• Jay Smith

Mixed Messages

So far this week is looking much better than last as we move into earnings season once again. In today's update I want to quickly tackle the mixed messages we are facing from the markets already, and what I expect from the earnings season.

Firstly I want to discuss the latest numbers from the IMF today. In their latest forecast, the IMF predict global GDP to fall by 3% for 2020 before returning to growth in 2021. The model assumes that the majority of lockdown globally take place in Q2, with a ramp back up to normal in Q3. 8% of working days for the year are expected to be lost due to quarantine measures. The combined economies of Germany and Japan; approximately 9 Trillion dollars, is expected to be wiped off global GDP in 2020. That's a big number. But even in this report, the mixed messages have begun. While the impact of this fall is expected to be the largest since the 1930s, the IMF still offered 5.8% global GDP growth for 2021, the highest in 40 years. On balance, I agree with the report. Their estimates for quarantine appear quite accurate based on what we've seen so far, and 8% of lost workdays, although conservative, is also plausible given the number of people able to work remotely in today's modern economy. You can read more about the IMF report here: What's concerning, is that the stock markets currently appear focused on 2021's GDP numbers, not this years. That leads me nicely into earnings season. This week earnings kicked off with $JPM missing revenue and earnings per share, although as many point out, that's expected given the circumstances. EPS was significantly lower ($0.78 vs $2.14 expected) due to the banks efforts to build reserves to weather the potential storms to come this year. JPM also stated that they expect these reserves to grow further next quarter.

Slide displaying Reserve building from JPM Earnings Call

Of course, while banks are to some extent a thermometer on market health, there is no denying that they are one of the sectors best able to handle the recession. What everyone is really waiting to see is the leisure & tourism numbers roll in through Airlines, Hotel chains and Restaurants. We should get our first glimpse at the impact to that sector over the next few days. As we browse the transcripts and reports issued, for most companies the area to study will be the forecasts. Sales have not yet been impacted in a big way, especially in the US. Ultimately, even with the forward guidance offered, we won't understand the true extent of the damage until the further round of earnings next quarter. So, how am I handling this volatile period? To kick things off, I'm still running a heavily hedged portfolio. We are marginally net long currently, but this is something I'm managing quite carefully until we get a clearer picture on the economy. The goal until the data becomes clear, is to continue at a steady level. As a final note I wanted to add a little context outside just the IMF report. Every single major bank around the world is now predicting a global recession this year. Most are predicting it to be similar in severity to 2008, although perhaps with a shorter duration. The western nations are much better prepared with more tools available to stimulate the economy, so emerging markets is where most damage will be done. As the title suggests though, this will present some fantastic opportunities if we are able to spot them early and take advantage. Comments and questions welcomed. Stay safe everyone. :)


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