China’s Magnet Monopoly, Banks Look Strong in 2021, World Chip Shortage
Zacks Investment Management provides insight into the biggest news stories, and key factors that we believe are currently impacting the market such as:
- Magnets – an unlikely front in the economic battle against China
- Banks look to be in a strong position for 2021
- The realness of semiconductor shortage
An Unlikely Front in the Economic Battle Against China – Many economic battles are being waged between the West and China, as the world’s second largest economy (China) angles to become the most important on the world stage. One of the unlikely fronts in the economic battle: magnets. Magnets have far more critical uses than many might expect. They are key components in electric vehicles, wind turbines, and a slew of other next generation technology. In other words, demand for magnets is likely to press higher from here. The problem in the marketplace currently is that China mines over 70% of the world’s rare earths and is responsible for 90% of the process of turning them into magnets. What’s more, China can both mine and convert rare earths at a much lower cost than other developed countries, given state subsidies, lower labor costs, and a decades-long head start on the technology needed to process the rare earths. The West is not necessarily sitting idly by – businesses are posturing for government support to ramp up supply chains for producing magnets at a lower cost, but maybe years or even decades away from contributing a steady supply. President Biden signed an executive order in February directing a review of supply chains for critical materials, in an effort to take steps to diversify away from China.1
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Banks Look to Be in a Strong Position for 2021 – In the years following the 2008 Global Financial Crisis, banks engaged in a years-long effort to recapitalize and boost their tier 1 capital ratios. The banks acted out of necessity – new laws required them to hold a certain amount of cash on hand relative to debt and other liabilities. It follows that going into the Covid-19 pandemic, banks were well-capitalized and ready to weather a fairly severe economic storm. Banks set aside billions in reserves to brace for a wave of loan losses, and they booked the reserves against profit for the first half of last year. Turns out, for banks, that storm did not turn out to be as bad as many anticipated. One year later, and banks are ready to release some of the ‘rainy-day money’ they set aside in the wake of the pandemic, which should provide a stiff tailwind to Q1 2021 earnings and also perhaps feed into lending in the new year. Another economic indicator supporting the case for banks to do well in 2021: the yield curve. An upward sloping yield curve generally favors bank earnings, since banks can borrow money on the short-end of the curve and lend it out at long-term rates. The spread is known as a bank’s net interest margins, and the steeper the yield curve, the higher the profit. When the line below is rising, the yield curve is steepening. Which you can see has been the case of late.3
The Semiconductor Shortage is Real – Global supply chain disruptions have created bottlenecks for many key inputs, but none perhaps as acute and critical as semiconductors. The issues are prevalent on two fronts: supply and demand. On the demand side, the global movement to set up home offices and buy new computers and other electronics led to a sharp increase in the need for semiconductors. On the supply side, semiconductor manufacturers did not expect demand so sustain or even go up during the pandemic, and were caught flat-footed when it did. Semiconductors are most often associated with computers and electronics, but they are also critical components of automobiles. Automakers across the spectrum, including Ford, Toyota, Honda, and General Motors have gone as far as to halt or reduce production due to lack of essential components. One fear among economists is that the semiconductor shortage will eventually find its way down into consumer prices, and we are starting to see early evidence of that – in March, the average used vehicle cost 13% more than a year earlier.5
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2 Zacks Investment Management reserves the right to amend the terms or rescind the free How the Looking to Retire in 2021? Here are 4 Things to Consider First offer at any time and for any reason at its discretion.
3 Wall Street Journal. July 14, 2020. https://www.wsj.com/articles/this-is-not-a-normal-recession-banks-ready-for-wave-of-coronavirus-defaults-11594746008?mod=djemMoneyBeat_us
4 Fred Economic Data. April 14, 2021. https://fred.stlouisfed.org/series/T10Y2Y#0
5 Wall Street Journal. April 12, 2021. https://www.wsj.com/articles/chip-shortage-is-bad-for-gm-but-worse-for-car-buyers-11618234080
6 Zacks Investment Management reserves the right to amend the terms or rescind the free How the Looking to Retire in 2021? Here are 4 Things to Consider First offer at any time and for any reason at its discretion.
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