February 2024

Newsletter February 2024

February 2024:

We are back from the winter break! The month for February marked the start of the second semester: our first meetings, Apertivi and we welcomed some new members!

In this edition of our February Newsletter, we can't wait to share the insights and experiences that made last month truly special for us!

February Recap

• Public speaking workshop: We have started out the month with a public speaking workshop. It was an occasion for our members to exercise their skills in a fun and interactive way by gathering attention through an elevator pitch.

• Open Workshop: We welcomed WIF applicants to an open workshop, where we presented the association. The workshop was naturally followed by a Kahoot on recent market news. Applicants were able to ask all the questions they wanted through the panel Q&A as well as during the Aperitivo that followed.

• Weekly workshops: This month, our members have had the chance to follow two very interesting workshops on different areas of finance: restructuring and derivatives trading.

edia where we post our weekly tips, market news nspiring u

---

News Recap

U.S.'s GDP (Q4) data, PCE and energy independence:

The U.S. economy, while experiencing a slight downward revision in its fourth-quarter GDP growth to 3.2% from an initially reported 3.3% (and a previous data of 4.9%), showcased a stronger composition than previously thought, indicating a positive near-term outlook despite a slow start due to freezing temperatures at the beginning of the year. This revision was mainly due to a decrease in inventory investment, contrasted with upgrades in consumer spending, as well as state and local government, residential, and business investments. Notably, the economy has managed to avoid recession predictions following the Federal Reserve's interest rate hikes aimed at controlling inflation, supported by a robust labor market that has kept wages high and bolstered consumer spending.

Consumer spending, a critical driver of the U.S. economy, was revised up to a 3.0% pace, significantly contributing to GDP growth. The adjustments in investment in homebuilding and nonresidential structures like factories indicated stronger domestic demand than initially estimated. Despite these positive trends, inflation was slightly revised upwards, although it remained relatively mild compared to earlier in the year. The core personal consumption expenditures (PCE) price index, excluding food and energy, rose at a 2.1% pace, slightly above the Federal Reserve's 2% target, primarily driven by higher housing costs.

The economy expanded by 2.5% in 2023, an acceleration from 1.9% in 2022, growing above the Fed's non-inflationary growth rate. However, January's economic data showed signs of weakness, attributed in part to weather conditions, with some analysts cautioning against dismissing these indicators as merely weather-related. Factors such as a decrease in shipments of non-defense capital goods and a souring of consumer confidence, alongside a widening trade deficit, suggest potential challenges ahead. Despite these concerns, the U.S. economy remains robust compared to global counterparts, with ongoing risks including geopolitical tensions that could impact economic stability.

In addition, energy security has become synonymous with national security, and the United States is gearing its strategy towards energy independence, a goal that promises greater economic stability and strengthens its geopolitical position. Diversification of the energy portfolio is at the heart of this strategy: the US is not only increasing its production of oil and natural gas, which guarantees a steady domestic supply, but is also investing aggressively in renewable energies such as wind, solar and bioenergy. Thanks to the IRA, wind power generation is set to triple by 2030 and solar power generation is set to increase sevenfold. This balanced approach to energy independence mitigates the risks of over-reliance on any single energy source and paves the way for a smooth transition to cleaner, more sustainable energy. The effects of energy independence extend far beyond national borders, influencing global energy markets and geopolitical dynamics. These changes in the global supply and demand equation, could stabilise or even lower world energy prices. Japanese equities rise despite economy shrinking

Japan's economy faced a contraction for the second consecutive quarter, with GDP shrinking by 0.4% on an annualized basis in the fourth quarter, contrary to economists' expectations of a slight growth. This contraction was driven by a decrease in private consumption and public spending, challenging the Bank of Japan (BoJ) as it contemplates exiting its negative interest rate policy, a stance it has maintained since 2007. The GDP decline, marked by a 0.2% fall in private consumption following a 0.3% drop in the preceding quarter, signals a technical recession, defined as two successive quarters of GDP contraction.

This economic downturn complicates the BoJ's monetary policy trajectory, especially considering the anticipation of a rate hike possibly as early as March or April. The recent GDP data, highlighting broad-based declines across private consumption, capital spending, and government consumption, adds to a series of disappointing economic indicators. Despite a minor boost from exports, the overall economic landscape suggests a cautious approach towards any imminent policy adjustments.

Simultaneously, Japan's stock market has witnessed significant milestones, with the Nikkei 225 index surpassing its all-time high, a peak not seen since the late-1980s asset bubble. This surge was propelled by robust performances in chip-related stocks and positive earnings from global tech firms, coupled with a depreciating yen, which has attracted foreign investment. This rally reflects a shift in investor sentiment, increasingly favoring Japanese equities over those in markets like China, due to geopolitical tensions and economic slowdowns.

