BlackRock Commentary: Leaning further into cyclicality

Wei Li, Global Chief Investment Strategist of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist and Scott Thiel, Chief Fixed Income Strategist, 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 UK has led the developed world in the pace of its vaccine rollout, with the euro area set to catch up after a slower start. Vaccine rollouts and fiscal spending are paving the way for an accelerated global restart, reflected in a recent rise in real rates. This supports a broadening of the cyclical tilt in our tactical views, with our recent debut of a UK equities overweight and upgrading euro equities to neutral.

Article Image 1

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. You cannot invest directly in an index. Sources: BlackRock Investment Institute and Refinitiv Datastream, data as of Feb. 26, 2021. Notes: The chart shows the estimated equity risk premia and historical ranges since December 1997 for selected equity markets, represented by MSCI USA, MSCI UK, MSCI Europe (euro), and MSCI Emerging Markets Indexes. We calculate the equity risk premium based on our expectations for nominal interest rates and the implied cost of capital for respective equity markets.

 

UK and euro area stocks lagged the global market in 2020. UK stocks, skewed toward sectors that typically fare poorly during cyclical downturns and weighed down by Brexit uncertainties, were the worst performer among developed market (DM) peers. With the risk of a no-deal Brexit lifted and the UK leading the vaccine rollout among DMs, we see a broad activity restart in the summer. Unprecedented UK fiscal support – which the government plans to keep in place – has helped to minimize long-term economic scarring, reinforcing our positive view on this market. We see the euro area restart lagging that of the UK or U.S. by a few months, given its slower-than-expected vaccine rollout, but this leaves room for a catch-up. In addition to the positive macro backdrop, we see valuations in these two markets as supportive, based on our estimates of the equity risk premium, our preferred valuation gauge that accounts for changes in the risk-free rate. See the chart above.

We expect a vaccine-led reopening to enable activity to return to pre-Covid levels by late 2021 or early 2022 in the euro area and the UK, with a well of pent-up demand fueling spending, especially in services. Activity data last week were stronger than expected, suggesting services have not been as severely hit as by the initial lockdowns as in 2020. We see ongoing fiscal support for the most affected households and sectors, and expect central banks to keep financial conditions easy. We expect the ECB to likely reiterate such a commitment at this week’s policy meeting, pushing back against higher bond yields.

Recent earnings suggest an improving outlook for European and UK companies. More European companies have beat earnings expectations in the fourth quarter of 2020 than ever – albeit versus moderate expectations – accompanied by an improving margin picture. Cyclical exposures such as materials and energy have posted the strongest upward earnings revisions, lending additional support.

Rising government bond yields recently have put pressure on equities. Yet we see UK and European equities relatively well placed in this environment, as our research shows equity prices are typically less sensitive to rising rates when valuations are low, or the ERP is high. More broadly, we don’t see rising nominal yields as a source of worry as long as our new nominal theme holds, with a more muted central bank response against inflation than in the past – and monetary authorities leaning against any excessively rapid increases in real yields. The recent increase in real yields, in our view, reflects expectations for a stronger economic restart and underpins the recent broadening of our pro-cyclical stance.

The bottom line: We have broadened our pro-cyclical stance over the tactical horizon as we expect a rapid activity restart later this year and into 2022. As a result we are overweight UK equities and have upgraded euro area equities to neutral. We also recently downgraded euro area peripheral bonds to neutral, as yield spreads have narrowed. Overall, we prefer equities over credit over the tactical horizon given the relatively more attractive valuations in equities. European companies have also made strides in the shift towards sustainability, positioning them well for the transition to a zero-carbon economy that we see as a key driver of asset returns over the strategic horizon.

Market Updates

Article Image 2

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current 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, in descending order: spot Brent crude, MSCI Emerging Markets Index, MSCI Europe Index, the ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, MSCI USA Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, J.P. Morgan EMBI index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

Market backdrop

U.S. 10-year Treasury yields hit the highest level since last February, putting pressure on the stock market. Nominal yields have been climbing since September, but the magnitude has lagged that of the rise in inflation expectations during the period. Inflation-adjusted yields remain deep in negative territory – in line with our new nominal theme. We still believe the new nominal will support equities and risk assets over the next six to 12 months.

Week Ahead

  • March 11 – ECB policy meeting
  • March 12 – University of Michigan Surveys of Consumers
  • March 8-15 –  China total social financing and new yuan loans

The ECB policy meeting will be in focus after the spike in U.S. government bond yields have driven up global yields. We expect the central bank to reaffirm its intention to keep policy easy until the effects of the pandemic are past and inflation is sustainably back at target. University of Michigan consumer sentiment survey could shed light on the status of the restart as some states have started to ease restrictions.


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 March 8th, 2021 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.

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.

