How Will Global Slowdown Impact Investors in October?

Oct 26, 2015

Morgan Stanley reported lower-than-expected earnings of $0.48 per share

Morgan Stanley (MS) reported net revenue of $7.8 billion for the third quarter ended September 30, 2015, as against $8.9 billion a year ago. For the current quarter, net income stood at $1.0 billion, or $0.48 per diluted share, compared with net income of $1.7 billion, or $0.83 per diluted share, for the same period a year ago. With reported earnings much below the consensus estimate of $0.64, the stock has lost 4.8% as of October 19. It is down by 5.1% from a year ago as of October 19.

James Gorman, the chair and chief executive officer of Morgan Stanley, said in a press release, “The volatility in global markets in the third quarter led to a difficult environment, impacting in particular our Fixed Income business and our Asia Merchant Banking business. The Firm benefited from the stability of the Wealth Management business, our ongoing leadership in Equities and the continued strength of our Investment Banking franchise. Our business model provides a steady foundation for the Firm as we navigate these challenging markets and focus intensely on addressing areas of underperformance.”

Fluctuating currency levels, the slowdown, and falling commodity prices have adversely impacted the broader market. The Financial Select Sector SPDR ETF has lost 4.9% year-to-date as of October 19. After the release of earnings, financial stock BancorpSouth has gained 0.04%, whereas M&T Bank, BBCN Bancorp, and Zions Bancorporation have lost 3.1%, 0.26%, and 0.89% as of October 19. The stock earnings have fallen short of Wall Street estimates.

With the stronger dollar, IBM reported earnings at $3.34 per share

Also, with the gloomy global climate and the stronger dollar, IBM reported a revenue below the consensus estimate. The stock has lost more than 5.0% after reporting its earnings at $3.34 per share as of October 19. IBM has lost 8.6%, whereas the Technology Select Sector SPDR ETF was up 8.9% from a year ago.

Equity earnings are likely to be adversely impacted by the sluggish economic climate in the third quarter of 2015. The strong dollar, weakening demand conditions, and the slowdown in global markets are influencing earnings this quarter.

Next, we’ll look at some housing numbers that were released in the US.

 

Housing market index rose by three points to 64 in October

According to the National Association of Home Builders (or NAHB), the housing market index (or HMI) rose to 64 in October as compared to 61 in September 2015. With a rise in homebuilder optimism, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF have increased 0.26% and 0.59% as of October 16. The ETF jumped 15.5% and 18.2% from a year ago.

“The fact that builder confidence has held in the 60s since June is proof that the single-family housing market is making lasting gains as more serious buyers come forward,” said NAHB chair Tom Woods, a homebuilder from Blue Springs, Missouri, in a press release. “However, our members continue to tell us there are still pockets of softness in some markets across the nation, and that they face challenges regarding the availability of lots and labor.”

Future expectations rose by seven points to 75 in October

The HMI is one of the best predictors of future housing activity. It is based on responses from homebuilders, who have the best pulse on current and future homebuilding trends. An increase in a component that gauges sales expectations in the next six months to 75 from 68 index points implies that the builders are hopeful about future housing demand. Unless they are confident about an uptick, they will not commit new funds for construction.

Buyer traffic remained unchanged at 47

Also, the current sales conditions component has risen to 70 index points in October while buyer traffic has remained unchanged at 47, which is still below the neutral level of 50. This suggests that there isn’t an uptick in walk-ins for new home sales by potential customers. Homebuilder stocks such as D.R. Horton, Lennar, Home Depot, and NVR were up 33.7%, 16.8%, 30.2%, and 28.8%, respectively, over the past year as of October 16.

The housing market is set to keep improving with 30-year floating mortgage rates staying low at 4.0%. With better job prospects, there may be a surge in home sales.

Now, let’s look at how Russia’s economic growth is shaping up.

 

Russia GDP fell in September

According to the Federal Service of State Statistics, the gross domestic product (or GDP) of Russia has fallen 4.3% for the third quarter, slowing to -3.8% in September. GDP fell 4.6% in August 2015. With shrinking GDP, Russia-focused Market Vectors Russia ETF and the Direxion Daily Russia Bull 3X ETF were down 20.6% and 71.6%, respectively, from a year ago as of October 19.

