But UBS noted that there are increasing signs that Apple is working on autonomous vehicle technology. For example, Apple was recently granted a patent for VoxelNet, a technology that could be used for AVs, the analysts said.
“Although Apple has not made a formal announcement yet, we believe the series of patents granted around AV further demonstrates Apple is allocating significant resources to projects that have ‘optionality’ but not reflected in the shares,” they said.
UBS also noted that Apple’s Voxel patent file makes a brief mention that the technology involves processors that simulate a vehicle making a turn, a further hint that the company is diving into self-driving cars.
“Although the application could have a myriad of uses, we find the use of the word ‘vehicle’ in the patent claim along with prior research published by Apple as important clues around the company’s commercial intentions,” said UBS.
Apple rose as much as 1.6% on Thursday, though the stock is down roughly 2.5% year-to-date as investors have taken profits from mega-cap technology names that dominated in 2020.
“Apple currently trades at 28x NTM P/E, in-line with its trailing one year average,” said UBS. “However, we believe a sum-of-the-parts (SOTP) framework is more appropriate going forward given auto optionality. As such, our price target of $142 reflects not only a value for Apple’s “Core” of ~$128 but also an evenly-weighted probability value of Apple’s auto opportunity ($14/share) in our SOTP analysis.”
Central banks will soon need to issue digital currencies as the use of cash slowly becomes irrelevant, according to UBS chief economist Paul Donovan.
“Central bank digital currencies are likely to start becoming part of individual economies’ payment systems in the coming years,” he said in a note published this week.
People are using physical forms of money, like notes and cash, much less than before. Moreover, about half of Sweden’s banks no longer accept cash and its economy is expected to go cashless by 2023.
“We wave debit cards and mobile devices around with the reckless abandon of a first year student at Hogwarts trying out a wand, magically paying for things without ever having to touch cash,” Donovan said, referring to the boarding school in the “Harry Potter” series of children’s books.
Donovan laid out specific differences between how CBDCs would operate compared with cryptocurrencies. CBDCs would be interchangeable with notes and coins in circulation, accepted for tax payments, and wouldn’t have wild fluctuations in value – unlike typical crypto, such as bitcoin. Officially backed digital currency supply could change depending on the central bank’s ability to regulate the spending power of the currency, he said. Meanwhile, cryptocurrencies are decentralized and cannot be controlled by any one party.
He also said digital cash is a direct claim on the private bank to which its account is tied, and not on the government. This means government-produced money is becoming less significant, while digital money produced by the private sector is increasing in importance.
“If central banks want to stay relevant as cash becomes less relevant, they might have to consider entering the world of digital money,” he said.
China is among the leading economies looking closely at CBDCs. The People’s Bank of China aims to become the world’s first to issue a digital currency as part of a push to reduce its reliance on the dollar-denominated financial system, according to Reuters.
Federal Reserve Chairman Jerome Powell said last month a potential digital dollar is a “high priority” project for the US. But he thinks CBDCs should exist alongside cash and other forms of money, rather than replace them entirely.
Forget the pandemic. Inflation is the new issue haunting Americans, on Wall Street and Main Street alike.
Celebrations over vaccine approvals and falling COVID-19 case counts are giving way to concerns over just how quickly the economy will recover – and what that means for prices.
New stimulus signed earlier this month promises to send hundreds of billions of dollars directly to Americans and supercharge consumer spending. And shortly afterward, the central bank underscored that it will support a strong recovery this year, as the Federal Reserve reiterated that it plans to maintain ultra-easy financing conditions at least through next year.
The potent combination of monetary and fiscal support has many fearing a sharp jump in inflation. The eventual reopening of the US economy is expected to revive Americans’ pre-pandemic spending habits. Yet an overshoot of expected inflation could spark a cycle of increasingly strong price growth that leaves consumers with diminished buying power.
Worries of such an outcome are shared among both the investor class and the general public. Google searches for “inflation” surged to their highest level since at least 2008 last week, according to research by Deutsche Bank Managing Director Jim Reid. Dovish investors might highlight that similar spikes emerged after the financial crisis, but hawks can point to the unprecedented scale of pandemic-era relief for why today’s situation stands out, Reid said in a note to clients.
“Whether or not inflation ever materializes there is a rational reason why this time might be different. That’s reflected in the increased attention on inflation,” Reid added.
