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Monday, July 10, 2023

Earth Play

From Bloomberg:

Citigroup, Inc. is looking to expand its footprint in a market that’s so far been dominated by Credit Suisse, according to a senior banker at the Wall Street firm. Jay Collins, vice chairman of banking, capital markets and advisory, said Citi is “absolutely interested” in arranging new deals in the market for debt-for-nature swaps, which allows countries to restructure their debt in exchange for promises to protect the environment.

There are requests for proposals out there that “Citi is and will participate in to help get these deals done,” Collins said in an interview. . .  Citi has already acted as a financial adviser to countries structuring debt-for-nature swaps, Collins said, [adding] “I’m huge fan.” However, there’s also reason for caution, he said. The financial structures behind such deals remain “very complex and they take a long time,” according to Collins. “Most countries trading at deeply discounted debt can’t wait that long [to refinance].”

The comments echo concerns raised by HSBC Holdings Plc, which has signaled it’s keen to compete for such deals. Farnam Bidgoli, HSBC’s managing director and global head of ESG solutions, recently told Bloomberg she thinks many countries would be better off tapping more traditional debt markets. A key concern is keeping costs down for the borrower, Bidgoli said. She also pointed out that structures to date have left very little cash for actually protecting nature.

Pick of the Litter

Mr. Market sees better days ahead – or whistles past the graveyard: Though the averages have stormed higher of late, including a 39% first-half jaunt for the tech-heavy Nasdaq 100 to mark its best such return on record, expectations for the upcoming second quarter earnings season trend in the opposite direction. Earnings per share across the S&P 500 will shrink by 7.2% relative to a year ago, analyst guesstimates collected by FactSet show, which would represent the weakest quarterly showing since the depths of the pandemic in mid-2020.  Net profit margins will likewise ebb to 11.4%, analysts collectively expect, which would mark the seventh sequential decline in the last eight quarters.  

That low bar duly presents the potential for a pleasant surprise, some reckon. “Rarely can you injure yourself falling out of a basement window,” Sam Stovall, chief investment strategist at CFRA Research, puts it to The Wall Street Journal.  

The prospect of a trough in corporate earnings stands as a further salve for the bull crowd, as median four quarter returns on the S&P 500 stand at 5.1% after EPS growth reaches its cyclical nadir, data from Bloomberg show.  

Investors are seemingly counting on it, as evinced by the S&P 500’s near 8% rally since the end of March, during which time the sell side tweaked year-over-year second quarter earnings projections lower by 2.5 percentage points in aggregate. 

Indeed, Wall Street expects better days dead ahead for corporate America, anticipating a 0.3% year-over-year rise in third quarter EPS, before accelerating to a positive 7.8% pace in the final three months of the year.  “The market is pricing in a very angelic [earnings] scenario, and we are very reluctant to buy into that,” Florian Ielpo, head of macro at Lombard Odier Investment Managers, told the Journal, adding that his firm has been lightening equity exposure in its flagship portfolio and maintains a roughly 25% cash position. 

Fund managers likewise confront an historically top-heavy market backdrop following the blistering spring and early summer rally, as only 23% of individual equities have outperformed the S&P 500 over the three months through June, data from BofA show, easily the lowest share on record going back to 1986.  

Outsized strength in the largest names has arguably left that cohort over its skis: Citing data from JPMorgan Asset Management, Chris Pavese, chief investment officer at Broyhill Asset Management, relayed in a LinkedIn post last week that the 10 largest firms in the S&P 500 command a near 32% combined weight in the broad index.  That’s the highest such share since at least 1996, and well above the 21.5% contribution to S&P 500 earnings from that group over the last 12 months. “It’s going to be a great time for stock pickers as this unwinds, again,” Pavese predicts. 

Recap July 10

Stocks managed to edge higher by a quarter percent on the S&P 500 with the Nasdaq 100 settling little changed, while short-dated Treasurys enjoyed a bid ahead of Wednesday’s June CPI reading with the two-year yield declining nine basis points to 4.85%.  Gold stayed put at $1,931 an ounce, WTI crude pulled back a bit to $73 per barrel and the VIX climbed back above 15. 

- Philip Grant