Wei Li, Global Chief Investment Strategist of the BlackRock Investment Institute together with Vivek Paul, Head of Portfolio Research, Paul Henderson, Portfolio Strategist and Christian Olinger, 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.

Key Points

Long-term asset views: Strategic views are evolving in the new regime. We lean into investment-grade credit and away from high yield. We stay overweight inflation-linked bonds and stocks.

Market backdrop: Stocks were flat and the yield curve further inverted last week. The Federal Reserve seems set on rate hikes, even as the damage is starting to be clear.

Week ahead: Global manufacturing and services data should signal how economic activity is responding to central banks’ policy tightening. We see recessions ahead.

Our strategic views of five years and longer are positioned for the new regime of greater macro and market volatility. We go more overweight investment grade (IG) credit on attractive yields and healthy corporate balance sheets that can withstand the mild recession we expect. We stay modestly overweight developed market (DM) equities. We expect the overall return of stocks over the coming decade to be greater than fixed-income assets even if equities take a near-term hit.

Leaning into investment grade credit

Strategic (long term) asset views, November 2022

Since our last strategic view update, we increased our overweight on global IG credit and cut high yield to neutral from overweight (see chart). We like the income we can pick up in IG at higher spreads. And we see looming recessions having more ripple effects on high yield than IG. Other views hold true as the new regime plays out. Our expectation of sticky inflation favors inflation-linked bonds not yet pricing in that view. Nominal long-term bonds are challenged for multiple reasons that we see driving a higher term premium, or the compensation for holding them. We prefer short-term government bonds because they don’t face the same risks from investors demanding more term premia as in long-term bonds. Our modest overweight in DM stocks is because we think central banks will live with inflation, keeping recessions mild, and long-term valuations are fair.

Unpacking our views

The new regime warrants getting more granular than broad asset class views can convey – both between and within asset classes. For example, old correlations have broken down between equities and bonds that underpinned the bond role as portfolio ballast. We’re underweight government bonds because we think investors will demand higher term premium amid higher inflation and elevated debt burdens. Within government bonds, we like short maturities to collect attractive coupons. We prefer to take fixed-income risk in credit – and prefer public credit to private. We like the income potential and strong balance sheets in IG where credit spreads are near the widest in two years. We’re cautious on high yield and move to neutral – even mild recessions lead to greater defaults and downgrades in lower quality credit.

We stay overweight in inflation-linked bonds because we see persistent inflation – and we still like long-term inflation-linked bonds. Why? We think the new regime of production constraints is set to persist, reinforced by three big transitions. First, aging populations mean shrinking workforces – one reason why labor supply is struggling to keep up with output. Second, we think geopolitical fragmentation is rewiring supply chains. Efforts to re-shore operations could also add to the upward pressure on wages and inflation. Third, we see the transition to net-zero carbon emissions reshaping energy demand and supply over time. Yet market pricing shows expectations for inflation to slow back near pre-pandemic levels.

Over the next year, stocks don’t yet fully reflect our recession expectation and the resulting drag on corporate earnings. That’s why we’re underweight tactically. But strategically we expect the overall return of stocks to be greater than fixed-income assets over the coming decade. That’s partly because we see the politics of recession taking over from the politics of inflation – and central banks will eventually live with some inflation. Staying invested in stocks is one way to get more granular with structural trends impacting sectors. We think lower-carbon sectors like tech and healthcare will benefit more on average than traditional energy stocks in the transition to net-zero carbon emissions, even as traditional energy firms with credible transition plans can do well. In private markets, valuations have not caught up with the public market selloff, reducing their relative appeal. But we think private markets should be a larger allocation than what we see most qualified investors hold.

Our bottom line 

Our strategic views are positioned for the new regime of greater macro and market volatility. We think portfolios need to be more dynamic and change more frequently by constantly assessing the economic damage in market pricing. Watch for our updated views and more on navigating the new regime in our 2023 Outlook on Nov. 30.

Market backdrop

Stocks flatlined this week while the U.S. Treasury yield curve neared its most inverted levels since the early 1980s. Federal Reserve officials made clear that what matters is not the pace of rate hikes, but the end-point for policy rates. The Fed is set to overtighten policy, causing a mild recession, just as signs of damage become evident – such as a further drop in U.S. housing starts. We think the Fed will ultimately stop when the economic pain is clearer and live with some inflation.

This week’s global PMIs take center stage as we gauge activity relative to the looming recession we expect in major economies. We don’t see a soft landing outcome from central bank overtightening but think they will stop short of causing deep downturns as the damage from sharply higher rates becomes clearer.

Week Ahead

Nov. 22: Euro area flash consumer confidence

Nov. 23: Global flash PMIs; U.S. durable goods

Nov. 24: Germany IFO business survey

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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 21st November, 2022 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.

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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 our professional traders and analysts are watching in the markets. As part of Templeton Global Equity Group, the European equity desk is manned by a team of professionals based in Edinburgh, Scotland, 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 a calmer one for global equities as the dust settled on the sharp Consumer Price-Index (CPI) fuelled moves higher the previous week. Focus was on familiar themes of US inflation given the Producer Price Index (PPI) release in United States, while in Europe, the United Kingdom budget and outlook was a talking point. On the week, the MSCI World Index traded down 0.6%, the STOXX Europe 600 Index was up 0.2%, the S&P 500 Index was down 0.7% and the MSCI Asia Pacific Index was up 0.5%.

European outlook: less bad?

As we enter the second half of November, it’s notable that German gas reserves are essentially at 100%, further easing concerns about winter heating needs and a severe economic recession.