The theme that this time might be different was echoed by a UBS team led by Arend Kapteyn, who wrote in a March note that “pandemic price movements have been unusually large … and are historically difficult to model/predict.”
More recently, a survey from data firm CivicScience shows 42% of adults being “very concerned” about inflation, according to Axios. That compares to just 17% saying they’re “not at all concerned.”
Inflation worries investors more than Covid
Also, institutional investors are shifting their focus from the pandemic to the risk of rampant inflation. Higher-than-expected inflation is now the biggest tail risk among fund managers, according to a recent survey conducted by Bank of America, higher even than the pandemic itself. Snags to vaccine distribution fell from the top of the list to third place, while a potential bond-market tantrum was the second most-feared risk.
To be sure, younger Americans seem less perturbed. The gap in inflation expectations between the baby boomer generation and millennials is the widest its ever been, a team of Deutsche Bank economists led by Matthew Luzzetti wrote earlier this month.
The disparity is likely a product of vastly different circumstances, according to the team. Older investors lived through the “Great Inflation,” a period from the mid-1960s to the early 1980s during which inflation surged and forced interest rates to worrying highs.
Younger Americans have only known a quarter-century of inflation landing below the Federal Reserve’s 2% target, and millennial investors could have a massive influence on whether inflation expectations and real price growth trend higher as the economy reopens, the bank’s economists said.
“With memories of the Great Inflation possibly already lifting inflation expectations for older age groups today, a more material drift higher in expectations likely would require a lift from the younger age groups,” they added.
CivicScience’s newer data suggests that gap is quickly closing. More than half of respondents aged 18 to 24 said they’re “very concerned” about inflation, more than any other age group surveyed. By comparison, just 37% of Americans aged 55 and older said they’re “very concerned.”
Respondents aged 35 to 54 were still the most worried overall, with 48% saying they’re “very concerned” and 36% saying they’re “somewhat concerned,” according to CivicScience.
Kapteyn’s note for UBS highlighted that the conversation around inflation closely resembles the one following the Great Recession: “A decade ago, following the global financial crisis, we were having very similar conversations with clients as we are now.”
At that time, fears of a quick recovery fueling an inflation bubble were similarly strong, “but instead we wound up in secular stagnation,” the bank wrote, referencing the phrase made famous by prominent economist Larry Summers to describe prolonged low growth and low inflation.
This suggests that Americans’ worries about future price growth – including warnings from Summers himself – could starve the US economy of healthy growth and rehash the last decade’s plodding recovery.
Another massive tranche of fiscal stimulus is on the brink of passage, and UBS sees the measure fueling strong growth well into next year.
Economists led by Seth Carpenter expect US gross domestic product to grow 7.9% from the fourth quarter of 2020 to the fourth quarter of 2021. Growth on a calendar-year basis will total 6.6%, a larger-than-usual difference due to depressed first-quarter gains.
The economy will continue to expand at a robust pace in 2022 as a new fiscal support measure further boosts the recovery, the team projected.
The bank’s previous baseline scenario assumed Republican opposition would force President Joe Biden to shrink his $1.9 trillion stimulus plan, but that hasn’t taken place. With House Democrats poised to approve the measure in a final vote on Wednesday, the bill is set to lift the last pockets of the economy still struggling through lockdowns.
“The manufacturing sector is robust. The housing sector is surging. The part of the economy that is lagging is consumer spending on services,” the team said in a Tuesday note. Their updated forecast sees spending more evenly spread between goods and services.
Nearly all signs point to a healthy recovery in the coming months. The average rate of vaccination has stabilized above 2 million shots per day, according to Bloomberg data. At the same time, daily case counts are down significantly from their January peak and hospitalizations have similarly plummeted.
The pace of the rebound has raised questions as to whether Biden’s massive relief plan is necessary. Where Democrats claim the hole in the economy is large enough to warrant nearly $2 trillion in fresh aid, critics argue the proposal will overheat the economy and send inflation soaring.
UBS sees little risk of a lengthy inflation overshoot. April and May will likely see price growth sharply accelerate, but that rally will quickly give way to moderately higher inflation in line with the Federal Reserve’s target. The roughly 10 million jobs still lost to the pandemic are proof that there’s room for stronger-than-usual inflation, the bank said.
“We see sustained growth, well in excess of the long-run sustainable pace, but we also see a substantial amount of labor market slack,” the team added.
