Morning Note: Market news, thoughts on Emerging Markets, and an update from Delta Air Lines.
Market News
The PBOC unexpectedly kept its key medium-term lending facility rate unchanged at 2.5% while also pumping more cash into the financial system, defying expectations of a cut. Given the economy needs more support, the central bank will probably lower the key rate by 10bps and reserve requirement ratio by 25bps this quarter, Bloomberg Economics said.
A group of former US officials arrived in Taiwan to meet outgoing President Tsai Ing-wen following the weekend’s pivotal election that handed VP Lai Ching-te a win. Lai — branded an “instigator of war” by Beijing — pledged to keep the peace, while China downplayed the results, which observers called a failure of Xi Jinping’s strategy.
This morning in Asia, markets were generally little changed: Hang Seng (-0.3%); Shanghai Composite (+0.2%). Once again, the exception was Japan which continued its strong start to the year: Nikkei 225 (+0.9%). The FTSE 100 is currently trading 0.1% lower at 7,618. The price of UK homes coming to market jumped 1.3% in January, the most in eight months, Rightmove said. Sterling currently trades at $1.2754 and €1.1637.
Treasury two-year yields dropped to the lowest level since May as a surprise decline in producer prices reinforced bets on Federal Reserve rate cuts this year. The 10-year Treasury currently yields 3.95%. Traders are pricing in an about 80% chance of a Fed reduction in March — up from a little over 50% a week ago. Friday’s economic data came a day after a hotter-than-estimated reading on consumer prices — underscoring the bumpy path officials face in bringing inflation to the 2% target. Gold trades at $2,054 an ounce.
The global wheat surplus is set to slide into a 10m ton-deficit, with demand seen surpassing 794m tons for the 2023-24 season, led by China, BMI said. It expects prices to average $6.33 a bushel in 2024. The price of uranium passed the $100/pound threshold following a production warning from Kazatomprom, citing difficulties with sourcing sulphuric acid needed for uranium production. Oil trades at $78.20 a barrel.
Source: Bloomberg
Asset View – Emerging Markets
After outperforming UK equities and keeping pace with the S&P 500 in the 12 months after the pandemic, Emerging Markets (EM) equities have lagged their Developed Markets counterparts. The exceptional strength of the US dollar is one headwind that can explain this. Another has been weakness in the Chinese market driven by capital flight from the country due to increasing geopolitical tensions with the West. As the largest constituent in the index, this has weighed on broader performance. However, many markets such as India and Latin America are performing strongly.
EM are feeling the pressure from the same issues that are affecting equity markets all around the world. However, we feel that significant valuation discounts to, in particular, US equities, coupled with the greater growth opportunities over time mean investors should look through the current uncertainty and maintain a meaningful allocation to EM.
-------------------
Ashmore Group, the specialist Emerging Markets (EM) asset manager, has this morning released an update in respect of the quarter ended 31 December 2023. The figures were slightly market expectations and in response the shares are little changed in early trading.
During the period, the group’s assets under management (AUM) increased by 4% to $54.0bn, comprising positive investment performance of $3.9bn and net outflows of $1.6bn.
The group’s net outflows reduced from prior quarters as, while there continues to be some risk aversion among certain investors, clients responded to the improving global macro environment. Equities delivered a net inflow (AUM up 8% to $6.5bn) and, within the fixed income themes, the outflows were broadly spread with no significant patterns.
The Federal Reserve’s signalling of the end of its rate hiking cycle and continued economic stability in many emerging countries delivered strong performance across EM over the three months. Fixed income indices rose by 6% to 9% and equities increased by 8%, and most of Ashmore’s strategies outperformed over the quarter. Ashmore’s longer-term relative performance (over one, three, and five years) remains consistent.
Looking forward, the company believes EM will continue to enjoy superior economic growth, effective monetary policies, and the benefits of a weaker US dollar as the Fed reaches the end of its tightening cycle. These factors, along with attractive absolute and relative valuations, will support EM asset prices in 2024, leading to outperformance and higher allocations from investors who currently have significantly underweight allocations to EM.
Source: Bloomberg
Company News
On Friday lunchtime, Delta Air Lines released its 2023 results which highlighted industry-leading operational and financial performance. However, the guidance for 2024 disappointed the market and the shares were marked down 7% in response.
Delta is one of the world’s largest global carriers with a fleet of around 1,300 aircraft that are varied in size and capabilities, providing flexibility to adjust aircraft to the network. The group has acquired new and more fuel-efficient aircraft with increased premium seating to replace older aircraft and has reduced fleet complexity with fewer fleet types. In the latest quarter, the group took delivery of 15 aircraft, bringing full-year deliveries to 43. With an industry-leading global network, Delta and the Delta Connection carriers offer service to more than 280 destinations on six continents.
During the year, operating revenue grew 20% to a record $54.7bn. Premium and non-ticket revenue has reached 55% of total revenue, explaining Delta’s differentiated financial results from the industry.
In the final quarter, operating revenue grew by 11% to $13.7bn, slightly above the market forecast. The group enjoyed the highest holiday travel volumes in its history. Strong demand through the quarter drove domestic total passenger revenue up 7%, with international passenger revenue up 25%. Premium product revenue grew 15%.
Adjusted non-fuel unit costs were $35.8bn in the year, with adjusted fuel expense down 3% to $11.1bn and fuel efficiency up 1.4%. The full-year operating margin grew by four percentage points to 11.6%, still well below the pre-pandemic level. Adjusted diluted EPS was 6.25c, at the top end of the group’s 600c-625c guidance range. In Q4, EPS was 1.28c, at the top end of the company guidance of 105c-130c and versus consensus of 117c.
Free cash flow was $2.0bn and allowed the company to further pay down its borrowing, with net debt to EBITDAR falling from 5x to 3x. The group has $6.8bn of liquidity. The weighted average interest rate is 4.6%, with 90% fixed rate debt and 10% variable rate debt.
Demand for air travel remains strong – recent corporate survey results indicate that 93% of companies surveyed expect their travel volumes to increase sequentially or stay the same in the March quarter and into 2024. The group expects Q1 revenue growth of 3%-6% to a record level on improving domestic environment and continued strength in international demand. Unit revenues are expected to be flat to down 3%. This includes a headwind from higher international mix, the normalisation of travel credit utilisation, and the lapping a competitor’s operational challenges in the year ago period. EPS of 25c-50c is expected.
For the full year, however, the group has lowered its guidance for EPS to $6-$7 versus previous guidance of ‘more than $7’. The group’s prudence is explained by the amount of uncertainty that continues to exist within the supply chain, in the maintenance arena, and within the economic outlook. Free cash flow is expected to be $3bn-$4bn.
Source: Bloomberg