Global stocks skid as inflation hits retailers
INVESTORS FEAR RISING PRICES WILL SLOW ECONOMIES
Heavy falls in European and Asian stock markets followed Wall Street’s worst day since mid-2020 yesterday, as stark warnings from some of the world’s biggest retailers underscored just how hard inflation is biting.
Downcast earnings reports from top US retailers heightened worries about consumer resilience at a time of rising interest rates, surging energy prices, China lockdowns and the Ukraine conflict.
“Inflation is catching up and profit margins are taking a hit. Soon enough, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending,” said Craig Erlam, a senior market analyst.
Europe, Asia feel US pain
On Wall Street Wednesday, all three major US indices dived, with the Dow sinking more than 1,150 points or 3.6 per cent. The Nasdaq plunged 4.7 per cent by the close. The Dow was lower in late morning trading yesterday, but both the broader S&P 500 and tech-heavy Nasdaq Composite were higher.
The FTSE 100 index sank 2.5 per cent, while while France’s Cac-40 index and Germany’s Dax dropped by 2.2 per cent and 2.1 per cent respectively. In Asia, Japan’s benchmark Nikkei index closed down 1.9 per cent, while Hong Kong’s Hang Seng dropped 2.5 per cent.
Countries are also grappling with steep rise in inflation -the UK’s reached a 40-year high of 9 per cent in April — and there are concerns that some economies are heading for a slowdown as interest rates are increased.
Shares in Chinese tech giants plunged after Tencent shares plunged more than 8 per cent in early trading before paring losses slightly.
First, the bad news – investors are starting to get real worried about what they should be doing with their stock holdings. The result? US stocks, including some of the bluest of blue-chips, took a beating on Wednesday and which extended into sharp sell-offs in most Asian markets.
In the UAE, the DFM remained mostly flat, even with the bellwether stocks such as Emaar Properties (down 1.01 per cent), Dewa (-1.13 per cent) and Emirates NBD (-0.37 per cent) were all trailing at 01.10pm. Going flat the day after the S&P 500 was down 4.04 per cent and Nasdaq by 4.73 per cent should constitute as a win in itself.
But it was ADX that brought the cheer and the good news. The Abu Dhabi index was up 1.13 per cent, with market-setting stocks such as IHC and Alpha Dhabi gaining 8.75 per cent and 1.17 per cent, respectively. (The latter had announced a Dh9 billion participation in a new venture capital fund that will look at investments in the US and elsewhere, in areas such as AI and fintech.)
“Even with a brutal sell-off in the US, ADX’s gains can be fully attributed to IHC since the stock rose by 7.6 per cent after the Dh7 billion strategic investment in India’s Adani Group portfolio companies,” said Vijay Valecha, Chief Investment Officer at Century Financial. “Even though a global economic slowdown is anticipated, business acquisitions and investments don’t seem to slow down in the Arab region. They have so far depicted resilience to withstand the turbulent times.”
ADX has gained 18 per cent year-to-date while the US global benchmark is down 17 per cent.
Saudi scene
In Saudi Arabia, investor sentiment seems mixed, with the Tadawul dropping 2.75 per cent yesterday, mostly driven by oil’s price flip-flops. “Surging inflation and aggressive Fed tightening could result in an economic slowdown and which could lead to lower oil prices in Q3/Q4 of 2022,” said Valecha. “If that happens, demand could weaken for oil and Gulf economies will feel the brunt, and that sentiment has dragged down the Saudi market.” (Brent crude is at $108.3 a barrel yesterday afternoon.)
What should investors do?
Depending on whether the prevailing mood is risk-free, then they should be looking even more closely at value – real value, mind you. Any company with the promise of solid dividend payouts – think Dewa and the promised one from the UAE’s latest IPO Borouge – should keep investors insulated against any future corrections. Repeat the process elsewhere as well.
“Record inflation levels worldwide hint at adding inflation-hedging stocks to one’s portfolio and one could consider utility service companies like Dewa, e& (formerly Etisalat), du and consumer staples such as Dubai Refreshments,” said Valecha. “These stocks may be less impacted by the overall selloff in the broader market.”
Recession vs stagflation
Analysts are starting to repeat the dreaded ‘stagflation’ chant, whereby economies suffer through rising consumer prices, high unemployment and tepid growth. Is such a scenario worse than whatever a recession brings in its wake?
“A recession would perhaps be a positive outcome from all of this in the coming
Oil prices are on the rise again as Shanghai takes a big step towards reopening. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market.”
Craig Erlam
| Sr. Market Analyst, Oanda
The Abu Dhabi stock market continued to recover thanks to the strong oil prices and could reach its peak. The market is also seeing support from the announced IPO of Adnoc’s subsidiary.”
Daniel Takieddine
| CEO - MENA, BDSwiss
Many countries are facing a cost-ofliving crisis. The cost of borrowing is rising too. As a result, there have been aggressive falls in assets, such as stocks, industrial metals, and cryptocurrencies.”
Raed Hamed Alkhedr | Market Research, Equiti
months,” writes Simon Ballard, Chief Economist – Markets Insight & Strategy at FAB Global Markets.
“A recession would imply that even though current monetary tightening moves will send the global economy into restrictive territory, a higher rates complex will at least succeed in its intended goal of quashing inflation pressures.”
Not so with stagflation. “Global markets overnight – and again this morning – appear to be pricing in the far more worrying scenario of stagflation developing over the coming months, fueled by the combination of rising and perhaps largely interest rateresilient global inflation, tighter monetary policy by the Fed and the BoE, subsequent slowing global economic growth as well as disrupted supply chains due to the war in Ukraine, all alongside China’s restrictive zero-Covid policies,” said Ballard in the note.
Each of the points he notes on their own have the power to hurt the global economy. Taken together, they constitute quite the nightmare scenario.
Unless investors want to do a Warren Buffett redux and make some buying the dip, they are better off on the sidelines.
Even though a global economic slowdown is anticipated, business acquisitions and investments don’t seem to slow down in the Arab region. They have so far depicted resilience.”
Vijay Valecha | CIO, Century Financial
Recession would imply that even though current monetary tightening will send the global economy into restrictive territory, a higher rates complex will succeed in quashing inflation pressures.”
Simon Ballard | FAB Global Markets