BlackRock Commentary: Death of the office? Far from it.

Wei Li, Global Chief Investment Strategist together with Mark Everitt, Head of Investment Research and Strategy, Elga Bartsch, Head of Macro Research and Christian Olinger, Portfolio 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 pandemic has led to widespread remote working, raising doubts about the future of offices. We believe the office is far from dead, but expect the impact of flexible working to vary across assets and locations. We see the restart and higher inflation driving up rental income and a more muted response of interest rates to rising inflation than in the past supporting real estate valuations.

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Sources: BlackRock Investment Institute, National Council of Real Estate Investment Fiduciaries, with data from Refinitiv Datastream, as of March 31, 2021. Notes: The orange line shows U.S. core real estate cap rates as represented by the NCREIF Property Index. The yellow line shows the yield of the Refinitiv Datastream U.S. 10-year benchmark government bond index. Cap rates – calculated as net operating income/property value – are a commonly quoted valuation metric for real estate. It is similar to an earnings yield – a lower cap rate means higher valuations. Past performance is no guarantee of future results.

 

Private market valuations have historically been closely linked to the interest rate and credit spread environment. The U.S. real estate cap rate – a measure of valuations – has trended lower since the global financial crisis, in line with the decline in Treasury yields. The cap rate stood around three percentage points above the Treasury yield at the end of March, in line with the 20-year average. A lower cap rate indicates higher valuations. See the chart above. We see a more muted monetary policy response to rising inflation than in the past – what we call the new nominal – and expect it to support real estate valuations overall. Yet cap rates are just one of the drivers of real estate returns. Cash flow growth is also key – and the pandemic has highlighted the uneven impact on cash flows across assets. Properties that have benefitted from the structural trends accelerated by the pandemic, such as warehouses, have performed well and are still attracting high investor interest. Office and retail lagged, though office occupancy rates and income have been rebounding amid the restart. We see a growing dispersion of fortunes even within the office sector, which accounted for nearly 40% of the global real estate market value at the end of 2020 as estimated by MSCI.

Flexible working will likely reduce aggregate demand for offices in some markets, but the effect may not be as large as one may expect – due to tenants’ desire for less density and the need to accommodate peak demand days, in our view. In a survey by real estate service firm CBRE just 9% of large companies expected significantly smaller office prints in the long term, compared with 39% last September. A wait-and-see attitude as the new normal of flexible working shapes up may also have helped moderate the desire to shrink the office size, with existing lease commitments limiting the short-term impact, in our view. We believe the effect will also vary by region, country and even city. For example, we expect much higher occupancy rates in parts of Asia Pacific where homes tend to be smaller and less conducive to remote working.

The pandemic has also accelerated structural trends such as an increased focus on sustainability – now a key consideration among real estate investors and building occupiers. Sustainable assets such as “green buildings” are likely to trade at a premium to non-sustainable assets, in our view. Large real estate investors such as pension funds and insurance companies are setting more stringent environmental, social and governance (ESG) metrics for their investment managers as the issue has risen to the top of investment mandate requirements.

A transformation to a “hub-and-home” flexible working model in some markets could take a couple of years, and will drive a shift in the capabilities and functions of offices, in our view. We expect higher-quality office properties – typically large, newly built spaces with greater flexibility and better sustainability credentials – to benefit at the expense of offices that are smaller, less energy-efficient, and outside core locations. Other factors that are also likely to contribute to the dispersion of performance include the proximity to major transport hubs, ease of access for employees commuting by car, and the quality of building management.

The bottom line: We still see opportunities in the office sector despite changing work patterns, but expect a dispersion across locations and property types and an increased focus on sustainability to be another key driver. Elsewhere in real estate, we still like logistics properties due to their exposure to the accelerated expansion of e-commerce, but see some parts of that market nearing peak valuation. We stress the importance of expert asset management as tenants, owners, operators and investors alike navigate an uncharted territory, both in the future of work and the macro environment.

 

Market Updates

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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 as of July 1, 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 Europe Index, MSCI USA Index, MSCI Emerging Markets Index, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI index, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

Market backdrop

U.S. job growth accelerated in June, with nonfarm payrolls increasing by 850,000 after a rise of 583,000 in May. Stocks rallied to record highs after the better-than-expected employment data. We see labor market bottlenecks as real but expect them to resolve over time. Some 130 countries have backed plans for a global minimum tax as part of an OECD initiative to tax cross-border digital services and limit multinationals from shifting profit to lower-tax jurisdictions.

Week Ahead

  • July 5 – Euro area composite purchasing managers’ index (PMI); China services PMI
  • July 6 – Germany ZEW indicator of economic sentiment; U.S. services PMI
  • July 7 – German industrial output; Fed June meeting minutes release
  • July 9 – China consumer price index and producers price index

Markets will closely watch the U.S. jobs report this week to gauge how quickly the labor market is healing amid the economic restart. Vaccination-driven reopening is starting to lift output especially in services, but short-term labor market bottlenecks may lead to volatility in month-to-month data. We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Fed faces a high bar to change its easy monetary policy stance.


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 July 6th, 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.

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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

Global equities were mixed last week across the regions, reflecting unwinds and relative exposures to value versus growth. US equities rallied through the week into the long holiday weekend, with the S&P 500 Index closing up 1.7%. European equites finished roughly flat after a mid-week unwind over month and quarter end. Meanwhile, Asian equities lagged, with the MSCI Asia Pacific Index closing the week down 1.5%. COVID-19 themes were evident as fears regarding the spread of the Delta variant hit investor sentiment given potential travel restrictions. Repositioning was also a clear driver for markets through a week which straddled quarter-end. However, volumes were poor—25% below the year-to-date average.

Delta Variant Concerns in Europe

As we noted last week, COVID-19 cases have risen quite dramatically in the United Kingdom over the last few weeks as the Delta variant continues to spread. Infections have risen sharply since the decline in early May; however, the young and uninoculated remain the key demographic in the positive cases. Infections among people who have received both jabs of a vaccine (likely 50 years old and above) have not risen significantly. The United Kingdom does continue to test significantly more than other countries and hospitalisations remain at relatively low levels, meaning the medical system is far from any signs of stress that would require increased restrictions. Based on government commentary, most of the remaining restrictions are on track to be eased on 19 July. It appears that as long as the vaccines continue to work, the risk of any further economic setback remains low. The United Kingdom does appear to remain on track for a rapid economic recovery, with a solid rebound expected through the second half of this year.

Whilst the United Kingdom is the test case at present for the COVID-19 vaccination programme, there are concerns around Europe that infections may start to edge up again as regional variations begin to spread. There is nothing yet to suggest that economic growth in Europe is at risk, but there is uncertainty on what kind of impact the spread of the Delta variant would have around Europe, where a smaller percentage of the population are even partially vaccinated. Europe is roughly 6 weeks behind the United Kingdom and the number of infections in parts of Europe have shown signs of ticking higher and the Delta variant is already dominant in Portugal. In France and Spain, 20% of infections are of the Delta variant. However, as this variant spreads, vaccination progress is expected to pick up speed too, meaning that a higher percentage of the population of the eurozone may be vaccinated than was the case at the same stage of the cycle in the United Kingdom. This should hopefully keep economic growth in Europe on track and avoid any harsh new restrictions.

Quick First-Half 2021 Recap

We thought it would be useful to quickly recap some of the overall moves we saw over the first six months of the year.

In the first half of the year, we saw clear rotation into cyclicals and value stocks and away from the previously dominant secular growth industries such as technology, “stay at home” and renewables, which led the market last year. Strong growth, rising commodity prices and rising inflation expectations have aided this move. The European banks have led the way, with the STOXX Europe 600 Banks Index up 23.8% on the year—eurozone banks specifically are up 27%. Utilities are the only sector to finish the first half of the year in the red, down 2.9%. There has been a significant disconnect between the performance of energy stocks in the United States and Europe. US energy stocks are up 42% (the best-performing sector stateside), whilst the sector in Europe finished the first half of the year up just 10%. Persistent inflows have kept equity markets resilient.

Within Europe, the United Kingdom has lagged, with the FTSE Index up 9% in the first half of the year, but the region is benefitting from multiple backdrops, including relative political stability and a skew towards domestic consumption.

Week in Review

Europe

European equities largely recovered from an end-of-quarter blip to finish last week down just 18 basis points. The month-end and quarter-end market unwinds last Wednesday injected a little bit of life into equity markets on what was a relatively quiet week. Market volumes remain low, roughly 25% below the year-to-date (YTD) average. Volatility rose 15% last Wednesday, with the V2X hitting 19.50. The consensual reflation trade was unwound into month-end, as year-to-date winners were sold through the early part of the week. Focus then was on the latest US June Nonfarm payroll number, which came in at 850,000, which was higher than expected. Equity markets have been on a rather steady grind higher through June but there is still some nervousness out there. There are fears that macro data has peaked, growing concerns on whether the Delta variant will spread across Europe, and, finally, central bank rhetoric remains a key focus as investors look for any hints of tapering.

There were a couple of themes to pick out throughout the week. COVID-19 travel fears continued to weigh on travel and leisure stocks, which were lower last week. There’s no respite there with the latest holiday company TUI bond issuance unsettling investors and acting as a reminder just how liquidity-constrained many travel/leisure names remain and how uncertainties remain high. Also, on the reopening theme, Goldman Sachs’ Going Out basket was down 1.8% on the week, whilst the equivalent Stay at Home basket rose 1.5%. The banks lagged overall after a late selloff driven by the yield outlook. In terms of the outperformers, media outperformed, up on the week, along with chemicals and health care.

United States

US indices managed gains of more than 1% across the board in what was a relatively quiet week heading into the Independence Day holiday weekend. The only real catalysts for the week were the ADP Employment Change and the June employment report, both of which did not disappoint. Despite all the positive data, stocks have been trading in a very tight range. These tight trading ranges continue to drag historical realized volatility lower, the lowest level seen since the beginning of 2020. With that said, US stocks recorded their second-best first half of the year performance in over 20 years, with the S&P 500 Index up over 14.4%.

US non-farm payrolls were the main focus from an economics perspective last week. In the end, the print for June, while better-than-forecast (strength from services & government), is still within the ballpark of expectations. As such, it is unlikely to fire up the market’s imagination as it doesn’t suggest “substantial further progress” in labour-market improvement. This print argues for yields to tread water with a downward bias and for stocks to continue to be supported. The unemployment rate was higher than expected, which may worry the Federal Reserve (Fed). Various Fed speakers have outlined in recent weeks that employment may be as much as 10 million below pre-COVID-19 levels, and the data for June marks incremental progress without suggesting any quantum leap. In other words, there is no impetus to push the taper timeline forward.

The S&P 500 Index posted a fifth straight quarterly gain in the second quarter in the wake of the 20% drawdown in the first quarter of 2020. The central bank liquidity tailwind continued to act as one of the more powerful forces for risk assets, with the combined G5 central bank balance sheet at US$30 trillion+. The Fed’s balance sheet topped US$8 trillion late in the second quarter, up from US$4.1 trillion at the start of 2020. Fiscal stimulus lingered as another high-profile theme, estimated at US$17 trillion globally. Pent-up demand and vaccine traction (over 50% of US adults have received at least one shot) drove reopening momentum. Another earnings season of outsized positive surprises and expectations for 30%+ S&P earnings growth in 2021 also fed into the bullish narrative. Inflows were another positive. Retail buying and corporate buybacks also helped, although discretionary corporate buybacks are winding down as we head into earnings season.

Asia and Pacific

Asian equities sold off last week, with the MSCI Asia Pacific Index closing the week down 1.5%. A subdued week in Japan saw the Nikkei closing down 1%. Year-to-date winners—the likes of reopen trades and financials—underperformed. The increased media coverage on the Delta variant and COVID-19 cases spiking globally may be another reason why Japan struggled, especially given the Tokyo Olympics is kicking off in just three weeks. COVID-19 vaccination speed continued to improve, with companies now starting to have on-site inoculation. Confidence among Japan’s manufacturers improved for a fourth quarter, rebounding to the highest level since 2018. The Bank of Japan’s Tankan Survey showed sentiment at big product makers rose nine points to 14 in June, a touch behind expectations.

Hong Kong’s Hang Seng Index closed down 3.3% on the week with both Hong Kong and China Connect closed on 1 July for SAR Establishment Day. Hong Kong only opened for a half-day trading this morning amid a rainstorm warning. The Hang Seng Index topped 29,300 resistance levels and pulled back as more infections Delta variant put recovery on hold, and overshadowed technology’s strength given Facebook’s winning of anti-trust lawsuits the previous weekend.

Week Ahead

Monday 5 July  

  • UK new car registrations
  • European Central Bank’s (ECB’s) Luis de Guindos speaks
  • China Caixin composite and services Purchasing Managers Indices (PMIs)
  • Japan composite and services PMIs
  • Australia composite and services PMIs, retail sales
  • US market closed for Independence day holiday

Tuesday 6 July

  • Germany factory orders, ZEW
  • Eurozone retail sales
  • Global final composite and services PMI
  • ECB’s Pablo Hernandez de Cos speaks
  • Vienna energy forum
  • Reserve Bank of Australia monetary policy
  • US: (June) ISM services

Wednesday 7 July 

  • Germany industrial production (IP)
  • France trade balance, current account balance
  • Italy retail sales
  • European Commission publishes summer forecast
  • Vienna energy forum
  • China foreign reserves
  • US Federal Open Market Committee meeting minutes
  • US: (May) Job Openings and Labor Turnover Survey

Thursday 8 July

  • ECB minutes
  • UK RICS house prices
  • Germany trade balance
  • France Bank of France industry sentiment
  • Bank of England (BoE) bank liabilities/credit conditions surveys
  • Japan current account, trade balance
  • US Department of Energy Data
  • US: initial jobless claims, consumer credit

Friday 9 July     

  • UK Monthly GDP, Industrial Production (IP), trade balance
  • France IP
  • Italy IP
  • China consumer price index (CPI)
  • Istat releases the monthly economic note
  • BoE’s Andrew Bailey, ECB’s Christine Lagarde speak on panel
  • G20 finance ministers and central bankers meeting

 


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 5th July 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. 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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