The Ingham Analytics Weekly Letter on Sunday - 21 March 2021

Sunday, 21 March 2021

Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees, taking stock of things that grabbed our attention during the week that was, not too seriously, and with tongue in cheek.

'We Irish are the only people who are nostalgic for the future' US President Joe Biden said during a virtual bilateral meeting with Ireland's prime minister, Taoiseach Micheal Martin, on Wednesday. Other St Patrick's Day messages came from far and wide including a videoed message from The Duke and Duchess of Cambridge, royals who exhibit true class and dignity. In Irish Gaelic Prince William said 'Beannachtai na Feile Padraig oraibh', meaning Happy St Patrick's Day.

To our readers of Irish descent, we send equally warm greetings in this your special week of the year and raise a glass of Jameson's to that!

On the topic of Ireland, it is a little-known fact that the largest aircraft leasing company in the world is based in Dublin - and set to get bigger. You can buy AerCap stock on the NYSE under the ticker symbol AER.

Just over a week ago AerCap neared agreement with General Electric (NYSE:GE) to acquire 100% of GE Capital Aviation Services for $25 billion, largely in shares. This would mean GE owns 46% of the combined company and transfers $34 billion of net assets. With aviation in the doldrums right now Irish eyes are indeed nostalgic for the future!
This week marked the anniversary of the bottoming of the COVID-19 induced global equity markets sell-off. The S&P 500 Index was at an intraday low of 2192 points this week in 2020, a fall of around 35%. Seldom, if ever, have markets delivered such a quick myocardial infarction, all without the typical risk factors such as drinking too much booze or being flabby.

We then went from vertiginous on the downside to price earnings ratio inflation across a narrow range of largely US the stocks, ignited by ultra-cheap monetary and fiscal policies and the cabin fever that came with twiddling your fingers in lockdown.

This week the much-hyped ARK Innovation ETF was down over 20% from mid-February and back to its level of early December. The fund, started in 2014, was relatively pedestrian for several years until igniting follow the bottoming out of equity markets last March.

There are other ETF's that are actively managed and capture an extensive value chain rather than being narrowly exposed to a few one-hit wonders like ARK. Nevertheless, whilst buyer beware always applies in these instances credit to ARK for their openness, willing to share their ideas and modelling, unlike traditional asset managers.   

Markets remained skittish this week following major central bank meetings, including the Federal Reserve. Thursday and Friday were down days in international equities and the bond market continues to send worrying signals about incipient inflation.

The US ten-year Treasury hit 1.74%, its highest since January 2020 and comparing with 0.9% at the start of the year, whilst over in England the UK gilt was at 0.84%, also up sharply from 0.2%. Yield curves have steepened across the board compared with last year.

Bond investors in the US worry that interest rates will climb sooner than anticipated betting that inflation will rise as growth picks up and remain elevated long enough to force the Federal Reserve (despite comments on Wednesday) to tighten monetary policy. Inflation is bad for bonds. Those concerns led to a sharp selloff in the government bond markets and spurred US investors to exit tech and other high-growth stocks.

Much like in South Africa, although with a sharply lower risk profile, there has been a big rise in the supply of Treasury stock as the US government funds trillions of dollars in COVID-19 relief spending. We detect indigestion in the bond market, muting appetite for bonds. The US government has been spending money like a drunken sailor on shore leave.

Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, this week issued a paper entitled 'Why in the World Would You Own Bonds?' Indeed, why in the world. As Mr Dalio says bond markets offer ridiculously low yields that are negative in real terms. The economics of investing, he says, is stupid. We can't disagree.

Fun fact: how long would it take to get back $100 invested in a US long-bond before you even start earning a yield? Even at these levels, 40 years. And that doesn't compensate for inflation. Inflation adjusted you'd wait for 500 years. And that is in the US. Japan, Europe? You'll never get your money back.
This week, Bank of America issued research on how households plan to spend their $1,400 stimulus cheques. It appears the stimulus will be in savings accounts and lower borrowings with about one-third overall planning a trip to the e-shop. Predictably, the higher income groups plan to save the most. High levels of hoarding are also observed in the UK.
On a related subject we issued 'Rate accelerator' this week in which we conclude that whilst only a few months ago the US Federal Reserve was signalling low for long on rates the markets are signalling that low for long is no longer tenable. And as rates tighten so too will priced-for-perfection stocks weaken.

There are signals of disruptive repricing in financial markets. Rising rates in developed countries makes developing markets less attractive and we're already seeing capital outflow.

Foreign holdings of South African rand denominated bonds is now the lowest in several years as sovereign risk is high and even the second highest bond yields of main emerging markets are not enough of an attraction relative to weak economic fundamentals, fiscal stress and political uncertainty and lack of will to reform.
In 'South African bond yields - COVID-19 infected?'' the data we unpack shows the degree to which South African registered commercial banks have gorged on government securities, even as foreigners headed for the hills. This is a COVID-19 phenomenon as banks have hoarded cash and raked in deposits, even as lending has stagnated. The only assets around of any decent size are bonds. But at some point, the music will stop - and government will have few if any investors around with the appetite for their sub-investment grade paper.

And finally, we keep close tabs on the EV value chain, from mining to charging, and this week Volkswagen Group treated the world to its own version of Tesla's 'Battery Day', in this instance 'Power Day' where manganese shoved aside lithium as the chemical element of choice for VW batteries.

VW is developing a unified battery to be used in 80% of the firm's vehicles by 2030. Whether you own a Golf or a Bentley or a Porsche or an Audi they'll all come with the technology. These unified batteries have the same physical dimensions but differ in chemistry and electronic intelligence inside. VW are targeting a battery cell cost reduction of 30% to 50%. The main volume vehicles will use high-manganese chemistry that is lower on nickel and does not use cobalt in the cells.

VW needs 240 GWh worth of batteries annually by 2030 and will come from either VW owned factories or co-owned with partners like Swedish firm Northvolt. By 2023, there will be six factories.

We listened to the two-hour presentation hosted by several VW Group and partner executives and specialists. Wow, this is proper, a deep bench of know-how. Technically demanding topics were handled with elegant simplicity. It was graphically rich and well-choreographed. An EV sceptic would have pause for thought. If you haven't seen it check out the web. Presentation materials are available on the VW site.

This is a topic all on its own but for investors who have been swept up by the EV mania here is a salutary lesson that first to market isn't necessarily the market winner. And VW isn't a Johnny-come-lately to electric, having quietly built its capability and now outselling Tesla by a wide margin and set to accelerate.

VW reported annual results on Tuesday, not coincidentally the day after 'Power day.' Both presentations were delivered in flawless English by the contributors and speaks to how VW sees itself as a truly global business across multiple platforms and uses.

VW has an enormous balance sheet with total assets of EUR185 billion. COVID-19 notwithstanding the Group is comfortably profitable and generates net cash. The auto division spends 7% of revenue on research and development and 6% on capital expenditure. Dividend is maintained for the year.

The VW share price has moved up of late, perhaps belatedly. Tesla, despite the recent decline, has a market cap 3x larger than VW. Go figure that one. Given the strategic and engineering objectives that have been clearly articulated and executed on, underpinned by robust financials, there is much to ponder. Ausgezeichnet, VW.

Thank you all for visiting us.

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