Top 10 Stocks for Q3 2022 – Part 2

Unfavorable Backdrop

High inflation has been troubling most major economies around the world, with the US Consumer Price Index having surged to the highest levels since May 1981, while the Bank of England expects it to hit double-digits in the UK.

To combat this, many central banks have embarked upon an aggressive and front-loaded monetary tightening path, with China being a notable exception. In June, the US Federal Reserve delivered its third straight and largest rate hike in nearly thirty years, while the Bank of England also raised rates for the fifth time in a row, as the European Central Bank now expects rate lift-off in July.

These tightening policies, along with other factors such as trade disruptions and high energy & commodity prices, impede economic activity, generate fears of stagflation and are creating a challenging environment for stock markets. The SPX500 hit bear territory in June, the pan-European EUSTX50 has had a very bad first half of the year, whereas the UK100 is taking a beating in June, although it has been resilient this year.

Despite the current doom and gloom, stock markets had managed to rally after the pandemic plunge and have the ability to do so again, although it seems early for such moves.

Against this backdrop in a two-part series, we take a look at some stocks from around the world, which are drawing our attention for the third quarter. In this Part 2, we will focus on firms from Europe and China that operate in the energy sector, the airline industry, e-commerce and more. You can read Part 1 here.

Shell

Formerly known as Royal Dutch Shell plc, the UK-based international energy company, was renamed to Shell plc at the beginning of the year. The firm focuses on oil and natural gas exploration, production, refining and marketing, as well as the manufacturing and marketing of chemicals.

In line with Western sanctions, many oil and gas companies had to exit their operations in Russia after the war in Ukraine erupted, and Shell was not an exception, shortly after the conflict started. The firm announced its intention to exit its stake in Gazprom and committed to a phased withdrawal from all Russian crude oil, petroleum products, gas and liquefied natural gas (LNG). ^[1]

These actions were not without consequences and resulted in a $3.9 billion hit during the first quarter of the year, although profits were significantly boosted by soaring energy prices, in an extremely tight market. Adjusted Earnings surged to $9.13 billion in that period, from $6.391 in Q4 2021.

Rival BP and other energy giants also saw their bottom line benefiting from the elevated oil and gas prices, something that has sparked debate for windfall tax on such firms. The UK government announced such action in May, with a tax of 25% on profits of oil and gas companies. The Energy Profits Levy is intended to be temporary and is planned to be phased out when oil and gas prices return to historically more normal levels ^[3].

However, these measures may only have a limited impact on the bottom line of such global energy companies, especially as energy prices remain elevated.

SHEL.uk posted a massive rally of nearly 50% during the first five months of the year, in-line with the surge in oil prices, which culminated in nearly two-year highs in June. The current month however, is poised to become the first losing one of 2022, amidst global stagflation fears.

Tesco

Tesco is a British multinational groceries and merchandise retailer, with its first store dating back to 1929 in London. Today it operates in the United Kingdom, the Republic of Ireland and Central Europe.

In June, Tesco dominated the Grocer Golden Awards 2022 with multiple victories, including Grocer of the Year and Britain's Favourite Supermarket. ^[4]

Back in April, Tesco reported solid results for the full 2021/2022 financial year, with an impressive 34.9% growth in Retail Adjusted Operating Profit, to £2.649 billion. However, it had disappointed with its forward guidance for the current 2022/2023 financial year, expecting lower profit of £2.4 - £2.6 billion. ^[5]

In the mid-June update for the first quarter, the firm maintained the above guidance, while CEO Ken Murphy noted that the environment remains challenging. He also warned of "unprecedented increases in the cost of living" which makes it important for Tesco to work with its suppliers to "mitigate as much inflation as possible". ^[6]

Retailers around the world are indeed facing an unfavorable environment, amidst supply chain disruptions and surging inflation that increases costs and leaves consumers with less disposable income. Inflation in the UK hit a forty-year high in May, while the Bank of England expects it to rise to around 11% in October. ^[7]

The year started on the front foot for TSCO.uk, but things quickly soured as the war in Ukraine erupted, UK inflation keeps rising and the Bank of England continues its monetary tightening. The stock has lost more than 10% from January to May.

Lufthansa AG

Apart from the Lufthansa brand itself, the German-based Group includes more high profile carriers, such as SWISS, Austrian Airlines and the popular low-cost firm Eurowings. It is one of the largest in Europe, having carried more than 45 million passenger in 2021. ^[8]

The Group took a hit during the pandemic as lockdowns around the globe halted traveling, but has been recovering since, along with the rest of the hospitality and travel industry.

