US profits slow
Profits continue to underwhelm. Projections for revenue and profits continue to be cut, even with a backdrop of better than expected economic data which should buoy corporate profits.
Marx’s battle of prices versus wages rages on with impact on profit margins
The confluence of falling inflation but elevated cost inflation through wages is crimping profit margins. The National Federation of Independent Business (NFIB) survey captures the price versus wage tension in the US economy. The price versus wage difference tends to have a strong correlation to the profit margins. Post 2020, prices rose more quickly than wages and profit margins rose sharply. As labour markets have tightened with fewer workers available, so wages are catching up with price increases so profit margins are shrinking. As Karl Marx may note, the age old battle between capital and labour rages on.
The price versus wage tension tends to drive profit margins. With wage increases catching up with price inflation so profit margins are set to fall
Source: Bloomberg, Artorius
This is a key development often seen at the end of the economic cycle. Until profit margins stabilise it is hard to become convinced of the longer term attractions of equities, particularly in the US when they are fully valued.
China
Better economic news is emerging from China. In February, the Cheung Kong Graduate School of Business (CKGSB) Business Conditions Index (BCI), a survey that aims to gauge the business sentiment of executives about the macro-economic environment in China, registered 57.6, a vast improvement from January’s score of 49.7.
The business survey registering above 50% shows the economy in a positive growth environment. This month, apart from the company competitiveness index (which measures company positioning, not operational performance), all indicators rose, showing that China’s economic recovery is in progress. This follows the policy announcements at the end of last year and the Covid reopening.
The Chinese Credit impulse indicator, a measure of new loans/GDP, provides a good lead to the improving backdrop in the Chinese economy, as captured by a the CKGSB Business Conditions survey
Source: Bloomberg, Artorius
Existential risks lurk. If China becomes more active in supporting the Russian war against Ukraine, then investors may place the country in the same category of pariah status as Russia. This would result in fund outflows and curtail inward investment. We would act accordingly in our asset allocation.
All expressions of opinion reflect the judgment of Artorius at 15th March 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.