The week ahead – German elections, Rolls-Royce, IAG, Nvidia and Berkshire Hathaway results

German elections – 23/02 – Having seen how unpopular the mainstream parties have become in the past few years; this German election could well upend the status quo which has been in place since German reunification back in 1990 and in so doing send shockwaves across Europe. The courting of the AfD by Elon Musk in the last few weeks giving them a legitimacy they may well have lacked has helped push the AfD into second place in the opinion polls behind the CDU/CSU and given the German population a choice that they wouldn’t have even countenanced when Angela Merkel was Chancellor of Germany. Unfortunately, while she enjoyed significant levels of popularity when she was running the country the various decisions she took when she was in charge have tarnished her legacy significantly, from the decision to close Germany’s nuclear power capability, to the decision in 2015 to admit over a million of migrants from Syria and the Middle East, which has been blamed by many for the rise in violent attacks carried out by migrant suspects. Given the electoral maths involved and the unwillingness of the two main parties to countenance an alliance with the AfD a big surprise seems unlikely, however any new government will still have to deal with the problems of a manufacturing sector that has been in a depression for the last 2 years, and a cost-of-living crisis that has meant the German economy has barely grown in that same period, not to mention a much less tolerant attitude to inward migration. There is also the added problem of the additional costs that a vastly different approach to foreign policy which has seen the US baulk at continuing to fill the gap when it comes to looking after its interests in Europe when it comes to defence, which could lead to some difficult discussions when it comes to the constitutional debt brake.    

EU CPI (Jan) – 24/02 – Having cut rates again at its most recent meeting the ECB could well be close to calling a short-term halt when it comes to further rate cuts. With a market rate significantly below its peers, ECB governing council member Isabel Schnabel suggested recently that the central bank could be close to the point where a pause could happen. Having started its rate cut cycle earlier than its peers it certainly has room to do so and headline inflation across Europe is lower at 2.4% on the headline level and 2.7% on core prices. This week’s confirmation of these numbers should add to the expectations that another rate cut would well be some way off in the short term. 

Germany and France Q4 GDP – 25th and 27/02 – The challenge facing the ECB is no better laid bare than in the performance of the Germany and French economies over the last few months. Since the middle of last year, the ECB has cut rates 5 times in the expectation that it could go some way at boosting the output of Europe’s two biggest economies. Sadly, Europe’s biggest problems go somewhat deeper than in lowering borrowing costs. German manufacturing has been in a depression the last 2 years with the result the German economy has barely grown and may even have shrunk. While France may have performed slightly better that is largely down to its services sector which has done better with the Olympics also helping. At the end of last year, the German economy shrank by -0.2% with an expectation that Q4 is unlikely to be much better. In France the economy also contracted in Q3 by -0.1%, with an expectation that Q4 could see a modest return to growth of 0.1%, with the services sector driving the improvement.   

US Q4 GDP and Core PCE (Jan) – 28/02 – This week’s Q1 GDP numbers are set to reiterate the slowdown in the US economy shown in the numbers released at the end of last month which showed an annualised rise of 2.3%, down from a figure of 3.1% in Q3. While on the face of it the slowdown was more than expected a large part of the reason was due to the impact of the hurricanes and the strikes at Boeing. On a household consumption basis, we saw output pick up from 3.7% to 4.1%, pointing to a resilient US consumer, however as we look to 2025, the pace of GDP growth is still expected to slow to a level of around 2%, still pretty healthy but an indication of slightly persistent inflation constraining spending. Inflation on a PCE basis, which is the Federal Reserve’s preferred inflation measure, is expected to remain sticky at 2.8%, with a close eye also to be kept on Personal income and spending levels for signs that higher prices are weighing on the US consumer. 

Rolls-Royce FY 24 – 27/02 – Amongst one of the standout performers share price wise over the last 2 years, the transformation from pandemic basket case, and “burning platform” to a company that has seen its share price surge under the guiding hand of CEO Tufan Erginbilgic who has managed to oversee a remarkable turnaround in fortune. When he took over, he didn’t hold back calling the business a “burning platform” before taking a hatchet to thousands of jobs, and focussing on the core business, rolling up the engineering technology and safety operations into one division. While the recovery in the aviation business has undoubtedly helped, the return of its investment grade credit rating is also welcome, lowering its costs in the process. At the most recent trading update, expectations for underlying profit were kept unchanged at between £2.1bn and £2.3bn, along with FCF guidance of £2.1bn and £2.2bn. Large engine flying hours have now fully recovered and are at 102% of 2019 levels for the year to date, while defence is also doing well with testing on the F130 engine for the new US Air Force B52J Stratofortress. With the SMR technology also getting adopted by the Czech Republic, the outlook continues to look positive and with the share price already at record highs, and the return of the dividend which was announced at the end of last year, the bar is high given recent gains in the share price. The company now needs to deliver when it comes to the outlook, or risk a modest pullback. 