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, volatility in bond yields remained a key driver for equity market sentiment. In particular, mid-week commentary from US Federal Reserve (Fed) Chair Jerome Powell was a key talking point. Whilst headline moves for global indices were muted, the MSCI World Index was up 0.1% and there was significant rotation between asset classes and sectors. On the week, the Stoxx Europe 600 Index closed up 0.9%, the S&P 500 Index up 0.8%, and the MSCI Asia Pacific Index down 0.3%.

US Yields Continue to Rise as Powell Fails to Settle Nerves

As with recent weeks, the US bond market drove equity market action last week, with Powell’s speech prompting US bond yields to move sharply higher and equites to decline.

Speaking on Thursday, 4 March, Powell stated that whilst current conditions in the US economy ‘could create some upward pressure on prices’, these effects would likely be temporary and would not require additional action from the Fed. He did not feel the current climate risks runaway inflation, as seen in recent history. Powell said: ‘At the Fed, we are well aware of the history and how it happened, and we’re not going to allow it to happen again. It was a situation where the Fed didn’t step in when it should have, when inflation pressures were building. That’s not at all the current situation’.

Some had hoped he would suggest the Fed would be more willing to take steps to halt the recent rise in bond yields; however, he merely commented that the recent moves were ‘notable’. Whilst nothing he said was that surprising or controversial, this lack of action over recent yield volatility spooked some investors, and we saw some aggressive market moves on Thursday of last week. Notably, there was a continuation of rotation out of assets that benefit from low interest rates and into areas that may fare better in inflationary conditions.

The US 10-year Treasury yield traded above 1.6% and yield-sensitive momentum/growth stocks slumped, whilst value names, which would fare better in an inflationary environment, held up better. On the week, the US 10-year yield closed at 1.57%.

Last week we also saw Fed Governor Lael Brainard make similar comments, stating that ‘some of those moves last week, and the speed of those moves, caught my eye’ and the Fed would act if it saw ‘disorderly conditions’.

With the US 10-year yield remaining above 1.50%, this is above the average S&P 500 dividend yield and could put some pressure on securities that saw inflows for their income yield in recent times. The TINA (there is no alternative) argument for holding these names will be questioned if US yields remain elevated.

Emerging markets have also seen scrutiny in this environment. Emerging markets tend to fare better when Treasury yields are low, thanks to the higher yields that they generally offer, coupled with the relative low cost of servicing their own debt. As US Treasury yields have risen in recent weeks, we have seen a stalling of inflows into EM assets. The Financial Times highlighted that emerging market assets suffered their first daily outflows since October 2020, with daily outflows of US$290 million last week, vs. daily inflows of US$325 million in February.

Looking ahead, the European Central Bank (ECB) meets on 11 March and could garner a great deal of attention given current market conditions. The Fed’s policy meeting next week on the 17 March will also no doubt be a huge focus globally.

Energy Markets in Focus

Last week saw some dramatic moves in energy markets, with West Texas Intermediate crude oil up 7.5% to above US$66 per barrel last week after the OPEC+ group ratified a smaller-than-expected production increase. It announced plans to increase production by 150,000 barrels per day (bpd), which was lower than expected. There had also been an expectation the Saudis would unwind some of the 1 million bpd unilateral cut made previously. The Saudis decided to extend their voluntary reduction another month, with the Saudi Oil Minister stating, ‘the only thing that’s certain today is uncertainty’.

Energy markets saw further volatility today following attacks on Saudi oil facilities from Yemen.

The Week in Review

United States

The S&P 500 Index continued its grind higher last week, but as the US bond selloff continued, so did rotation into value and out of growth stocks. With this, the NASDAQ underperformed, down 1.9%, amid weakness in the technology sector. Real estate investment trusts (REITS) and consumer discretionary stocks were also lower on the week. The energy sector was the clear outperformer, up +10% given the move in crude oil.  value names rallied, seeing financials and cyclicals outperform.

Feeding into the cyclical strength, US stimulus remains a focus, with the US $1.9 trillion rescue plan passing through the Senate on Saturday. The bill is now back with the House to approve the Senate amendments, and President Joe Biden is expected to sign the bill on 15 March. The COVID-19 relief bills passed in the past year are estimated as totalling 25% of US gross domestic product (GDP).

Macro data was better overall last week and supportive of the reflation trade. The ISM manufacturing Index data beat estimates. The ISM prices paid component was at multi-year highs and ISM delivery times are at the second longest since 1979, providing clear evidence of the disruption to supply chains, which in turn also can fuel inflation.

The headline nonfarm payrolls number in the February US employment report was particularly strong at +379,000, and there was a positive revision of 38,000 to the prior figure. Unemployment fell further (to 6.2%) and average hourly earnings also looked decent at +5.3%, although it was noted in the Fed’s Beige Book report that the shortage of qualified workers had pushed up wages in many areas. This trend appears likely to continue in the coming months.

