Market Overview

13 October 2021

Growth and Luxury Stocks May Benefit from High Inflation

The second half of October on Wall Street began with a moderate decline in average stock prices, but the S&P 500 broad market index was kept within the same range mostly above the 4,270-4,300 support area. Inflation worries were noticeable ahead of a fresh U.S. consumer price index (CPI) which will be released today, although it has already become clear that the Federal Reserve (Fed) has a tendency to focus more attention on job targets and has a more "wait and see" kind of approach when it comes to growing inflation. 

Most investors are well aware of the matter and therefore are unlikely to receive any unambiguous signals about the tapering schedule from the Fed’s Minutes, which will be released later in the evening. For this reason, fund managers and private traders seem to be trying to rely more on assets that may even benefit from rising inflation, or at least the sectors, which may not suffer too much from sharp consumer price jumps. 

Financials could be the first and foremost beneficiaries as the banks are holding massive volumes of Treasury bonds, and the higher inflation expectations are, the larger the yields are on both the U.S. and global bond markets. However, it is obvious that the shares of the five largest American banks will be subject to an additional "stress-test" by quarterly reports over the next few days. JP Morgan & Chase should be the first to react to its Q3 report today, followed by the Bank of America, Citigroup and Morgan Stanley tomorrow, with Goldman Sachs making a release on Friday. 

Even the scenario of a probably slight decrease in revenue compared to the previous couple of quarters has already been created as a notion that the overall uptrend for the financial sector could be maintained, but higher volatility is possible at least as a first reaction. Meanwhile, the next reports of most representatives of the retail sector, which also does not seem to care too much about inflation, are still far away. And if some of them are trading at a significant discount compared to summer peaks, this may gradually attract more new investors to their shares even now, without waiting for additional justifications from newswires. 

Such an attitude could be analysed, for example, by the shares of Nike. The popular manufacturer of sportswear and shoes received a heavy blow of paradoxical sales-off in response to more than successful revenue figures published on September 23. Even all-time record $1.16 profits per share was not able to stop the crowd’s irrational behaviour which was embarrassed by the company's management’s remarks that problems in the supply chains had begun to have an impact on future financial results. 

Despite very strong results in the previous period, according to the CEO, Nike simply will not have time to meet the increased demand for its products by Thanksgiving and Christmas, which may easily lead to a shortage of total revenue. Lockdown restrictions at factories in Vietnam, where Nike produces approximately 50% of its shoes and 30% of clothing, also lead to an increase in the delivery time of goods. However, excessive demand, even if the manufacturer cannot meet it in a given time, could hardly be considered to be a real negative for business. It will almost certainly have a positive effect on new orders in the very near future, as consumers become more active, if not by the holidays, then afterwards. 

Again, wide and growing channels of direct and digital sales will additionally help the company to keep its marginality at a high level. Digital sales of the Nike brand increased by 29% year-on-year. The retailer heavily invests in its own website and a set of mobile applications. The development of this direction was especially rapid during quarantine restrictions, when many customers decided to shop without leaving home, but many of them continue to use this comfortable experience even when they have the offline shopping option. 

Nike's gross profit margin increased by 170 basis points, to 46.5%, compared to the same period of 2020, due to increased efforts in the direction of direct sales to customers, higher sales volume at full price, plus favourable changes in foreign exchange rates. At the end of September, Nike announced that it had completed the last quarter with inventories of $6.7 billion, which is almost the same as the previous year and slightly lower compared to the previous quarter ($6.9 billion). The company said its inventory is now on its way to warehouses. 

Against all this commotion, it may look more like a casual negligence on the part of most of the market community that Nike shares were trading at some point in early October even below $145 per share, which meant an almost 17% discount compared to August peaks of about $175. This strange and probably temporary situation was partly fuelled by the summarised downward correction on American stock exchanges, but things are beginning to improve, leading to Nike ending trading on Tuesday, October 12, above $153 per share. However, the company still looks markedly undervalued according to many experts, while the average consensus of Wall Street forecasts expects Nike to at least reach levels above $170 again before the end of the year. 

Similar processes may occur with the luxury segment of the retail market, as it may sometimes receive even a strong boost from inflationary expectations, as brand lovers try to make expensive purchases in advance. For example, the famous French luxury goods maker LVMH (Louis Vuitton Moet Hennessy) added 1.95% after the announcement today that sales of its fashion and leather goods division rose strongly in the third quarter. It helped LVMH shares to soar, although overall revenue growth in Asia and the U.S. became smaller after a brilliant performance in the first half of the year.

"A lot of growth stocks, luxury, IT, all these have been the most affected by the recent rotation in favour of value," Roland Kaloyan, head of European equity strategy at Societe Generale remarked. "My view is that fundamentals for growth stocks remain strong, and the recent rotation is an opportunity to build a position". He added, however, that Q3 earning "will be the moment of truth for margin and pricing power stories."

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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