Daily Digest:
w/c 24th June - a relatively light data week, with spotlight on US GDP and Durable Goods Wednesday, then the Fed’s preferred inflation measure, the MoM and YoY PCE data on Friday

Three Stocks to Buy and Two Stocks to Stay Away From

The New Year is just around the corner and so it is quite an appropriate time to take stock and consider what trends may shape our investment outlook heading into 2023.

One cannot say that COVID-19 and/or its variants has fully been vanquished. Coupled with the risk of a larger scale war in Europe, a global energy shock, inflation, monetary tightening, and slow growth in China it leaves one plenty of food for thought.

Russia’s War in Ukraine to Drag On and Maybe Expand

Given the intransigent mood coming from the Kremlin one must consider the fact that Putin is in Ukraine for the long haul. The longer it continues, the greater is the risk that we see an escalation in the ramifications of the war in the wider the European theatre and probably NATO.

The setbacks Russia has raised the question if Putin will look to create a greater mobilisation of additional troops. Will that be effective? The first round of conscription has not proved successful at all. This points to President Putin escalating the conflict beyond traditional battlefield fighting. He may well use long-range Russian missiles to reduce Ukrainian infrastructure and deploy the abhorrent weapon that is white phosphorus in civilian areas. The ultimate risk is that in desperation he goes nuclear via strategic weapons.

I would still suggest that the likelihood of a nuclear escalation remains low, however, the use of other heinous weapons will create vile uncertainty.

Using the “S&P Aerospace & Defense Select Industry Index” (U.S. spelling) as a proxy for defense stocks it has gained 0.66% in the past six-months whereas the S&P 500 has fallen by 1.35%.

Raytheon Technologies Co (RTX NYSE)

I was recently interested in the news at the end of November that the U.S. Army awarded a USD1.2 billion contract to Raytheon Technologies Co for six National Advanced Surface-to-Air Missile Systems (NASAMS) for Ukraine.

This comes as the U.S. approved sending Ukraine a total of eight NASAMS to defend against Russian missile and drone attacks. The first delivery of two NASAMS air defense systems came in November and the rest will be delivered in future months once they are built. Raytheon will also benefit from the fact that the Pentagon recently announced it was sending four Avenger short-range air defense systems that use Stinger missiles, made by the company.

Raytheon Technologies One-Year Chart
Figure 1: Raytheon Technologies One-Year Chart and Technical Sentiment
Source: Pope Family Office (PFO)

I like this stock as the immediate technical sentiment is such that one does not have to charge in right now as there is sufficient positive sentiment for one to still make a good money even with a late entry.

The stock close at 99.49 on the 8th and I would look for gains to 106.09 with further extensions to 112.17 and 115.93. My stop loss is set at 90.17.

Avoiding New Disease Outbreaks

Across the world governments and businesses long for a return to normality. That is not only a sense of normal in terms of inflation and interest rates, also in the realm of public health.

Given that a variant of COVID-19 still stalks the streets we are heading into a trying era of the                     “Persistent Pandemic”.

There are many reasons one could reach for to explain the rising intensity of new diseases: intensive animal agriculture, urbanization, migration and travel all feature highly. Going hand in hand with this threat is the vulnerability of the populations in both the U.S. and Europe as the “anti-Vac” brigade become more vocal and possibly more forceful.

AstraZeneca (AZN London)

AstraZeneca (AZN London) announced at the end of November that it was to acquire biotechnology company Neogene Therapeutics for up to USD320 Million to bolster its bid to boost its pipeline of cell-based cancer treatments.

Whilst AstraZeneca’s oncology portfolio has driven 33% of the company’s revenue in 2021 it has not had an approved cell-based cancer therapy. That meant it was lagging behind key rivals such as Novartis (NOVN Switzerland).

Yesterday (December 8th) the group announced that a phase III trial of its capivasertib drug in combination with Faslodex (fulvestrant) had demonstrated a: “…statistically significant and clinically meaningful …” improvement in progression-free survival in patients with positive, low or negative hormone locally advanced or metastatic breast cancer.

AstraZeneca One-Year Chart
Figure 2: AstraZeneca One-Year Chart and Technical Sentiment
Source: Pope Family Office (PFO)

What’s not to like with this? Well, some may argue that the current impulsive channel is maxed out as it is close to the prior local top. I am looking for a big push that will see at least a 38.2% extension on the old local top . hat will see the stock surge to 12380.56. Stop loss set at 1000.

The Green Transition

The green transition refers to aims of the UN-Habitat in its Strategic Plan 2020-2023. It is the social change strategy to turn the current environmentally unsustainable global situation into a sustainable condition targeted to benefit everyone and everything on the planet.

It seeks to promote a sustainable urban future and combating climate change through the reduction of greenhouse gas emissions. This is driven by the fact that 90% of the world’s population breathe polluted air according to the World Health Organisation (WHO).

SSE Plc (SSE London)

In mid-November shares in U.K. power generators rose after leaked reports indicated that the government’s planned windfall tax on the energy sector will focus more on the oil and gas sector.

The U.K. government had been under pressure to find tens of billions of pounds to ensure that public debt will return to sustainable levels over the medium term.

On December 8th developers SSE Thermal and Equinor (OSLO:EQNR) confirmed that the Keadby 3 carbon capture power station in the Humber has become the first power and CCS project in the U.K. to receive planning permission It received a development consent order following permission from the Secretary of State for Business, Energy and Industrial Strategy (BEIS).

