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US and UK positions

 US earnings/strong dollar: buck starts here


Even with currency hedging, the earnings pressure will remain. Morgan Stanley reckons that every 1 per cent change in the Dollar Index knocks 0.5 per cent off company profits. Combined with the effects of higher inflation and a consumer demand dip, the appreciation should shave 10 per cent off of fourth-quarter S&P 500 earnings. Analysts see earnings per share from S&P 500 companies touching $218 this year then climbing to $259 in 2024, up nearly a quarter from 2021.

That seems optimistic given that companies already struggle with margin compression and the Federal Reserve remains committed to fighting inflation with more interest rate rises. More domestically oriented US companies should have an easier go. The S&P 500 US Revenue Exposure index, which tracks the stocks in the benchmark with higher than average US revenue exposure, is down 14 per cent this year.

Sterling weakness/HK stocks: utility bills
Hong Kong-listed stocks are among the most affected. Consider Hong Kong-listed banks. In June, UK credit exposure was a quarter of the group. HSBC earnings are sensitive to movements in the pound because they have high liquidity balances in sterling.

Peer Standard Chartered’s UK underlying pre-tax profit was about 9 per cent last year. Local utility companies could feel the biggest impact. It holds 41 per cent of Northern Gas Networks, which owns the North of England gas distribution network. Power Assets’ parent group, Cheung Kong Infrastructure Holdings, is another one that is impacted.

The UK accounts for about a third of CKIH’s profit. Both have heavy UK investment exposure. When the pound fell to $1.30 in 2019, that sparked profit warnings by these Hong Kong groups. They have little to look forward to at home too, with analysts expecting the economy to contract this year, down from expectations for 0.3 per cent growth.

DocuSign: on the dotted line

In the bonfire of the cloud software-as-a-service companies, DocuSign is suffering more than most. Over the past 12 months, the share price is down 80 per cent. His appointment alone should steady the company following the former CEO’s abrupt departure in June. Perhaps his prior experience can help DocuSign to explore new revenue streams, too.

DocuSign’s core e-signature service is still convenient for online transactions. DocuSign has 1.28mn customers, adding 44,000 in the last quarter. Last year billings, which includes deferred revenue, rose 37 per cent. This year they are forecast to grow just 7 per cent.

The net dollar retention ratio, which compares recurring revenue for subscriptions, has fallen from 124 per cent two years ago to 110 per cent. In the last earnings, DocuSign posted $622mn in revenue, more than a fifth up on the previous year and beating expectations. Rival Adobe’s recent purchase of design software company Figma for $20bn reduces the odds that it will make a similar bid for DocuSign. Subscriptions are steady and DocuSign has a reassuring $1.1bn cash on hand.

UK insurance: motoring up

The over-50s market specialist yesterday slashed its profit guidance by two-fifths as a result of the rising cost of motoring claims. Shares lost up to a quarter in reply, leaving them at an all-time low that valued Saga at just £150mn, from £2bn five years ago. Car-insurance peers Admiral and Direct Line slid too. Share prices across the board have fallen 40-60 per cent since the start of the year.

Admiral already says it expects inflation of 11 per cent during 2022. The market leader has taken action. Admiral increased prices for new policies by 16 per cent in the first half. The wider market should expect something similar.

Thomas Bateman at Berenberg says UK motor insurance should increase another 15 per cent to cover claim inflation. Indeed, prices have risen on average by 3 per cent per month between June and August, ONS data say.
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