Weekly View - Netflop

Incumbent Emmanuel Macron was re-elected to a second term in Sunday’s French presidential elections. The euro has held steady on the news of his victory over his eurosceptic and far-right rival, Marine Le Pen. The June parliamentary elections in France will be critical. Elsewhere, more positive news for markets came in via the euro-area flash composite purchasing managers’ index (PMI), which rose above consensus expectations in April, more than compensating for March’s decline.

The first-quarter reporting season has been more positive on top line beats than expected. Markets are penalising stocks that miss forecasts, especially those of growth companies. In another example of how growth stocks are being punished as soon as their growth reverses, Netflix saw its share price plummet by 36% last week after reporting a contraction in subscribers. In a bad week for equities (despite decent earnings news overall), growth-oriented indexes suffered the most, with the largest US tech giants leading the losses. The overall decline in equities is now in line with that of bonds, with the MSCI All Country World index down 11% year to date (in USD) and US 7-10 year government bonds down 10.6%.

Meanwhile, the inflationary and economic impact of China’s zero covid policy amid the property sector’s continued deterioration sent the MSCI China down by nearly 7% last week. Markets in general are preoccupied by the prospect of tighter monetary policy conditions from global central banks to stem rising prices. Indeed, while the Federal Reserve and the ECB both stepped up their inflation-fighting rhetoric, they failed to prevent market-based inflation expectations from moving higher. US 10-year breakeven rates (the difference in yield between inflation-protected and nominal debt of the same maturity) reached their highest level in at least 20 years at 3%. Markets fear that in order to rein in inflation, the Fed will be forced to raise rates to a level that depresses economic growth. Given that US consumer spending remains strong, this potentially implies multiple 50-basis point interest rate rises. Market-based inflation expectations in Europe (5y-5y inflation swaps) reached their highest levels since 2012. As a result, markets are now expecting the ECB’s quantitative easing programme to conclude in June, followed by a first interest rate hike by September and German Bund yields are nearing the psychological 1% level. We like companies with pricing power and real estate investment trusts as portfolio inflation hedges.