The pair said the order marked “…a major step forward…” for Keadby 3, which is currently in the due diligence stage of the U.K. Government’s Cluster Sequencing Process. Under the plans, the power station would have a generating capacity of up to 910MW and capture up to 1.5 million tonnes of CO2 a year, representing around 5% of the U.K. Government’s current 2030 CCS target.

SSE Plc One-Year Chart
Figure 3: SSE Plc One-Year Chart and Technical Sentiment
Source: Pope Family Office (PFO)

This, judging by the chart is not a stock to be bought immediately. Indeed, the technical sentiment is muddled until one reaches the end of next week. By that time, the lion’s share of the likely retracement within the broad corrective channel will be completed at the level of 1610 it may well be worth making a small entry with a little capital kept in reserve in case SSE dips to 1580-1600. At that stage the better sentiment should start to break through and in that regard, I am looking for the “green wave” of investing to lift this to 1896 and even 2024 beyond that. Stop at 1550.

Emerging Market Economies Face a Sovereign Debt Crisis

It has been rather quiet on the emerging market (EM), front of late. However, this is never an area where one can be complacent. Watch out for a sovereign debt crisis to appear in 2023.

Several EM economies remain highly leveraged and have had to borrow significant amounts to finance their economies during and post the COVID-19 pandemic. Of course, as the Fed has hiked Fed Funds from 0.25% to 4.00% global borrowing costs have risen. The strength of the USD has meant Dollar-denominated debt and imports invoiced in USD has become increasingly expensive.

The Sri Lankan government was the first sovereign to face the choice of caping food and energy for its population or repaying foreign creditors. It is not going to be the last to face this dilemma.

HSBC Plc (HSBA London)

I am fearful of this and even though many major banks are raising their outlook for emerging markets’ hard-currency bonds the ability to service and repay the debt largely depends on the Fed slowing and then halting the ongoing cycle of rate increases. That needs to be the case if the Dollar is to peak in 2022 and decline next year.

For that reason, I want to keep betting on the safe haven currency and have one play that is swimming against the tide of EM optimism. HSBC Asset Management Head of Global EM debt Luther Bryan Carter said in November:

“…Emerging markets are at the epicentre of sustainable investing, a just transition and Paris Agreement alignment… As investors, we believe direct and consistent engagement with emerging market issuers can offer opportunities for assessing their ESG plans and progress. … It will help them tackle their challenges and gaps – and help drive positive change…”

Figure 4 reveals what a tangle the sentiment is in and I think on the short-term one can make a play by selling this stock with a target of 460 if not a return to 440 from the current level f 495.90. The stop is set at 520.

HSBC Plc One-Year Chart
Figure 4: HSBC Plc One-Year Chart and Technical Sentiment
Source: Pope Family Office (PFO)

The Squeezed UK Consumer

Retail sales in the U.K. increased 0.6% month-on-month in October of 2022, after falling an upwardly revised 1.5% in September when an additional bank holiday for the Queen’s funeral was observed by many businesses including retailers. This was a rare, pleasant surprise as they exceeded the market forecast of a 0.3% rise.

Increases were seen in all of the main sectors apart from food stores, where sales fell 1%. In recent months, supermarkets have highlighted that they are seeing a decline in volumes sold because of increased cost of living and food prices.

For many households 2022 into 2023 will see the health crisis morph into a deep economic one. Crawling away from COVID-19 and the cost of living crisis is whipped into a perfect storm as inflationary pressures and higher interest rates will lead to cash shortfalls into 2023 when the Christmas bill on credit card debt has to be paid.

Therefore one should expect a market in decline during Q1 2023 and retailers are going to facing a continual battle to manage operational costs while trying to keep ahead of the competition.

That means more capital has to be ploughed into digital platforms as consumers save fuel costs by increasing their consumption online.

Marks and Spencer Plc

Marks and Spencer (M&S) started the festive season with 12 Days of Sparks promotion offering free items every day to people who have and used the Sparks app. There was a new daily reward every day from December 1st until December 12th, with prizes such as light-up biscuit tins and the coveted gin snow globes, to vouchers for money off flowers and knitwear.

Some shoppers have turned on M&S, calling it out for offering prizes that aren’t worth the trip to their nearest shop to claim them. The advent calendar gift that each shopper gets in their Sparks app is completely random, and some have been left feeling disheartened after opening the app to find hand creams and football chocolates.

This is not good news as at the start of this season M&S said it faced a blizzard of higher costs for retailers and pressure on household budgets as it reported a fall in profits for H1 2022. The stalwart of the U.K. High Street said trading would become “…more challenging…” after it revealed its profits dropped by 24%.

It said all parts of retail would be affected by the economic climate, adding unviable firms would go bust. One may have expected M&S to be in a strong position, but with the high price of food driving customers to cheaper alternatives and the advent calendar flop it may not be a Happy New Year!

Marks & Spencer Plc One-Year Chart
Figure 5: Marks & Spencer Plc One-Year Chart and Technical Sentiment
Source: Pope Family Office (PFO)

The share price could not break over 128 at the end of November and has floundered into December. I see this stock falling back further to 107.82 and then 92.45. Stop loss at 135.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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