However, despite the Nikkei's remarkable performance, Japanese investors remain wary of fully embracing their home stock market, reflecting a preference for overseas equities. This trend is underscored by substantial inflows into foreign-focused equity funds, contrasted with modest gains for domestic market funds. The hesitance stems from concerns over sustained corporate returns and the traumatic memories of the 1990s market crash. To maintain the Nikkei's upward trajectory, a more substantial domestic investment is deemed crucial, given Japanese households' significant cash reserves and relatively low equity asset allocation compared to other regions. The Nippon Individual Savings Account (NISA) program, aimed at encouraging stock market investments among Japanese individuals, is highlighted as a pivotal measure to shift household assets towards equities, potentially reinforcing the domestic market's momentum. Fears of a China deflationary spiral, China De-Risking and FTAs

The Chinese domestic economy continued to struggle, with disappointing retail sales and further deterioration in housing activity. Fourth-quarter GDP rose by 5.2% year-on-year, in line with predictions but remaining historically weak. Whilst the PBOC announced several stimulus measures, it was not the political measure the markets had hoped for to boost activity. Continued concerns about China's economic outlook probably contributed to the poor performance of the MSCI Asia ex-Japan Index and the MSCI Emerging Markets Index, which fell by 5.4% and 4.6% respectively over the month. China 10Y yield moved below 2.47%, breaking Covid19 lockdown lows. With local equity market imploding and real estate in freefall, fears of a Japanese style deflationary spiral are growing. 

Moreover, for the first time in 20 years, the U.S. imported more from Mexico than China in 2023, with China’s import share falling from 21.6% in 2017 to just 13.9% in 2023. While China’s role as “factory to the world” has been challenged in recent years, the nation has simultaneously doubled down on what they term the “New Three”: electric vehicles, lithium-ion batteries, and renewables.Whereas reliance has fallen in areas like clothing and furniture, America’s green transition—as well as its semiconductor and defense sectors—remain deeply dependent on China and increasingly so. Therefore, the U.S.-China “de-risking” debate is far from over and will remain front and center as the 2024 election approaches. 

Simultaneously, China is proactively constructing an alternative trade architecture, leveraging its Belt and Road Initiative to foster ties with the developing world. This strategic pivot aims to insulate its trade from U.S. influence through a network of bilateral and regional Free Trade Agreements (FTAs), signaling a significant move towards reshaping global trade dynamics on its terms. However, this endeavor is shadowed by China's internal economic strains, including a troubling debt scenario and challenges in maintaining the renminbi's stability. Chinese regulators are actively working to stabilize the renminbi ahead of crucial leadership summits, signaling a cautious approach to monetary policy to avoid exacerbating the currency's weakness.

In the meanwhile, Germany's increasing investment in China, despite governmental advisories, indicates the complexity of reducing economic dependencies on China. German direct investment in China has reached a record high, underscoring the entangled economic interests that complicate efforts to decouple from China's economy. This scenario is emblematic of the broader dilemmas facing economies globally as they navigate their relationships with China amidst rising geopolitical tensions and economic interdependencies.

---

Dealflows & IPOs this Month

Capital One to acquire Discover

Capital One Financial Corporation’s proposed $35.3 billion all-stock acquisition of Discover Financial Services sheds light on the unknown nature of the future of the payments industry. This strategic acquisition forms a global payments powerhouse, shielding the US credit card giants against the rise of fintech and forming a combined company with a larger card loan volume than JPMorgan Chase. It has also presented a unique opportunity, with Discover being one of only four major card networks, allowing Capital One to create an end-to-end payments ecosystem. The deal would lead to Capital One shareholders owning approximately 60%, and Discover shareholders owning the remaining 40%, of the combined company, with Discover shareholders will receive 1.0192 Capital One shares for each Discover share. This represents a premium of 26.6% based on Discover’s closing price of $110.49 on February 16, 2024. The acquisition is expected to generate $2.7 billion in pre-tax synergies, be more than 15% accretive to adjusted non-GAAP EPS in 2027, and deliver a return on invested capital (ROIC) of 16% in 2027 with an internal rate of return (IRR) exceeding 20%.

Disney acquires stake in Epic Games 

At the beginning of the month, Disney announced its plans for a $1.5 billion equity investment in Epic Games, signalling its bet on the future of the entertainment industry being in gaming and, more specifically, the metaverse. This reflects other similar investments, such as Lego, which also invested in Epic Games, creating a collaboration between Lego and Epic Games’ hit game, Fortnite. The investment, which gives Disney a 9% stake in Epic Games, values the private company at $22.5 billion, consistent with the likes of Fidelity, T. Rowe Price and Blackrock who have marked their stakes in Epic Games. It is a stark fall, however, from its previous valuation of $35.1 billion in April 2022, when the firm raised funds from Sony Group Corp and Lego Group. 