Total Revenues doubled to € 5.363 billion in the first quarter of the year, compared to Q1 2021, although they were marginally lower than those generated during Q4 2021, which of course included the holiday season. Margins also improved significantly to -11% on a yearly basis, but were worse than the -4.6% of the previous quarter, while passenger capacity was 57% of the pre-pandemic levels. ^[9]

The Cargo business was a lifeline for the industry, as passenger traffic plunged due to the pandemic and strengthened in Q1 for Lufthansa AG, hitting new records of € 495 million.

The firm saw significant increase in demand during the first quarter of the year, and the high Inflation, which hit record levels in the Euro Area, does not seem to be a deterrent. The firm expects a record summer period and plans to offer around 75% of the pre-crisis capacity in Q2.

It is clear that the air transport industry is recovering, with the International Air Transport Association (IATA) now expecting losses to drop to $9.7 billion this year, while saying that profit should be on the horizon in 2023. ^[10]

However, airlines still have to grapple with high fuel costs due to the surge of energy prices stemming from the war in Ukraine, which Lufthansa AG acknowledged as a source of uncertainty.

LHA.de had a profitable first quarter, but this changed as the war in Ukraine started in late-February, sending energy prices soaring. The second quarter is negative so far, resulting in a roughly mixed first-half.

Renault

Renault is a historic French car manufacturer known for its forward design, iconic models and motor racing involvement. The Group also includes Dacia and Alpine and has more than 111,000 employees in 38 countries. ^[11]

In light of the war in Ukraine, the Group exited Russia, which was its second biggest market in 2021, with sales of 428,264 vehicles ^[11]. It sold its 67.69% controlling interest in AVTOVAZ in May, while retaining the right to a return to the country "in the future, in a different context", as per CEOs Luca de Meo's comments. ^[13]

The first quarter was not particularly good given the semiconductor shortages and the aforementioned war in Ukraine, with the Group having generated Revenues of €9.7 billion, down 2.7% year over year. Vehicle sales dropped 17.1% compared to Q1 2021, to 552,000 units. ^[14]

The Renault brand has a strong electric and hybrid presence, with its E-Tech electrified line-up, accounting for 36% of its Q1 passenger car sales. It aims to become 100% electric by 2030 for passenger cars in Europe.

Supply chain disruptions persist, Eurozone's rampant inflation diminishes consumer disposable income, while the ECB gears up for rate lift-off which would increase borrowing costs. The Group is expected to release its half-year financial results in late-July and we will be looking forward to more insights on how it navigates these industry challenges.

Passenger car registrations in France, which is Renault's biggest market, picked up in May compared to the previous month, according to the European Automobile Manufacturers Association (ECEA). However, they remained below the March peak and were below the May 2021 levels as well. ^[15]

Concerns over the company's large exposure to Russia, had caused RNO.fr to plunge in February, but it has found support during the second quarter.

JD.com

Founded in 2004, JD (Jindong) is a Chinese e-commerce and tech giant, with activities spanning into logistics, artificial intelligence, health and more. It is publicly traded in the Hong Kong and USA stock markets. ^[16]

JD.com had reported Revenue of RMB 239.7 billion (US$ 37.8 billion, as reported) for the first quarter, up 18% compared to last year, marking a less than impressive growth rate for the firm's standards, although the results definitely showed resilience. CEO Lei Xu had talked of "healthy growth", in a backdrop of a "challenging external environment". ^[17]

As of the end of June 18, JD had registered total transaction volume of RMB 379.3 billion, during this year's 618 shopping festival, exceeding last year's performance, although the approximately 10% year-over-year growth is not awe-inspiring. ^[18]

Chinese tech companies have faced tighter regulatory environment at home, but the head of JD's retail business noted that regulation is now "conducted in a more rational way", but he "wouldn't say regulation [is] loosening" as per his recent comments on CNBC. ^[19]

JD has been under regulatory scrutiny in the US as well, along with other Chinese firms that are dual listed abroad. It was recently added to a list of entities that could face delisting from the US stock markets, if they fail to comply with US auditing procedures for three consecutive years. ^[20]

JD.us is having bad year in line with the broader tech sector and has been trading in bear territory for a while now, having lost around 40% from its November peak to May's close.