BlackRock Commentary: Our midyear outlook

Jean Boivin, Head of the BlackkRock investment institute, together with Mike Pyle, Global Chief Investment Strategist, Elsa Bartsch, Head of Macro Research, and Scott Thiel, Chief Fixed Income Strategist, also all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

The COVID-19 shock is accelerating structural trends in inequality, globalization, macro policy and sustainability. This is fundamentally reshaping the investment landscape and will be key to investor outcomes. Our Midyear outlook explains why the most important action investors need to take today is to review their strategic asset allocation to ensure portfolios are resilient to these trends.

BlackRock 30.06 Article Image 1

Sources: BlackRock Investment Institute with data from EPFR, as of June 2020. Notes: The chart shows the global total assets under management at ESG-mandated funds. The “other “category includes money-market and alternatives funds. Data for 2020 through May 31, 2020.

The pandemic has supercharged a shift toward sustainability. Assets under management at environmental, social and governance (ESG)-mandated funds in the U.S. exceeded last year’s record levels at the end of May, even as markets had sold off. See the chart above. Sustainable flows are in their early stages, in our view, and the sustainability wave will likely unfold over years and decades. We also believe markets still under-appreciate the potential economic damage caused by climate change, as well as related opportunities such as the long-term rise in renewable energy. The pandemic has brought some setbacks in sustainability-related trends. For example, some governments have paused efforts to curb plastic use. Yet we believe these setbacks are temporary, and the pandemic has thrown spotlight on the “S” in ESG, as issues such as employee safety and social purpose of companies come to the fore. We see sustainability rising above the mere labels of environment, social and governance. A focus on sustainability can help portfolios achieve greater resilience to shocks, in our view.

The focus of the BlackRock Investment Institute’s virtual – but no-less real – Midyear Outlook Forum in early June was decisively on longer-term trends. The COVID-19 shock has pushed the world harder against four key limits we identified at our November forum: inequality, globalization, macro policy and sustainability. We have revamped our three investment themes to reflect the changes. Our new macro view is captured by the “Activity restart” theme as economies reopen at different speeds. A “Policy revolution” is taking place to cushion the pandemic’s shock, making this our second theme. Our third theme is “Real resilience,” as countries and sectors look set to make a comeback as diversifiers in a more fragmented world, offering resilience to real economy trends.

We highlight the importance of the “Real resilience” theme in particular. The structural shifts accelerated by the pandemic shock are already challenging the resilience of portfolios here and now. The chart on the previous page illustrated one such trend – a shift toward sustainable investing. Others include the intensifying U.S.-China strategic rivalry across multiple dimensions. In this increasingly bipolar world, investors need to balance the investment case for gaining exposure to both these engines of global growth, with possible investment restrictions on each side. We see structural portfolio resilience as much more than just relying on broad asset class correlations in public markets. It’s making sure portfolios are well positioned at regional, country and company level to underlying themes.

We believe what is needed today is a reassessment of the whole portfolio, not just a tweaking at the edges. On a strategic horizon, we highlight the fading role of nominal government bonds as their expected long-term returns fall into negative territory in developed markets. We instead prefer inflation-protected bonds as inflation risk builds up in coming years. We also view portfolio diversification as key, as return dispersion grows across regions, and within asset classes. On a tactical basis we maintain a modest pro-risk stance overall, and prefer credit to equities, favoring up-in-quality assets that have policy backstops and are higher up the corporate capital structure. We upgrade European equities to overweight, as we see the region as offering the most attractive exposure to any cyclical uptick due to its public health measures and ramped-up policy response.

 

Market Updates

BlackRock 30.06 Article Image 2

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, June 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

 

Market backdrop

Measures to contain the virus are gradually being eased in many developed economies. May’s data suggested the worst of the contraction may be behind us, but we see a bumpy restart in coming months. We are tracking the interplay of containment measures and mobility changes on activity as economies have started to reopen. The unprecedented policy response has boosted markets, leaving a potential resurgence of infections and policy implementation as key risks. U.S. Congress is headed for a fiscal cliff as jobless benefits, state support and payroll protection measures are expiring soon.

Week Ahead

  • Tuesday:  U.S. consumer confidence; China official manufacturing purchasing managers’ index
  • Wednesday: Manufacturing PMI for Japan, China (Caixin), the euro zone and U.S.
  • Thursday: U.S., UK and euro area flash PMIs
  • Friday: Caixin China services PMI

The U.S. job market data will be in focus. Consensus estimates point toward modest pickup in U.S. employment, yet there is a risk of a sizable decline. Markets will closely watch the U.S. COVID-19 case count trend this week and next, to gauge the development of the outbreak and its implication on the restart process of the economy.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 29th, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

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Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Last week was choppy for equities. The Stoxx Europe Index 600 closed  down 1.95%, but European equities did outperform US equities, with the S&P 500 Index closing down 2.9%. Markets in the Asia Pacific (APAC) region were mixed in a holiday-shortened week, with mainland China and Japan managing to make small gains.