The outlook matches that outlined in recent weeks by Fed Chair Jerome Powell. The central bank expects reopening to lift prices at a fairly quick rate, but the decades-long trend of relatively weak inflation won’t “change on a dime,” Powell said in a late-February House hearing.
The Fed’s preferred inflation gauge will only trend at its 2% target by the end of 2023, UBS said. Rate hikes likely won’t arrive until 2024, though tapering of the central bank’s asset purchases could arrive as soon as October if the recovery surprises to the upside, the economists added.
UBS more than doubled its price target for Tesla on Tuesday, from $325 to $730, while keeping its neutral rating, citing the electric car maker’s emerging leadership in software.
“Tesla has the potential to become one of the most valuable software companies,” the team of analysts, led by Patrick Hummel, said in a note.”This is the next battleground and main driver of valuation from here, in our view.”
Tesla’s narrative, the analysts said, is no longer about winning in electric vehicles where it has already established market leadership, but rather in software.
They predict Tesla will become one of the largest and most profitable original equipment manufacturers globally by 2030, projecting an estimated $200 billion market value for that segment of its business.
“We think the lion’s share of this value can be generated by software, mainly autonomous driving,” UBS analysts said. “No other carmaker is closer to monetize fully autonomous driving for everyday use, and the scalability of Tesla’s technology creates the biggest software-driven revenue opportunity in the industry, in our view.”
Even as its competition in the electric-vehicle space heats up, Tesla will be its most profitable player for years to come, analysts at UBS said in a Wednesday report on the future of the auto industry.
The team of analysts, led by Patrick Hummel, project that Tesla and Volkswagen will easily be the two largest producers of EVs by 2025, but that Elon Musk’s automaker will vastly outperform every other electric car company in terms of profits.
They estimate that Tesla will sell 2.3 million EVs that year and turn an operating profit (OP) of $20 billion. Volkswagen, they project, will sell 2.6 million electric cars for a roughly $7 billion profit. The next closest competitor, by UBS’ estimation, will be General Motors with 800,000 EVs sold and approximately $2 billion in earnings from them.
In 2020, Tesla’s first full year in the black, it sold just shy of 500,000 vehicles and netted $721 million. But roughly $1.6 billion of its $31.1 billion in revenue came from selling regulatory credits to competing automakers that need them to meet emissions standards.
Tesla’s massive profitability advantage won’t come from its cars, but rather from its software offerings, the analysts said.
Tesla is the only automaker that is able to beam out meaningful software updates to its vehicles, and its Autopilot driver-assistance system – which can be continually improved via over-the-air updates – is among the best the industry has to offer. An even more advanced automated-driving feature, “full self-driving” mode (FSD), is on the way.
“We estimate that $9 billion of the $20 billion OP is directly related to the monetization of Tesla’s software capabilities (mainly full self-driving),” the analysts said. “VW should be well ahead of all other legacy OEMs, thanks to scale, but with a much smaller upside from software vs. Tesla.”
Although FSD isn’t capable of making cars fully autonomous yet, Tesla bulls say it has the potential to dramatically boost the company’s profits. For instance, Tesla could realize huge gains if it follows through on its promise to establish a network of autonomous taxis.
In Wednesday’s report, the analysts predicted that in the long term, EV-focused companies like Tesla will continue to widen their technology lead over traditional automakers. Legacy manufacturers will lose market share as consumers choose more advanced products, ultimately leading to consolidation.
“All large global OEMs including VW have accelerated software/digitization investments, but it remains to be seen if their strategies succeed. Tech companies and EV pure-plays are potentially in a better position to be the leading innovators,” they said, adding, “Players with a fully functional autonomous driving stack own the key to financial success.”
UBS’s chief investment officer of global wealth management says investors should brace for a near-term spike in inflation, but concerns about a long-term rise are overblown.
“…While we think inflation may spike in the near term as pent-up demand meets constrained supply, we believe fears about a persistent rise are likely to prove overdone. However, such concerns could still trigger bouts of market volatility-S&P 500 futures were down 0.7% on Monday-and may test investors’ resolve,” said Mark Haefele in a Monday note to clients.
The CIO recommends to investors to “keep going cyclical for the recovery,” against this volatile backdrop. Cyclical stocks are those that react positively when the broader economy improves. UBS favors small-and mid-cap stocks globally and US large-cap stocks in financials, energy, industrials, consumer discretionary, and healthcare.