Decreasing exports led to a fall in GDP

Export trade contributes about 28.6% of Russia’s GDP. Russia is a major exporter of energy products. Exports of crude oil, petroleum, and natural gas account for about 68% of total export revenue. Crude prices have fallen about 13% since the beginning of the year. Falling oil prices have adversely impacted exports, which have fallen about 39.0% in August 2015 from a year ago. Also, sanctions from the US and Western nations are still in place, which has further impacted Russia’s economic growth.

Energy stocks such as Rosneft, Gazprom, LUKOIL, and Surgutneftegas have fallen 38.7%, 34.8%, 23.9%, and 11.4%, respectively, over the past year as of October 19.

Russia’s retail sales fell to 10.4% in September

Russia’s retail sales continued their declining spree. Retail sales decreased 10.4% year-over-year in September as against a drop of 9.1% in August 2015. The 9.7% decline in sales of food and tobacco and in non-food items by 10.9% were the primary factors in the decline.

Declining crude prices and sanctions from the West are adversely impacting the Russian economy. Rising inflation and the depreciating ruble are further deteriorating consumer sentiment. Policymakers in Russia need to implement various monetary and fiscal policies to help the economy regain strength.

Like Russia, Brazil is also faced with high inflation and sluggishness.

 

Brazilian business confidence fell to 35.0 in October

According to the Confederacao Nacional da Industria, business confidence in Brazil dropped by 0.7 points to 35 in October from 35.7 in September 2015. With declining business sentiment, the Brazil-focused iShares MSCI Brazil Capped and the Direxion Daily Brazil Bull 3X ETF fell 43.5% and 87.1%, respectively, from a year ago as of October 19.

Brazil is one of the worst-performing economies in emerging markets. Stocks such as Itaú Unibanco Holding, Petrobras, and Banco Santander are down 48.7%, 62.2%, and 41.6%, respectively, over the past year as of October 19.

It is not a good sign for the Brazilian economy that the business confidence index has been below the neutral level for a long time. Brazil is already struggling with high inflation and a depreciating currency.

Falling industrial commodity prices due to oversupply and lack of demand are dragging the metals and mining stocks down. Stocks such as Companhia Siderúrgica Nacional, Vale, and Gerdau are down 61.3%, 57.2%, and 64.7%, respectively, over the past year as of October 19.

Construction activity contracts in October

Companies are losing confidence in the economy due to the huge contraction in the construction industry and medium businesses. The index of current conditions has fallen to 26.5 points in October from 27.5 in September 2015. The index staying below 30 implies that business conditions are worsening.

Also, the expectation index for the next six months has fallen to 39.3 in October as against 39.9 in September 2015, which reveals that future expectations about economic growth remain sluggish. With negative industrial production and a high unemployment rate, Brazil is facing a severe contraction in economic growth.

 

China retail sales up by 10.9% in September 2015

According to the National Bureau of Statistics of China, retail sales reached 2,527.1 billion yuan, up by 10.9% in September as against 10.8% in August 2015. The iShares China Large-Cap ETF was up 2.6% from a year ago as of October 19. China Xiniya Fashion Limited lost 43.1%, whereas China Mobile Limited gained 4.5% over the same period.

Retail sales jumped in rural areas more than in urban areas

Retail sales in rural areas rose 380.3 billion yuan, up by 12.1% year-over-year. In contrast, retail sales in rural areas rose by 2,146.8 billion yuan in September, up 10.7% year-over-year. In terms of different consumption patterns, catering services saw a 12.1% jump in September, increasing 272.1 billion yuan from a year ago. Retail sales of goods rose 2,254.9 billion yuan, up by 10.7%.

Online retail sales are picking up in China

Online retail sales of goods and services were up 2,591.4 billion yuan, increasing 36.2% year-over-year. Of that, the online retail sales of physical goods totaled 2,151.0 billion yuan. Online retail sales jumped 34.7%, accounting for 10.0% of the total retail sales of consumer goods. The online retail sales of non-physical goods were 440.4 billion yuan, a rise 43.6%. Of the total online retail sales of physical goods, food, clothing, and other commodities went up by 42.7%, 26.3%, and 37.7%, respectively.

Internet retailers Alibaba, 500.com, and China Dangdang have lost 20.1%, 32.7%, and 42.2%, respectively, over the past year as of October 19. An uptick in Chinese retail sales is a positive sign, as it implies that domestic demand is rising with better consumer sentiment and may boost growth in the struggling economy.

 Source: Market Realist