Europe

European equities finished in positive territory last week, with a few moving parts behind the scenes. The Stoxx Europe 600 Index closed the week up 0.9%. Commodity prices joined credit markets as a focal point, with Brent crude oil up 4.5% at the close in Europe last week, on the back of the OPEC+ headlines. Events in the United States have been a key driver of European equity markets of late and Powell’s speech garnered attention in the region.

A particular theme we have seen in the last few weeks is winners being sold (profit-taking), and that was the case again last week. European value was thus up on the week. With the extreme rotation in recent weeks, EU value is now outperforming EU momentum over the past year, which seemed quite unlikely back in October 2020.

UK equities were strong last week. Large value constituents drove gains, along with Chancellor Rishi Sunak’s latest budget. Sunak extended furlough payments until the end of September, protecting jobs and incomes hit by lockdown. He also announced an extension of the stamp duty holiday, which supported the housebuilders.

The FTSE 100 Index closed last week up 2.2%. The FTSE MIB Index was the laggard in Europe, but Italian equities still managed to finish up 0.2% overall. There were reports that Italian Prime Minister Mario Draghi’s administration was ready to distribute €32 billion of extra stimulus. Note, COVID-19 cases are on the rise in Italy, similar to the rest of continental Europe.

In terms of sectors, oil and gas stocks outperformed amid the move in underlying commodity prices. Autos were also strong in Europe following some positive earnings in the space and a series of upgrades. In terms of the laggards, moves in the US market weighed on tech stocks in Europe. As has been standard of late, health care and utilities also underperformed, both down on the week.

Another continuing theme is ‘Reopening’ names faring better than ‘Stay at home’.

Asia and Pacific (APAC)

Performance in the APAC region was more muted, with mixed performances across the region. The MSCI APAC Index closed slightly lower (-0.3%) on the week. Japan’s equity market underperformed as the pandemic-related state of emergency was extended two weeks for the Tokyo region. There was also commentary from the Bank of Japan that made it clear that the central bank’s 10-year yield target is off the table as part of its policy review later this month, which in turn saw Japanese yields tumble.

In China, People’s Republic of China Premier Li Keqiang unveiled a goal of at least 6% growth in 2021, citing the ‘tremendous tenacity’ of the Chinese response to the pandemic and global recession. Some saw the 6% figure as disappointing, but it is important to remember that this is in the context of the Chinese administration’s goal to move away from intervention/stimulus.

China’s top banking regulator warned last week of the risk of bubbles within both international markets and the country’s own real estate space. He said, ‘I’m worried the bubble problem in foreign financial markets will one day pop’, adding that ‘China’s market is now highly linked to foreign markets and foreign capital continues to flow in’. These comments hit Chinese equities on Tuesday last week as they backed up concerns over monetary tightening in China.

China’s commentary was echoed in Australia the following day, as Australian Treasurer Josh Frydenberg warned that global stimulus is threatening financial stability. Australia also defended tough new foreign investment rules that have seen a decline in Chinese investment, arguing that an increasing number of potential deals are being motivated by strategy, rather than purely commercial gain.

Data over the weekend showed that China’s exports surged in the first two months of the year, jumping 61% (in USD terms). The surge may be skewed somewhat vs. an economy in lockdown this time last year, but still reflects strong global demand. Imports also grew more than expected, +22.2% in the first two months of the year.

The Week Ahead

ECB Meeting 11 March: How Will it React to the Rise in Global Bond Yields?

Ahead of the ECB meeting on Thursday 11 March, there has been the usual trail of commentary from various officials, and it looks like the meeting is shaping up to be one of those events that could leave the markets with more questions than answers. In terms of new policy measures, none are expected but the markets will be looking for Lagarde to clarify the ECB’s view on higher government bond yields, to what extent they are consistent with its stated policy aim of preserving accommodative monetary conditions and what, if anything, the ECB will do if market moves become misaligned with economic fundamentals.

Key Events:

  • Eurozone fourth-quarter GDP (9 March)
  • US consumer price inflation (CPI) (10 March)
  • ECB meeting (11 March)
  • UK January GDP (12 March)

Monday 8 March:

  • German Industrial Production
  • Bank of France Industry Sentiment
  • ECB’s Villeroy speaks
  • Japanese GDP

Tuesday 9 March:  

  • Germany Trade & CA Balance
  • Italy Industrial Production
  • Eurozone fourth-quarter GDP

Wednesday 10 March:  

  • US Core CPI
  • China CPI
  • Japanese PPI
  • Riksbank Rate Announcement: no change expected
  • ECB’s Panetta speaks

Thursday 11 March:

  • ECB Meeting
  • European Commission publishes economic forecasts

Friday 12 March:  

  • Germany CPI
  • UK Trade Balance & GDP
  • Eurozone Industrial Production

 


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 8th March 2021, 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.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.