COVID-19 Resurgence Fears on the Rise

Clearly, the continued easing of lockdowns was in focus, with a close eye on an infection rates. For the most part, Europe tends to be faring relatively well, whilst the US rate is sharply on the rise, seeing record one-day increases in cases.

The midweek market selloff in Europe followed a move lower in the United States after reports on the resurgence of the virus. Dr. Anthony Fauci, the director of the US National Institute of Allergy and Infectious Disease., reported a “disturbing surge” in cases in the country. Headlines on 26 June that Texas would be rolling back some lockdown easing measures given the spike in cases dented sentiment, causing US equities to sell off and  close the day down 2.5%. Infrastructure is starting to be stretched again too, with intensive care units in the city of Houston reported to be at 100% capacity.

Meanwhile, negative Chinese macro data (car sales were -11% year-over-year), speculation around US/EU tariffs, and recently lowered global growth forecasts from the International Monetary Fund also played into bearish sentiment globally.

Europe: Return to Favour?

European equities have outperformed US equities for the past two weeks, and amid the cyclical rally last week, there was continued saw discussion about whether this dynamic has further to run. There are a number of potential catalysts feeding into the argument that it does. Some reasons we see:

  • European Central Bank (ECB): The ECB has been forthcoming in pre-emptive easing of financial conditions and is providing a wealth of liquidity for banks (as we saw further evidence of in the recent targeted longer-term refinancing operations (TLTRO) announcement).
  • European Commission (EC) Recovery Fund: As we have covered in recent weeks, the collaborative nature and scale of the recovery fund demonstrates a strong commitment to Europe from member states. There are still details to be agreed upon, but the majority of observers appear to assume that the deal will be ratified in a form very close to what has been proposed. With this risk-sharing, the fiscal position of the European Union (EU) looks more comfortable than the United States.
  • Easing of Lockdown: Whilst we would caveat that we remain in uncharted territory, the re-opening of economies appears to be progressing well across Europe, with some forecasters looking for improvement in gross domestic product (GDP) readings in the year’s second half. It seems analysts are also expecting a faster and smoother rebound vs. the United States, as the EU is now ahead on controlling the virus. Despite the occasional emergency of new regional hotspots in Europe, the curve of new infections has remained suitably flat. In addition, EU governments have shown greater control in protecting the labour market.
  • US Political Headwinds: The overhang of the upcoming election weighs on the markets as US Democratic presidential candidate Joe Biden has gained traction against President Donald Trump as his support looks to have waned. Meanwhile, the often-turbulent European political backdrop has been (relatively) quiet of late, although we do have the spectre of Brexit to keep in mind.

On the macro data front, June Purchasing Managers Indices (PMIs) were released last week in Europe and came in ahead of expectations. The data showed a strong rebound across the board, with France moving out of contraction. We saw some other positive economic data releases; retail sales in Spain jumped 19.3% in May, whilst consumer confidence improved more than expected in both Italy and France.

We would note, however, that ECB President Christine Lagarde warned last week that Europe’s recovery will be “restrained” as increasing household savings hold back consumer demand. The negative impact of the pandemic on global trade is already extreme, and activity is likely to continue be “significantly reduced” by the fallout, according to Lagarde, who added that lower productivity owing to less efficient supply chains would lead to an incomplete economic recovery.

Last Week in Review

Europe

As noted, European equities lost almost 2% last week, but did outperform their US counterparts. Looking at sectors, the autos managed to only make a small loss with travel & leisure the clear underperformer. Better-than-expected PMI data was also in focus in Europe, and we saw more discussion over the potential for European equities to outperform their peers in other regions. The selloff came on lower volumes, with volumes 20% lower than year-to-date averages, suggesting there was not a great deal of conviction.

Banks came into focus over the weekend after the Financial Times highlighted global equity fund managers have reduced their exposure to European banks to the lowest level in more than a decade. The article cited data from Copley fund research, which tracks US$760 billion of global equity assets under management. The question now is whether valuations now become more attractive to investors, especially given the provision of stimulus from the euro area.

Whilst China/US relations tend to dominate headlines, there is increasing focus on the escalation of EU/US trade tensions. The United States is apparently weighing a fresh round of tariffs on US$3 billion in a number of different imports from France, Germany, Spain and the United Kingdom, according to a notice published by the US Trade Representative. There is a month-long US public comment period that will end on 26 July, so we will be watching for updates.

