Pacific as domestic demand there is far more important than in past decades. The July Caixin China PMI was better than expected, signaling a mild expansion, high frequency data are encouraging, as are regional PMIs in Asia Pacific. Faced with these tensions, the PBOC may again inject more liquidity and ease monetary conditions in the next few weeks as it will take many months to reverse some of the measures taken by this Republican administration. Tensions are positive for the dollar and negative for the EUR as investors tend to buy back the dollar in a period of risk aversion. Equally importantly, portfolio investments into China tend to slow down under tensions like this, which means fewer incoming dollars are sold by the central bank of China (PBoC) to buy euros.

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