With COVID-19 cases and hospitalizations declining in the US and vaccinations on pace for roughly 2 million shots a day, Haefele expects a wider opening of the US economy in the second quarter of 2021. Congress will likely pass a relief package north of $1.5 trillion before the end of March and the Fed will remain accommodative. Additionally, S&P 500 companies’ fourth quarter earnings exceeded expectations by almost 20%. This should be a positive environment for the cyclical rotation to continue, Haefele said.
Investors concerned about an uptick in US inflation will be watching the Personal Consumption Expenditures (PCE) price index for January that will be released Friday.
The debate around passing President Joe Biden’s $1.9 trillion aid proposal is a simple one.
Democrats argue the hole in the economy is so big that it warrants spending nearly $2 trillion, on top of the $3 trillion spent last March and the $900 billion spent late in Trump’s term. Republicans point to all the relief the government has already provided, and say the economy can recover with a much smaller boost. If you overdo it, they say, spending so much could take inflation to worrisome levels.
But there’s a third player in the debate: the Wall Street investment banks that are crunching the math. And they are increasingly saying the concerns about runaway inflation are misplaced.
For weeks, economists at major banks had sat on the sidelines, vaguely saying another package would achieve its intended goal of accelerating growth. Now that Democrats are charging forward with Biden’s large-scale plan and likely to pass the bill by mid-March, Wall Street’s take probably won’t make Republicans too happy.
Every big bank has its own forecast, models, and team of experienced economists, and many are arriving at the same conclusion: the benefits of the Biden plan overshadow the risks. After a decade of weak inflation and a currently stagnant economic recovery, Wall Street is cheering on efforts to supercharge the economy with a massive shot in the arm.
Here’s what four banks have to say about new stimulus and what inflation may come of it.
(Spoiler: not very much)
Bank of America: ‘A difficult balance, but so far highly successful’
Investors haven’t been thrown by the inflationary concerns surrounding stimulus. Stocks – which have historically sold off when consumer prices have overheated – sit near record highs. Investors are also continuing to rotate into downtrodden companies set to bounce back as the economy reopens, signaling they’re more focused on profit-growth upside than potential inflation headwinds.
Michelle Meyer, the head of US economics at Bank of America, puts its succinctly, saying the market is “painting a story of optimism.”
“Market participants are looking for stronger economic growth to push up inflation but not trigger Fed tightening too quickly,” the team said in a Friday note. “It is a difficult balance, but so far highly successful.”
The firm forecasts gross domestic product growth of 6% in 2021 and another 4.5% next year. This kind of expansion would fill the hole in the economy by the end of 2022, and additional stimulus would further accelerate growth, the economists said.
The question isn’t whether the economy will overheat, but by how much, they added. The output gap – the difference between actual GDP and maximum potential GDP – is projected to reach its greatest surplus since 1973 if Biden passes his proposal, according to the bank.
Still, with the Federal Reserve actively pursuing above-2% inflation for a period of time, the hole in the economy likely needs to be overfilled before there’s a return to stable growth, the note said.
UBS: ‘Rising only gradually’
The White House’s package might exceed what’s necessary but the effect on inflation “likely will be small,” UBS economists led by Alan Detmeister said in a Wednesday note to clients.
The bank’s rough estimate sees the proposal prompting about 0.5 points more inflation compared to a scenario where no additional aid is approved.
Price growth is expected to rise “only gradually” after “modest” inflation in the first half of 2021, the team said. Core personal consumption expenditures – the Fed’s preferred gauge of inflation – will rise to 1.8% in 2022 and to 1.9% the following year, still trending below the central bank’s goal. Inflation is likely to overshoot 2% beyond 2023 if the economy can strengthen further, UBS said.
The forecast doesn’t yet account for the currently proposed stimulus measure, but the package “poses a small upside risk” and probably won’t lead inflation to reach 2% any sooner, the economists added.
Goldman Sachs: ‘Models currently understate slack’
Economists led by Jan Hatzius took a different approach, focusing on models measuring the output gap instead of inflation expectations. The metric hinges on maximum potential GDP estimates published by the Congressional Budget Office, but those estimates change over time as the US economy evolves.
History suggests the CBO’s calculations are flawed and “currently understate slack” in the US economy, Goldman’s economists said Wednesday. The team alleged the office’s model suffers from endpoint bias, meaning it interprets short-term changes as a reversal of a long-term trend.