Biotech IPOs: Kyverna Therapeutics 

IPOs are at the heart of the biotech industry, but activity has slowed in recent years. In the boom of 2021, there were 108 biotech IPOs, raising nearly $15 billion, in comparison to 2022 and 2023, with less than 40 combined. IPOs act as vital tools to young biotech firms, allowing them to fund their scientific innovation and drugmaking. 2024 could be the rebound the market needs, with Kyverna Therapeutics, CG Oncology, and BrightSpring Health Services all entering the market. Kyverna Therapeutics, a clinical-stage cell therapy company tackling autoimmune diseases, went public on February 8th on the NASDAQ exchange at a price of $22 per share, which was increased from $17. With the current price at approximately $28, a healthy 27% return has been realized. Through its initial sale of 14.5 million shares, the firm was able to raise $319 million. Sources: TheGlobalTreasurer, CNBC, Reuters, Digiday, Biopharmadive

---

Analysis of the Markets

Rally of US tech stocks

This month US tech equities have seen an incredible rally: strong results from Amazon and Meta, with Meta also announcing their first dividends, alongside Nvidia’s unexpected extreme rally, pushed by their spectacular earnings. Meta’s announcement at the beginning of February raised its market capitalization by $197 billion, reaching $1.2 trillion. Amazon’s shares too increased by 7.9%, contributing an additional $135 billion in market value. Behind these numbers stands continued support for the big tech companies in the US, as AI spending continues to increase rapidly, further contributing to great future prospects. Nevertheless, Apple’s and Alphabet’s earnings did not meet expectations resulting in their decline: Alphabet’s disappointing advertisement revenues and Apple’s exposure to China’s slowdown are pushing down their market value. However, the star Nvidia continues to surprise investors (265% revenue rise from a year ago), closing with a 16.4% increase at the end of February (a $277 billion rise in market value), pushing Stoxx Europe 600, Japan’s Nikkei 225 and FTSE all-world index to reach record-breaking levels. Nvidia now has become the third most valued US-listed company, surpassing Amazon and Alphabet. 

With high-interest rates, big tech companies will further enjoy investors’ attention, as investors lean towards “safer”, high return investments within the economy, clouded by great uncertainty.  

Europe’s largest equity players

Past months have seen a multitude of rallies across the globe, with stock indices reaching record highs; however, the contribution of individual stocks to this progress has been quite uneven. In the US, the “Magnificent seven” (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia) have been responsible for this surge, whereas in Europe for the past year, 11 companies represented 50% gains on Stoxx Europe 600 index (GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP, Sanofi). Isolating the 11 companies, their stocks increased by 18% in the last year, whereas the Stoxx 600’ only by 7.5%, allowing for concerns for the concentration of growth among certain stocks, that was already seen in the US. Nevertheless, Europe’s leaders are much more diverse than the US’, which concentrate in the tech industry with a $13 trillion market capitalization, compared to Europe’s $3 trillion. Current interest rate climate continues to help the largest companies, as banks are still reluctant to lend to smaller borrowers, whom they perceive riskier. For now, the trend is expected to continue as passive investment popularity grows, but Joachim Klement, head of strategy at broker Liberum, warns any disappointment in performance can quickly reverse the strong performance of these 11 companies, severely affecting Stoxx 600 value.  

Cocoa futures spike to record-breaking prices

Hedge funds increasingly poured their money into cocoa futures in recent months, pushing prices to record-high levels. Concerns grew over the poor harvests in West Africa, an increasing trend due to climate change’s impact on the industry. Prices surged to £4757 per ton in London and $5888 per ton in New York. VP Stetzel of brokerage StoneX highlighted the danger of hedge fund concentrations in certain futures, contributing to volatility and difficulty to hedge exposure to price level changes.Source: Financial Times

---

Technicals Explained:Inverted Yield Curve

A yield curve represents how the interest rates (yields) of bonds depend on different maturity levels, such that the bonds are of equal credit risk. Maturity of a bond corresponds to the time until the date at which the borrower must repay the principal and the according interest or make the final cash flow transaction to the investor. Since it is more difficult to predict the final economic outcome the longer the maturity of the bond is, investors demand higher returns to compensate for the risk they are taking. Hence, the yields of long-term bonds are normally higher than those of short-term bonds. As a result, the yield curve is upward sloping.