IAG FY 24 – 28/02 – It’s been a strong performance for IAG shares over the last 6 months, the shares more than doubling since August last year. The owner of British Airways performance has been helped by a resilient travel sector in the second half of 2024, with the airline reporting a 15.4% increase in operating profit in Q3 and an improvement in margins to 21.6%, from 20.2%. Profits came in at €2.01bn driven by a 3.9% increase in transatlantic capacity, which saw an increase of 31.7% in passenger revenue for that segment. Total revenue for Q3 came in at €9.03bn, pushing revenue year to date above €24bn with profits after tax year to date coming in at €2.34bn. This improvement in profits was partly driven by lower fuel costs which fell 4.2%, compared to the same quarter in 2023, while net debt also saw a sharp reduction to €6.19bn from €9.24bn. On the outlook CEO Luis Gallego said that Q4 capacity was expected to grow by 5% and for the full year 6%, while non-fuel costs are expected to rise by 2%. On capex IAG said it expects to spend €3.1bn with an expectation to take delivery of 20 new aircraft, including 4 of those in Q4. The airline also announced a €350m share buyback. On the downside the recent decision to change its Executive Club rewards scheme for its British Airways customers has invited quite a bit of blowback from its frequent flyer client base, prompting anger that the new tier thresholds which are based on revenue spend would penalise those who self-fund their flights, as opposed to those whose flights are paid for by their employers. While BA have tweaked some of the changes to its frequent flyer rules in response to various complaints from its leisure members there is a possibility that some damage may have been done to its relationship to this cohort which could prompt a drop off in traffic in the longer term.           

Nvidia Q4 25 – 26/02 – When Nvidia reported in Q3 the bar had already been set high on an expectation that demand for AI chips would help drive a strong revenue increase for its data centre chips, with sales of its H100, Blackwell B200 and GB200 chipsets, despite some concerns about overheating issues. In any event Q3 revenues still managed to come in ahead of forecasts at $35.1bn, a 94% increase from the same quarter last year, while profits came in at 81c a share. Data Centre accounted for $30.8bn of that total. For Q4 Nvidia said it expected to see a modest increase on Q3 to $37.5bn, which was still modestly above the market consensus at the time. With gross margins already high at around 75% the narrative around Nvidia’s future returns came under scrutiny at the end of last month on the back concerns that DeepSeek, a Chinese AI company claimed it was able match the performance of US AI models like ChatGPT and OpenAI, at a fraction of the cost, using lower spec chipsets. The use of the high-performance chips that Nvidia specialises in has helped push the share price into the stratosphere in the last couple of years, driven by demand for AI based solutions. DeepSeek’s claims that they can achieve the same results at a fraction of the cost appears to have given the market pause for thought in the context of the sustainability of margins.             

Berkshire Hathaway Q4 24 – 24/02 – One of the most influential investors of the 20th and 21st Century, Warren Buffett has been an investor for the ages who shows little sign of slowing down even at the ripe old age of 94. Notable recent investments have been across all manner of sectors where he has stepped in when others have been fearful of doing so.  Buying stock in Goldman Sachs in the aftermath of the financial crisis. He then paid a reported $26n for the rest of the Burlington Northern Sante Fe railroad in 2009 he didn’t already own, taking the company private, at a time when a lot of people thought he was paying too much especially since it also had debts of $10bn. It was a deal that he said was his biggest bet ever and an insight into the mindset of value investing and how it underscores his entire investment philosophy. He's not one dimensional either having taken stakes in the likes of Apple, Amex, Bank of America, Citigroup, Coca Cola and Heinz. He also knows when it’s time to lock some profit in with his decision to sell 490m Apple shares last year, along with some of his stakes in Citi and BofA, prompting speculation that he was going cold on the tech giants’ prospects. Nothing could be further from the truth given he still holds a sizable stake in Apple worth billions of US dollars. With cash reserves of $325bn the size of the cash pile has prompted speculation that he might be fearful of an impending sell-off it also gives him flexibility to take advantage of new investment opportunities like the recent decision to spend $1.2bn on 5.62m shares in Constellation Brands, the owner of Corona and Modelo beers earlier this month. He has also increased his stakes in Domino’s Pizza and Occidental Petroleum in the last few months. It has also been noted that Berkshire sold out of both its S&P500 index tracker ETFs, which had been in his portfolio since 2019, although they were reasonably small positions, and only reflected 0.02% of the entire portfolio. Is that significant? Probably not, but as we look towards Berkshire’s Q4 numbers, investors will be keeping a close eye on the shareholder letter for Buffett’s views on his current portfolio as well as the outlook.