Economists don’t need to look too far back to find other examples of this, according to the bank. The CBO’s estimate of potential GDP was consistently revised lower from 2009 to 2017 when actual GDP lagged the maximum potential. Revisions then turned positive in 2018, when actual GDP exceeded the estimated maximum. The CBO reinterpreted what first seemed to be an overheating to later be a catching-up toward full potential, the economists said.
“Both on the way down and on the way up, actual GDP was therefore a leading indicator for estimated potential GDP, indicative of endpoint bias,” they added.
Overall, Goldman projects the output gap to currently be more than twice the size of the CBO’s estimate, backing the bank’s view that “inflation risk remains limited,” even with its above-consensus growth estimates. The CBO’s model is also hard to square with inflation over the past decade, Goldman said, as price growth has steadily fallen short of the Fed’s target even as the budgetkeeper saw the economy overheating.
Deutsche Bank: ‘An unusual moment in macro history’
A special report on Friday by Deutsche Bank’s Chief International Strategist Alan Ruskin sought to strike a balance. Essentially, he wrote, this coming year will be too soon to tell.
Noting that inflation usually tends to lag growth by as much as two years, Ruskin wrote that inflation fears likely won’t be easily proven wright or wrong in 2021.
“A few soft US inflation numbers will not sound the all clear. A few strong US inflation numbers will however elevate concerns,” he wrote. “There is then some inherent asymmetric skew to how the markets will think about inflation risks going forward.”
Ruskin foresaw building inflation fears for this reason, as his “all clear” on inflation risk will not be reachable. Over the medium term, he added, the “market consequences of a meaningful US inflation acceleration are far greater than if inflation fails to accelerate.”
Zooming out somewhat, Ruskin noted this is “an unusual moment in macro history” where “the ‘stars’ as they relate to inflation fears have aligned” because economists of various traditions, ranging from neo-Keynesians to Monetarists to the Austrian school, all have growing evidence showing more rather than less inflation risk.
These elements include the strongest money supply growth in history; the strongest expected real growth in 70 years; the closing of a large negative output gap, and some of the most accommodative financial conditions on record.
Ruskin wrote: “There is a certain sense of ‘if not now, then when?'”
Karofsky and Novelli have also pushed ways of boosting the business by linking closer with other UBS services.
Wealth management, for example, has been a big priority for UBS since the global financial crisis. Linking its $2.75 trillion wealth management business with investment banking has proven an effective strategy amid the boom in SPACs.
While many parts of the market are showing signs of “irrational exuberance” that should alarm some investors, UBS’s Mark Haefele says there are still some risk assets outside of bubble territory.
“All of the bubble preconditions are in place,” he explained in a Friday note, citing record low financing costs, new participants entering into the market, and a combination of historically low interest rates and high savings rates from government stimulus that’s left investors who are searching for returns with no alternative but equities.
However, Haefele said that while parts of the market seem speculative, investors shouldn’t worry that the whole market is in a bubble.
“The cryptocurrency markets are exhibiting signs of excessive speculation and the IPO/SPAC markets are the hottest in two decades. But these markets do not yet pose a broader systemic risk,” the chief investment officer of global wealth management said.
Within the IPO and SPAC market, as well as crypto, prices are discounting future rapid price appreciation, a factor that’s typically present during market bubbles, said Haefele.
Speculation is pushing up prices for bitcoin, especially as major investors raise their long-term price targets for the coin, like Guggenheim’s Scott Minerd who sees bitcoin hitting $400,000 in the future.
First-day IPO performance is also the strongest in around two decades. Airbnb leaped 115% on its first day of trading, while DoorDash opened 78% higher than its offer price. SPACs raised more than $70 billion in 2020, more than the entire prior decade combined, he said.
But equities as a whole are not in a bubble, said Haefele. For one, he explained that large parts of the market are not expensively valued by historical comparison. Removing Facebook, Amazon, Apple, Microsoft, Netflix, and Google, the S&P 500 only rose 6% in 2020.
He also said that valuations of indices look reasonable against the backdrop of low interest rates, and used an equity risk premium approach to explain why stocks still look cheap relative to bonds.
Against that backdrop, he recommends investors “think beyond the bubbles.”
“One reason that bubbles can be so deceptive is that there is often a grain of truth behind their narratives. The dotcom bubble, for example, correctly anticipated the impact of the internet,” said Haefele. “Many of the narratives linked to today’s bubbles may also prove to be correct. Investors may be able to capture some upside but reduce the risk associated with bubbles by identifying the narrative, yet investing in a more diversified way.”