Day: 14 September 2021

Vivek Paul, Senior Portfolio Strategist together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research and Natalie Gill, Portfolio Strategist, all forming 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.

Investors are grappling with an unusually wide range of potential economic outcomes beyond the post-pandemic restart, reflected in frequent shifts in equity market leadership and volatile bond yields. We stick to the anchor of our three key investment themes – and a broad strategic preference for equities over bonds in our updated long-term return assumptions. A more granular approach could help better capture these themes and provide diversification in portfolios, in our view.

Forward-looking estimates may not come to pass. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, July 2021. Notes: The chart shows 12-month forward earnings for the selected sectors within the MSCI USA and MSCI EMU indexes relative to their pre-Covid trend. Respective MSCI sector indexes are used as proxies. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index.

 

Our three investment themes are the new nominal, or a more muted central bank policy response to higher inflation than in the past, China stands out as a distinct asset class and global growth engine, and the journey to net zero. We advance our portfolio construction tool kit in two ways to reflect a more granular approach: One, we take explicit views across the yield curve; two, in equities we use sectors as the unit of analysis to inform our regional views. Rising earnings growth expectations and low interest rates have helped offset the impact of higher equity prices on our overall expected long-term returns. We’ve witnessed diverging earnings expectations across regions and sectors during the pandemic. Some sectors in the U.S., such as IT, materials and communications, have dramatically eclipsed their pre-pandemic earnings estimates. See the chart. In Europe, earnings estimates still lag pre-Covid levels in some areas but the earnings revision ratio – the ratio of the number of stocks with corporate earnings upgrades to those with downgrades – has been rising sharply, supporting our recent tactical upgrade of European equities to overweight.

We believe a sectoral approach to asset allocation in equities will allow investors to better tap into structural themes that are being turbocharged by the pandemic, such as sustainability. Climate change and the green transition will likely affect all assets, but it will be most pronounced at the sector rather than broad market level, in our view. Some sectors may benefit from being aligned with the green transition, as solution providers or by being less exposed to transition risks, including tech and healthcare. Others such as energy and utilities may face longer-term challenges even if restart dynamics brighten their near-term appeal. Just to be clear: These are broad sectoral views – and some individual companies within sectors may buck these trends, creating opportunities for differentiation.

We maintain high conviction in our new nominal theme that implies low real yields – a positive for risk assets. The fall in long-dated yields through the second quarter – a reversal from the climb earlier in the year – has further eroded our expected long-run returns across government bonds and credit. Yet we believe the interest rate environment lends itself to more granularity because the new nominal is effectively all about varying views across different parts of the yield curve. We expect short-term yields to likely stay low as central banks keep policy accommodative, yet see longer-term yields gradually rising on the back of higher medium-term inflation and a revival of term premia (the compensation investors demand for holding riskier longer-term bonds). As a result we expect the yield curve to be steeper in five years than the market is currently pricing. The implication? A preference for shorter-dated nominal government bonds over longer maturities within our overall strategic underweight on the asset class.

The bottom line: We prefer equities to credit and government bonds in strategic portfolios, and see the need for a more granular approach. In fixed income, we prefer inflation-linked bonds to nominal government bonds due to our medium-term inflation expectations and the diminished diversification role of nominal bonds. The lower for longer rate environment also boosts the appeal of private markets for eligible investors, in our view. We also still see a strong strategic case for Chinese assets – especially government bonds – even after allowing for sizable uncertainties, in large part because we believe even a “neutral” strategic allocation to China is significantly higher than current index weights and modest client allocations to Chinese assets. We recognize that precise implementation of more granular views in practice can differ widely among different types of investors.

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 Sept. 9, 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 USA Index, MSCI Europe Index, Bank of America Merrill Lynch Global High Yield Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets 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 U.S. 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and spot gold.

 

The ECB decided to reduce the pace of asset purchases under its pandemic emergency purchase program (PEPP) for the fourth quarter as expected. The central bank upgraded its growth and inflation forecast for this year, but expected inflation to remain far below target over the medium term. We expects the ECB to step up its regular asset purchases when the PEPP program expires early next year to achieve its medium-term price stability goals under its new policy framework. U.S. stocks declined from record high levels and the U.S. dollar rose as uncertainties over growth prospects weighed on markets.

Week Ahead

• Sept 14 – U.S. consumer price index (CPI)
• Sept 15 – China industrial output and retail sales; U.S. industrial production
• Sept 16 – U.S. Philly Fed Business Index
• Sept 17 – U.S. University of Michigan Surveys of consumers

All eyes are on August U.S. CPI data – and whether the monthly pace of price increases slowed down from July. The data will help investors assess the persistence and breadth of inflationary pressure amid the unprecedented restart dynamics. We believe the path of inflation will likely be higher than market pricing implies, mostly as a result of the policy revolution in response to the Covid shock and the shift in the Fed’s monetary policy framework.

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 September 13th, 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. 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.

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 generally declined last week as markets became a little more bearish. The MSCI World Index closed the week down 1.3%, and regionally, the S&P 500 Index closed the week down 1.7%, the STOXX Europe 600 Index closed down 1.2%, whilst the MSCI Asia Pacific Index outperformed again, up 0.8%.

Factors behind the weakness last week included concerns that we may have reached peak growth, COVID-19 infection rates, tax hikes, further Chinese interventionism, the sharp increase in placings, and hawkish central bank rhetoric. Also, we are seeing the busiest start to a month in terms of equity offerings since 2012. The bearishness could also be seen in the fund flow data, with cash funds seeing a US $15.2 billion inflow, the most in five weeks. The CNN Fear and Greed Index has now slipped back into “Fear” territory from “Neutral” one week ago.

Market Bearishness

Last week, markets appeared to be on the lookout for negatives. Whilst there wasn’t one overarching driver behind the weakness, a number of factors contributed.

Peak growth: There is a wide-held view in global markets that we are now past peak economic growth as the global economy recovers from an unprecedented downturn. Despite recent economic data that missed expectations—for example, last week’s UK gross domestic product (GDP) and German ZEW Survey—economic data generally remain strong.

However, the question is whether a peak in economic growth means a peak for equity markets. Equity markets are at, or are close to, all-time highs. As of this writing, the S&P 500 Index is up approximately 18.7% year-to-date and inflows into equities remain resilient. As macroeconomic data continues to normalise, there is less catch-up potential now, causing many to downgrade estimates for growth.

Central bank hawkishness: The European Central Bank (ECB) meeting last week came and went without too much fuss. A “moderately lower pace” of net asset purchases under the pandemic emergency purchase programme (PEPP) was largely in line with expectations. The ECB’s balance sheet has grown by €3.5 trillion since March 2020.

However, the dovish tone at the ECB was not matched last week by rhetoric from the Bank of England (BoE) or the Federal Reserve (Fed). BoE Governor Andrew Bailey confirmed that policymakers were divided in August on whether conditions had been met to raise interest rates and sought more employment data before making the call to tighten.

We saw economists bring their expectations of a 25 basis-points (bps) hike by August 2022 forward last week. The Fed’s John Williams (a Federal Open Market Committee voter) said that his outlook had not changed, despite the payrolls setback and that it could still be appropriate to taper this year. Atlanta Fed President Raphael Bostic (also a voter) agreed, supporting tapering this year and a quick wind-down.

Tax hikes: In the United Kingdom, ministers announced last Tuesday that National Insurance (NI) would rise by 1.25% to help the country tackle the backlog within the National Health Service (NHS) and to fund social care reform, breaking a Conservative Party pledge. The hike caused a bit of a storm in the media, with the opposition claiming the hike will hurt workers the most. Analysis by UK tax authorities said the changes would have a “significant” impact on economic factors such as earnings, inflation and company profits.

In the United States, House Democrats are set to propose new tax hikes to pay for the US$3.5 trillion spending package. The plan involves raising the corporate tax rate to 26.5% from 21%, a 3% surtax on incomes above US$5 million, raising the minimum tax rate on companies’ foreign income to 16.5% from 10.5%, and raising capital gains tax to 28.8% from 23.8%. On the back of the pandemic, tax hikes seemed inevitable; however, it is the extent and the speed at which they will be implemented that will be closely watched by markets heading into the new year.

German political uncertainty: Whilst the upcoming election in Germany isn’t likely to result in any radical policy shift, it does represent the end of an era for Europe’s largest economy. Current Chancellor Angela Merkel is stepping down, heralding a change for German politics. Heading into the 26 September election, the centre-right CDU/CSU, which has been at the forefront of German politics for 16 years, continues to trail the centre-left Social Democratic Party (SPD) in the polls. A shift away from the Union parties could not only change the landscape of politics in Germany, but in Europe too, where the country wields a lot of influence.

Week in Review

Europe

European equities tried to bounce off mid-week lows but still finished poorly, closing the week down 1.2%, with a few catalysts in play. The ECB meeting and announcement on Thursday was a key focus for markets, but the event passed without too much drama, in line with expectations. In this 2021 fiscal year, there was a record amount of paper that came to market in Europe with last week totaling US$6.7 billion. This brings the total so far in Europe to US$9 billion in September versus US$2.1 billion for the whole of August. Volatility spiked midweek in Europe last week but settled as the week went on.

In terms of factors, momentum stocks outperformed overall, up 1.9% in Europe, as investors moved to the recent winners. COVID-19 reopening stocks lagged again last week, down 2.9%, as concerns rumble on regarding the Delta variant as we head into the colder months.

Market volumes are still at very low levels, failing to make any significant bounce following the summer lull. Sector performance was mixed through last week with personal and household goods outperforming following some mean reversion for luxury stocks on the back of quieter Chinese interventionist newsflow in that space. Retail stocks weren’t far behind. In terms of the laggards, utilities and real estate stocks struggled as the threat of tapering increased through the week. Health care was the week’s underperformer following downgrades in the space.

In terms of macroeconomic data last week, eurozone second-quarter gross domestic product (GDP) was revised higher to 2.2% from 2% initially reported. That puts year-on-year (y/y) GDP growth at 14.3%, clearly magnified given a low base in the second quarter of 2020.

Elsewhere, German factory orders beat expectations in July, up 3.4% versus expectations for a 0.7% drop, but still down from 4.1% growth in June. New order growth in July was at the highest level since records began in 1991. The closely watched German ZEW survey declined in September, down to 26.5 versus a previous reading of 40.4. The survey said that whilst financial market experts continue to expect economic improvements, the expected magnitude of those improvements has been amended down significantly. Chip shortages and resource scarcity in construction continue to be key concerns.

United States

US equity markets drifted lower through the holiday-shortened week, with the S&P 500 Index ending the week down 1.7%, its biggest weekly drop since June, as a number of factors weighed on investor sentiment. The S&P 500 Index has closed lower on each of the past five sessions, and it now testing its 50-day moving average, a technical support level to keep an eye on. It is also worth noting that over the last decade, the S&P 500 Index has seen five straight down days 37 times and has been positive five days later on 33 occasions. Furthermore, it is important to keep in mind the S&P 500 Index had made all-time highs the prior week, so the index is still at lofty levels.

Upcoming “Quadruple Witching” Event: Aside from the factors discussed earlier that are weighing on sentiment, it is also worth noting one technical factor that may also have impacted market performance last week. This coming Friday is a quarterly “Quadruple Witching”, a day when index options, index futures, stock options and single stock futures expire, and we typically see huge market volumes as trades are repositioned. There is often heightened volatility ahead of these events, so this is something to keep in mind when considering recent moves and looking ahead to this week.

Looking at sector performance last week in the United States, the industrials saw the weakest performance as peak growth and supply concerns weighed. The health care sector also performed poorly after President Joe Biden’s administration announced plans to lower prescription drug prices. The best-performing sector was consumer discretionary, albeit still slightly weak.

Looking to politics, the wrangling over the Biden administration’s proposed US$3.5 trillion infrastructure bill continues as press reports continue to highlight the process is stalling due to the gap in headline spending preferences between moderates and progressives. In addition, it is worth noting the US has a “Debt Ceiling” deadline approaching in October, where the federal government will face shut down unless Congress approves a new ceiling. This deadline could be used as a bargaining tool by the Republicans in negotiations over the infrastructure bill, so something else for us to keep on the radar as prolonged uncertainty over this could spook investors.

It was a quieter week for US macro data, but the standout last week was probably US producer price index (PPI), which came in at +8.3% y/y.

Looking at new COVID-19 cases in the United States, there are signs the recent Delta wave has plateaued, as the number of daily new cases has drifted a little.

Asia and Pacific

Asian equity outperformance continued last week, helped by strength in Japan following Prime Minister Suga’s resignation the previous week. Japan’s Nikkei Index continued to rally, closing the week up 4.3%, and finishing at a two-month high. Meanwhile, the Tokyo Stock Price Index (TOPIX) rallied to a 30-year high. Suga’s decision not to run in the Liberal Democratic Party presidential election is helping risk appetite, with investors hopeful of a turnaround in the handling of the pandemic and a potential increase in economic packages.

Candidates are lining up for the election, with the reform minister, Taro Kono, currently leading the way in the polls. Another candidate, Fumio Kishida, said that an economic stimulus package worth “tens of trillions of yen” would be necessary to support Japan’s economy through the pandemic. This potential for extra stimulus was driving equity market moves last week.

Japanese equities were also helped as the GDP revision came in slightly ahead of expectations, with second-quarter GDP growth revised up to 1.9% annualized versus a previous figure of 1.3% and ahead of the consensus forecast. This means Japan has managed to avoid a double-dip recession.

Chinese equities were stronger despite another week of negative newsflow on regulation. One key driver may have been the better-than-expected trade data. Chinese customs exports rose 25.6% year-on-year in August, beating expectations. Imports also rose, up 33.1% year-on-year.

Nonetheless, there were further interventionist headlines last week, with Reuters reporting that the Chinese government was summoning gaming firms to instruct them to move away from their “solitary focus” on profit and prevent children under the age of 18 from becoming addicted to games. In Hong Kong, Tencent and NetEase combined lost more than US$60 billion in market capitalization on Thursday.

Week Ahead

Monday 13 September:

• Japan PPI inflation
• Italy unemployment rate quarterly
• Sweden unemployment
• Germany Wholesale Price Index (August)
• US federal budget

Tuesday 14 September:

• UK claimant count & ILO unemployment rate
• Switzerland Producer & Import Prices
• Spain Consumer Price Index (CPI)
• Sweden CPI
• US CPI

Wednesday 15 September:

• Japan core machine orders (month-on-month)
• China Industrial Production (IP) (y/y)
• UK CPI
• Euro area IP
• Norway trade balance
• France CPI
• Italy CPI
• Italy general government debt
• US Mortgage Bankers Association (MBA) mortgage applications (September), empire manufacturing (September), Import Price Index (August)

Thursday 16 September:

• Japan trade balance adjusted
• Netherlands unemployment rate
• Italy trade balance
• Eurozone trade balance
• US jobless claims

Friday 17 September:     

• UK retail sales
• Italy current account balance
• Euro area final CPI inflation
• US state employment

 

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 13th September 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.