Centerfin Collective Weekly

Weekly Update November 10, 2023

China slips into deflation again, 30-year bond auction goes badly, Disruption in healthcare = active investing

China slips into deflation again

This week, China’s Consumer Price Index (CPI) showed a decline of 0.2% year over year, and the Producer Price Index (PPI) was down 2.6% year over year. Most of the decline is attributed to pork prices falling over 30% from last year. China is the largest producer and consumer of pork in the world. While it isn't clear if this dynamic is supply versus demand-driven, it is still notable given China is the 2nd largest economy in the world.

  • China continues to have a hard time recovering from the heavy-handed handling of COVID over the past several years
  • For the last two decades, China has benefited from being a trading partner to the Western world, exporting its cheap manufactured goods
  • In the meantime, China has attempted to shift the core of its economy away from exports to consumption
  • This transition will be even more important now that the world has shifted into de-globalization mode
  • These recent data points are not indicative of the transition going according to plan

30-year bond auction goes badly

This week, the US Treasury auctioned off $24bn of 30-year US treasury bonds. While this auction was announced a few weeks ago, the demand was the weakest in over two years. The market reacted quickly, with long-end yields spiking and stocks selling off.  While reversing somewhat the following day, this is still important to pay attention to.  As we wrote about last week, the US Treasury purposely lowered the amount of long-term debt due to anticipated poor demand.

  • The reason we are focused on the long end of the bond market is that it is currently driving risk appetite
  • Given the fiscal deficit, if demand for long-term treasuries does not rebound, it could mean higher rates, which would be negative for risk assets (e.g., stocks)
  • If long-term bond yields trade higher, it is likely the US Treasury and/or the Federal Reserve will need to step in to keep a cap on rates
  • The flip side of this kind of reaction could mean inflation, as we saw after tremendous fiscal and monetary stimulus during COVID

Disruption in healthcare = active investing

Eli Lilly’s Mounjaro was approved this week for weight loss in the US. It will be sold under the brand name Zepbound. Weight-loss drugs are all the hype in healthcare. Goldman Sachs estimates that it is a $100bn opportunity. Most expect these drugs to be the highest-selling drugs of all time. It is estimated that 42% of American adults are obese. Obesity costs the US healthcare system $170bn each year. Currently, Novo Nordisk and Eli Lilly dominate the market. We are learning more and more about how these drugs will help prevent other illnesses (including heart disease, the leading cause of death), reduce major procedures, and massively disrupt healthcare.

  • By now, you probably have heard about Ozempic, Wegovy, or Mounjaro being used for weight loss
  • These drugs were previously approved to treat patients with type 2 diabetes but were also being used off-label for their weight loss benefits
  • These drugs have dominated healthcare investing this year, and now two are officially approved for weight loss in the US
  • While the long-term story is still to be written, this does highlight a theme we have been discussing for a few years, which is the need for active investing
  • Eli Lilly and Novo Nordisk are up 61% and 45%, respectively, YTD, while the broader healthcare index is down 8% YTD
  • The biotech index is down 20% YTD
  • This is similar to the dispersion we have seen in technology driven by AI
  • With rates now higher, we don't expect all stocks in these sectors (and others) to trade together
  • Higher dispersion argues for more active management

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