Global Weekly: The hearing aid boom

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The US and European equity indices showed very small gains this week. The announcement of US President Donald Trump’s tariffs on USD 200 billion of Chinese imports, immediately followed by retaliatory Chinese tariffs on US goods, did not spoil market sentiment. US investors, in particular, are not worried. They see Chinese imports as only a small portion of the goods companies need.

Express delivery company FedEx  declined by 5% on disappointing quarterly results. The reported USD 1.2 billion in operating income was well below consensus estimates of USD 1.4 billion. Increased labour costs and costs related to the integration of TNT Express pressured margins. The stock is experiencing a lot of volatility this year because of the US-China trade tensions, which could harm its transport business. But as only 2% of FedEx revenue is related to China, this seems overdone. Moreover, FedEx’s 11% year-over-year revenue growth is still impressive. The company’s management is not worried, based on good economic conditions, and have even very slightly raised their full year outlook.

Zalando issued its second profit warning this year, pushing the stock 10% lower. In March, the online fashion retailer warned of higher costs to fund expansion. This week, the profit warning was related to lower sales and earnings, due to the long, hot summer in Europe. Consumers were less eager to shop and bought cheaper light summer clothing than higher-margin heavier, warmer clothing. Inditex, known for its Zara stores, also mentioned similar trends last month. As these weather-related sales swings are often temporary, Zalando investors may just need some patience.

Sonova dropped by 3% this week, after a very strong run so far this year. The world market leader in hearing aids gained more than 30% since the spring, but competitors, such as William Demant, are 50% higher. Investors are finally appreciating the strong trends that underpin the hearing aid market. Hearing-aid manufacturers are supported by strong demographics. The world is aging and the average age of the first-time buyer is 72. In addition, more people are hindered by noise pollution. Noise cancelling techniques from high-end headphones are now being incorporated in hearing aids. Together with wireless connectivity, future generations of hearing aids will also be used to pick up telephone calls, watch TV and measure the health condition of the wearer. This market may be interesting for investors looking for companies with strong growth perspectives for years to come. As these stocks are volatile, a strong drop can be used to take a position.

US and German government bonds on the rise

The US and China’s ongoing tariff escalations have previously benefitted government bonds, as risk-averse investors sought their relative safety. This week’s actions had a different result, as the escalation was not as bad as feared.

Without a risk-off sentiment, positive growth expectations and tentative signs of wage pressure are resulting in rising rates. The yield curve has steepened, as the long end of the yield curve is widening. We believe that the yield curve will become very flat or even inverted next year, as we expect the US Federal Reserve will not hike further than to 3% by mid-year 2019. The increasing US yields carried Europe’s along too, with Bund yields moving towards 50 basis points. Italy is the exception, as its spreads declined following news supporting a 2019 budget deficit of around 2%. Still, uncertainty will remain until the budget is officially announced on 27 September.

In corporate bonds, US high yield profited from the risk-on sentiment and almost reached its lowest spread level since 2013. Investors therefore do not yet seem to be preparing for the end of the US credit cycle. Emerging-markets bond spreads fell in tandem, but are still about 1 percentage point above their February low. Two developments still weigh heavily on emerging market sentiment, trade tensions and elections in Brazil, while Argentina and Turkey have started fixing their problems.

Media headlines tend to equate currency volatility with an emerging markets crisis. But such a scenario usually requires two features that journalists ignore: poor macroeconomic policies and domestic funding. Although there are certainly problems in (some) emerging markets, we do not think these ingredients are present. In combination with increased yields, this could attract inflows to the asset class. Strong inflows in emerging-market exchange-traded funds this week, after months of outflows, indicate that more investors are starting to see current levels as attractive entry points for these risky markets.