China, Apple and the week ahead

Q4 GDP data suggests the Chinese economy may have hit a near-term bottom.

Growth was 7.9% year-over-year in the fourth quarter of 2012, which was better than the 7.8% forecast by economists, and much better than the 7.4% posted in the third quarter. This is the first acceleration seen in China since the fourth quarter of 2010.

While we shouldn’t conclude China is on the verge of a spectacular growth spurt—especially as Europe continues to struggle—we can at least feel better about the state of the Chinese economy as it appears to be achieving a level of stability that will give the markets comfort.

Read: China to bounce back

Naturally the TSX Index welcomed this news due to its heavy weighting towards commodity prices, but individual commodity price reaction was more muted as several commodities have been appreciating over the past few weeks. If Europe emerges from recession later this year and the United States is able to accelerate its own economic growth, then the outlook for the Chinese economy in 2013 remains positive.

Trading week ahead

U.S. markets are closed for Martin Luther King Jr. day. When traders return tomorrow, U.S. reporting season will kick into high gear as a third of all Dow components will report quarterly results.

In addition to these large-cap heavyweights, we will also see earnings out of Google on Tuesday and Apple on Wednesday. Earnings season in Canada will pick up pace later in the month as only Canadian National Railway and Open Text will be reporting next week amongst larger cap names.

Read: Smartphone users are hanging up on Apple

While the Federal Reserve won’t meet until January 30, the Bank of Canada will be in focus next Wednesday when our central bank will announce a rate decision. It’s no surprise that economists expect rates to remain unchanged, but as usual investors will be focusing on the accompanying statement which will indicate if the central bank sees rate hikes coming sooner than later. Economic data will be rather light on both sides of the border as Canadians will see reports on retail sales and inflation while American investors will likely focus on new housing and manufacturing data.

Considering the light economic news, earnings reports will dictate sentiment for the equity markets. However, commodity markets could remain focused on today’s GDP data out of China and the ongoing fiscal debate in Washington. It’s unlikely there will be any significant data or events over the next week that will alter the market’s view towards supply and demand, so any volatility in commodity prices will likely be foreign exchange driven based on the direction for the U.S. dollar.

Question of the week

What on earth is going on with Apple?

Its stock’s price performance has been terrible going back to September of last year, essentially falling from US$700 to US$500 per share.

Over the past four-and-a-half months investors have blamed tax-loss selling, portfolio rebalancing, potential U.S. tax law changes, increased competition, strategic direction concerns and gross margin pressure to explain why the stock has declined. That’s just a short list of reasons and each one of them probably has some level of validity.

Read: Market your practice like Apple

What’s clear is that Apple is no longer the market darling it once was, and investors are asking more questions about the company’s future. This is not to say that Apple is in imminent danger of collapse, but the company will have to communicate its strategy clearly and effectively to convince investors it can maintain its present market position and grow it going forward.

What are the biggest concerns amongst investors right now?

1) Future product strategies

2) Gross margin pressure/product demand

3) Competitive position.

The Street wants to know whether future versions of current products can really be revolutionary or what new products may be in the pipeline. Gross margin pressure is always a concern with technological maturity and saturation can cause product demand cycles to change. And of course, competitive position is always in focus for a company like Apple, which is used to taking away market share instead of giving it up.

Read: Record year for Apple app downloads

On the other hand, you could raise all of these concerns about any technology company. Investors will have more data to digest next week as Apple reports earnings on Wednesday. Analysts are looking for EPS of US$13.42 on revenues of US$54.8 billion. However, focus will likely be directed to management’s guidance for future quarters.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP