Market Pulse
Monday, January 16, 2023
16th Jan 2023
The re-opening of China will unleash a wave of demand. US inflation shows signs of peaking but 2023 holds new risks. Apple is expanding its competitive moat (even further).
The re-opening of China will unleash a wave of demand. US inflation shows signs of peaking but 2023 holds new risks. Apple is expanding its competitive moat (even further).
Our aim with the Sidekick Market Pulse is to make sure you stay in the know. We’ll keep you updated on new trends and key events from around the world. We want to do more than just report the news. We want to provide you with context to understand why it is important and our views on how it might impact markets.
China has been closed to the world for the last 3 years. On 8th January, China abandoned the last of its ‘Covid-Zero’ measures and the country reopened to the world. There will be big consequences.
The virus is running rampant in China with tens of millions of people catching the virus every day[1]. The rapid spread of covid-19 will likely lead to overwhelmed hospitals and rising covid-related deaths in the coming months. Another worry is a new variant of concern. So far, the World Health Organization (WHO) says we have nothing to worry about. The variants currently circulating in China are the same as the ones circulating in other countries around the world.
Despite lingering concerns about Covid-19, Chinese travellers are understandably excited by the prospect of an overseas holiday. Travel demand in China has built up to epic proportions. Bookings for outbound flights at China’s biggest online travel agency jumped more than 250% the day after the quarantine announcements were made[2]. There will soon be a wave of Chinese holiday makers around the world who deserve a good holiday!
We expect a wave of Chinese tourists, especially in places like Singapore, South Korea, Hong Kong, Japan, and Thailand. This is good news for airlines, hotels, and luxury retailers. Chinese outbound travel spending is down more than 50% from pre-Covid levels and could rebound fast[3]. Companies that stand to benefit from a tsunami of Chinese demand for luxury goods include LVMH, Richemont, L’Oreal, Shiseido, and Estee Lauder.
Later in 2023 Chinese economic growth should re-accelerate and along with it demand for goods, services and commodities. China buys more than 20% of the world’s oil and more than 50% of its copper and iron-ore[4,5]. Mining companies stand to benefit directly from higher demand for commodities. London listed BHP Group is trading at all time highs and is up almost 40% since late October.
Recovering Chinese demand for natural gas could mean Europe has to compete with China for natural gas next winter. This is not something Europe needs right now. The International Energy Agency (IEA) estimates that if natural gas demand in China recovers back to 2021 levels, Europe may be forced to introduce energy rationing next winter.
Global central banks are fighting to get inflation under control and a surge in economic activity and demand from China is not going to make things any easier. Softer inflation data in the near-term has the potential to lull not only investors but also decision makers at central banks into a false sense of security.
One thing is certain. The reopening of China could be one of the most significant economic events this year.
Central banks around the world are fighting inflation. Recent data from the US and elsewhere shows their efforts might be starting to bear fruit.
US Inflation continued to slow in December providing additional evidence price pressures might have peaked. Consumer Price Inflation (CPI) fell 0.1% from November thanks in part to falling energy prices. But it’s too early to say the inflation fight is entirely over. Core inflation, a measure that excludes more volatile food and energy prices, still rose 0.3% during December.
To combat high inflation, the US Federal Reserve has hiked interest rates seven times since March 2022. The most recent 0.50% increase came after four consecutive 0.75% interest rate increases. This slowdown in the pace of interest rate increases is an indication that the US Fed might be approaching the final stretch of interest rate hikes.
For now, the US economy is still firing on all cylinders and this is making the inflation fight more difficult. Consumer demand is resilient and, despite constant news of companies cutting costs by laying off workers, unemployment continues to fall.
The market currently expects the Fed to slow the pace of interest rate hikes and potentially start cutting interest rates by the end of 2023. The Fed has been saying that their plan is to keep rates at “a high level” until they are convinced inflation is falling towards their target. We don’t know who’s going to be right. We do know this though: any disagreement between the Fed and investor expectations sets the stage for ongoing market volatility.
Reducing high inflation by slowing an economy is not an exact science. Because things like wages and rent are often only negotiated annually, raising interest rates takes a long time to flow through the real economy. 2023 is going to be the year where the aggressive interest rate increases of 2022 increasingly impacts growth and employment. The narrative might soon shift away from rising inflation towards concerns about slowing economic growth and rising unemployment. Despite a recent market rally we’re not out of the woods yet.
Designed in California. Assembled in China. This is the Apple model, and it works very well.
Apple focuses primarily on design and the customer experience. They meticulously design both the product and the software to deliver beautiful, intuitive products but, for the most part, they still rely on components designed and produced by other suppliers. They use chips from Intel, Qualcomm and Broadcom, screens from Samsung and LG, and CMOS sensors from Sony. Apple competitors, like Samsung for instance, often use the same components in their products and can thus offer a broadly similar set of features.
But this is changing. For the last few years Apple has been busy bringing the engineering of various key components in-house. In 2020 Apple announced their intention to move away from Intel processors, opting instead to design their own ‘Apple Silicon’ in-house. This was a big leap, but has been an equally big success. Last week Apple announced they will go even further. They are currently working on replacing cellular modems and chips supplied by Qualcomm and Broadcom, two major suppliers. They also announced their intention to design their own displays in-house. Currently displays for Apple products are supplied mainly by Samsung and LG Display.
Moving to in-house component design in this way offers big advantages. Firstly, it gives you more control over performance and power consumption. Equally importantly, it reduces the ability of competitors to offer products with the same internal components. In short, it swings the door wide open to differentiate your product. By designing your own hardware, you can add difficult to replicate features that really sets your product apart.
Apple Suppliers – None of this is good news for Apple suppliers. Companies like Broadcom, Qualcomm and LG get 20% or more of their revenues from Apple. While revenues will not drop to zero overnight, they will drop eventually. Given the sheer size of Apple they might struggle to replace it.
Apple - Apple shares have not been immune to the tech crash. The Apple share price is down almost 25% since Dec 2021. Consumer demand is being impacted by a cost-of-living crisis fuelled by sky-high inflation and rapidly rising interest rates. Exceptional pandemic related demand for electronics is also normalising. While the short-term outlook for Apple is uncertain, the long-term outlook remains bright.
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[3] https://www.statista.com/chart/26141/top-5-biggest-outbound-tourism-spenders/
[4] https://www.mining.com/web/china-property-stimulus-to-rescue-copper-demand-but-not-yet/