EU Foreign Policy Chief Josep Borrell also commented last week that the EU is considering retaliating in response to US sanctions against the Nord Stream2 pipeline; the US imposed sanctions at the end of last year on European companies working on the project given it is part funded by Russian company Gazprom. The EU is also moving towards putting a US travel ban in place—so, there are plenty of potential downside risks to be watching.

The other clear risk for the region is Brexit. Over the weekend, German Chancellor Angela Merkel downgraded her expectations of a deal, suggesting that the UK government may not even be interested in coming to an agreement. This has seen the pound slide back below 1.10 vs. the euro as we kicked off trading this week.

United States

US equities underperformed global equity markets, with all three major US indices lower last week. All sectors were in the red, with the energy and financial sectors the week’s losers. Clearly the main focus was the uptick in COVID-19 cases, with the seven-day average at 35,206 on 26 June from 24,567 the previous week—the highest since the outbreak started. It is somewhat of a mixed picture, with the southern and western parts of the country seeing the most pickup, notably the states of Texas, Florida, Arizona and California. Texas rolled back some lockdown easing measures on 26 June and Florida banned the sale of alcohol in bars and restaurants.

The White House has continued to play down the escalation and the risks, which only heightens concerns with the potential for slower action and a continued increase in cases.

There was some cautious action from the Federal Reserve last week, with the central bank telling the largest US banks to continue the blanket ban on stock buybacks until at least the end of September, whilst dividends are restricted from exceeding the level of the previous quarter. This saw the US banks -7.2% on the week.

APAC

Markets in the APAC region were mixed in what was a holiday-shortened week for China and Hong Kong. Mainland Chinese equities (with markets only open three days) made small gains, as did Japan, whilst Hong Kong closed the week down slightly. Midweek, the US Pentagon put Huawei and Hangzhou Hikvision on a list of 20 firms it says are owned or controlled by China’s military, possibly opening them up to more US sanctions.

China’s market was shut on Thursday and Friday of last week, so any negative impact on equities was spared, but equities in the region were weaker as trading kicked off this week. Geopolitical concerns continued to bubble over the weekend after reports that the US government warned Hitachi against selling a nuclear power project in North Wales to China. The EU also said that investment talks with China were reaching a critical stage, so there is plenty of risk on the geopolitical front.

Week Ahead

This week looks to be a relatively quiet week ahead on the macro front in Europe but there are a few releases to watch.

Most importantly, on 30 June we have EU inflation data (Flash Consumer Price Index (CPI); and on Wednesday we have the Global Manufacturing PMI for June as well as the Riskbank monetary policy meeting (expectations are for interest rates to remain unchanged). In the United States, the June employment report will be the highlight on 2 July. After the last upside surprise in non-farm payrolls, any revisions will be in focus.

In the United Kingdom, we have “fiscal Tuesday” this week. On 30 June, UK Prime Minister Boris Johnson will set out a “Big Plan” for prosperity. This is the first of what looks like a series of policy/fiscal statements over the next couple of weeks. The key to watch in the announcements is how much is new cash and how much is the same cash being re-announced. According to reports, relatively little is new cash for this year, £700 million (0.035% of GDP). It looks as though risks are to the downside, with figures likely to underwhelm.

Brexit negotiations continue and 30 June also marks the Brexit extension deadline. It is widely expected that the United Kingdom will not extend the transition period past the end of this year.

Market holidays:

1 July – Russia

3 July – United States

Calendar:

Monday 29 June:

  • Economic/Political: Bank of England’s Andrew Bailey, Sarah Breeden and Gertjan Vlieghe speak; Brexit negotiations continue.
  • Data: Eurozone: economic survey; Germany: CPI; United Kingdom: M4 Money Supply, mortgage applications; United States: pending home sales; Japan: retail sales

Tuesday 30 June:

  • Economic/Political: Brexit extension deadline; BOE’s Sir Jon Cunliffe speaks; ECB’s Isabel Schnabel speaks; UK PM Johnson’s fiscal announcement; Brexit extension deadline.
  • Data: Eurozone: CPI, France: CPI; Italy: CPI; United States: consumer confidence; China: NBS Manufacturing and Non-Manufacturing PMIs.

Wednesday 1 July:   

  • Economic/Political: BOE’s Jonathan Haskel speaks; Riksbank interest-rate announcement
  • Data: Eurozone: Global: Manufacturing PMI; Germany: unemployment, retail sales; United States ADP employment report, ISM Manufacturing; China: Caixan Manufacturing PMI; Japan: Tankan Manufacturing and Non-Manufacturing Indices.

Thursday 2 July:   

  • Data: Eurozone: unemployment report; United States: June employment report, initial jobless claims, trade balance

Friday 3 July:   

  • Economic/Political: ECB’s Klaas Knot speaks
  • Data: China: Caixan Composite & Services PMI


Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 29 June 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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