However, the curve is not always increasing. When an economy starts to slow down, investors become progressively pessimistic about the near future and shift their money from short-term to long-term bonds, which are now considered to be the safer option. This, in turn, decreases the yield of long-term relative to short-term bonds, and the yield curve inverts – slopes downward.  

Importance

The inverted yield curve is of great relevance to all stakeholders since it predicts, usually successfully, a recession in the economy. It is the result (not the cause!) of expectations that the economy will deteriorate, whether due to changes in central bank policies, decreasing inflation, or other possibilities. Hence, the curve allows the governments and markets to prepare for the upcoming decline.  

Limitations

In spite of the historical success to predict economic recessions, the reliability of the inverted yield curve is limited by:

• Correlation: the relationship between the inverted yield curve and recessions is only a correlation, not a causation, and sometimes weak or even false;

• Limited outlook: as only bonds are considered, the curve does not provide a more extensive outlook on the performance of the whole market;

• Volatility: the curve is very sensitive to economic fluctuations, such as inflation, hence can be misleading at certain time periods;

• Predictability constraints: natural disasters or other black swan events, which usually result in a recession, can not be foreseen by the curve.

Despite these implications, economists usually take the warnings of an inverted yield curve seriously.

Real-life example

Since 1955, the U.S. economy has seen eleven inverted yield curves. Ten of them were followed by a recession (the 11th inverted yield curve, which happened in 1966, turned out to be a false positive). Even the recession caused by the COVID-19 pandemic was anticipated by an inverted yield curve, although that is attributed to pure luck, as discussed above. 

Therefore, it is reasonable to think that today the U.S. is heading towards yet another recession. Since October 2022, the yield curve has inverted, with 3- and 4-month bonds becoming more expensive than 10- and even 30-year bonds. The trend hasn’t changed since: currently, the 2-year interest rate is at 4.5%, while the 10-year – at 4.2%, a difference of around -0.3%, as seen in the graph below. 

US Treasuries Yield Curve

Among other factors, the Federal Reserve (Fed) monetary policy has been the most important reason for such an inversion. To battle the threat of high inflation, the Fed started raising interest rates in March 2022, which has resulted in an increase in the yields of all bonds (compare the blue and red curves in the graph). However, the yields of short-term bonds responded more dramatically than those of long-term bonds. Based on historical evidence, the U.S. economy is therefore predicted (with a 60% probability) to experience a recession until the year of 2025, according to the New York Fed model. 

Although the forecasts may seem concerning, economists believe that this case could be another exception to the rule. In contrast to an expected downturn, the U.S. economy has been much stronger than expected: in 2023, 2.7 million jobs were created, GDP grew by 3.3% in the last quarter, consumption and disposable income levels were still increasing, and consumer confidence did not show any signs of pessimism. Nevertheless, the inversion of the yield curve should not be ignored, as the recession is more probable than not. It is only left to see how it responds to the expected Fed interest rate cuts in 2024.

Woman of the Month:Jane Fraser

Jane Fraser is a British-American executive, who is serving as the current CEO of Citi 

After her nomination, she subsequently became the first woman CEO of a large US bank.She was educated at Importance Girton College, Cambridge where she studied economics, later completing an MBA at Harvard Business School. Shortly before her MBA, she had gotten her first job as an M&A analyst at Goldman Sachs.

Following her MBA, she decided to pursue consulting and joined McKinsey & Co, where she rose to partner level.

In 2004, she joined Citi as Head of Client strategy and in 2009, she got her first CEO role within Citi - she was appointed as CEO of Citi Private Bank.

In 2021, after 17 years at Citi and multiple CEO roles for different branches, she was appointed CEO of the whole group.

In 2023, she was named by Forbes as the 7th most powerful woman in the world.

WiF Recommends 

As the Nikkei 225 hits record highs, Japan's young start investing is a column from The Economist. The article focuses on the recent successes of the Japanese stock market, encouraging an unusual change in investing habits in Japan.

Bloomberg Surveillance from Bloomberg is a daily program hosted by Bloomberg journalists Jonathan Ferro, Lisa Abramowicz, and Annmarie Hordern. It provides insights into the economy and politics via conversations with leaders and decision-makers.

Nudge: Improving Decisions about Health, Wealth and Happiness by Richard Thaler and Cass Sunstein is a book on behavioral economics, focusing on choice architecture, nudge theory, and other concepts of this study area.

What’s next?

As the second semester commences, we look forward to networking events, weekly workshops, and, as always, honing our skills and knowledge in the financial area.

Follow us on Instagram to catch all the action, including some really cool financial quizzes and the latest news on WiF. We're super excited about this season and can't wait to celebrate another Christmas with you all!