In addition, sentiment on Europe in the latest Bank of America Fund Managers’ Survey showed some signs of improvement, with a rise in the number of participants showing mild upside to European growth momentum. In addition, while a majority of respondents projected global growth would slow over the coming year, gloominess about Europe over the next 12 months lessened. This is supportive for European equities, particularly highly levered names, and European credit markets continue to improve. However, European equities logged their 40th consecutive week of outflows last week, so not all observers are convinced it will be smooth sailing from here.

Week in review

Europe

European equities recovered into the end of last week to close slightly higher. Stocks had given up some of their gains on Wednesday and Thursday as UK and eurozone CPI prints proved less supportive for equity markets than the US CPI print a week prior. UK inflation for October came in at a 41-year high of 11.1%, well ahead of consensus expectations and a full percentage point higher than 10.1% in September. Energy was the key driver as gas prices rose 36.9% on the month. Food price inflation came in at its highest in 45 years, at 16.2%. Core inflation, which excludes food and energy, was steady at 6.5%.

Meanwhile, eurozone CPI was revised a little lower to 10.6% from the initial reading of 10.7%. However, it is still the highest rate of inflation since the euro was introduced two decades ago. These reports served as a dose of realism for investors midweek, as central banks turned more hawkish once again.

The UK government’s fiscal statement was the focus on Thursday, bringing £30 billion of spending cuts and £25 billion of tax increases. The UK Office of Budget Responsibility (OBR) expects debt-to-gross domestic product (GDP) to rise until 2027, then fall gradually. The OBR also forecast a sharp drop in inflation in 2024 to just 0.6% and then to -0.8% in 2025, which may lead some to rethink their peak rates estimates that might be lower than currently priced, and crucially a shallower and shorter recession than feared. However, the OBR did predict a record two-year fall in disposable incomes and said the pinch on the consumer is still going to be very visible well into 2023.

In terms of markets, UK domestic stocks rallied back through Friday, whilst gilt yields were higher across the curve. Sterling continued its recovery vs. the dollar last week.

It is interesting the OBR highlighted how significant the impact of the Ukraine war has been, and any positive news therein would provide a tailwind for markets.

There remains a risk tied to further escalation of the war and its impact on energy supplies, inflation and interest rates. As such, UK households could burn through their “lockdown savings” and the impacts on business investment from the war risk, as well as the likelihood of higher corporate taxes, represent market concerns.

In terms of sector performance, utilities outperformed last week amidst lower bond yields. The UK’s fiscal statement also provided clarity for utilities regarding a temporary 45% tax on the electricity generation sector. The UK’s fiscal statement also supported banks—a bank tax surcharge was reduced from 8% to 3%. Meanwhile, real estate stocks lagged on the back of the UK CPI print and the hawkish inferences. In terms of factor moves, cyclicals gave back some of the prior week’s gains, whilst defensive stocks outperformed.

It has been an interesting fourth quarter so far for European stocks, with the Stoxx Europe 600 Index up 11.5% since the start of October. Whilst the rally has some seasonality factors, the majority of the move has been attributed to the belief that we are now getting to the point of peak inflation. The data last week gave investors food for thought around whether the bear market bounce went too far. Some observers have pointed to a short-covering-led bounce. Technical resistance levels have received some attention too, with stocks and broader indices smashing through their respective 50- and 100-day moving averages. However, earnings and economic data continue to send mixed messages for investors and suggest no meaningful shift in bullish or bearish talking points.

United States

US markets paused for breath, with the S&P 500 Index closing slightly lower last week. This is perhaps not too surprising given the index was up 5.7% the prior week. However, the October PPI data boosted optimism that US inflation may be peaking and was supportive for risk assets—the PPI month-over-month was reported at 0.2%, lower than anticipated.

In terms of monetary policy, we had a number of Federal Reserve (Fed) officials speaking last week. The messaging was a little mixed but seemed to suggest a slowdown in the pace of its tightening cycle, albeit with the threat that interest rates could remain higher for longer.

Concerns around US growth remain. Last week’s Empire Manufacturing Survey beat expectations at the headline level, coming it at 4.5%, but the underlying reading was weaker than expected, and pointed to growth concerns (falling new orders and rising inventories). The Philly Fed Survey was also weaker than expected (coming in at -19.4) and reflected a fall in new orders fell and the average work week.

The US housing market continued to slow, with existing home sales dropping 5.9% month-over-month.  The NAHB housing market index fell to 33 from 38 in the prior month.

In addition, US personal savings have slumped to levels last seen during the global financial crisis, demonstrating the pressure on the US consumer.

The crypto space remains in focus following the collapse of the FTX cryptocurrency group, as legal proceedings revealed the group owes US$3 billion to their largest creditors.

The US dollar steadied up a little last week after a sharp move lover from its 20-year highs in the wake of the CPI print. The US Dollar Index is down 4% from highs, though still up 11% year to date.

Finally, the CNN Fear & Greed index suggests investor sentiment is comfortably in “Greed” territory—a sharp turn from highly fearful sentiment in a short space of time.

Asia

Asian equities traded higher last week, with the MSCI Asia Pacific Index closing last week up 0.5%. However, as usual, performance was fairly mixed throughout the region. Hong Kong’s Hang Seng closed up 3.8% and Taiwan’s TAIEX Index was up 3.6%, whilst South Korea’s KOSPI lagged in the region, down 1.6%.

Chinese equities were in focus at the start of the week after the government rolled out a 16-point plan to bail out the country’s property market. It is hoped that measures, such as relaxing bank lending and offering special loans for project completion, will help the struggling sector. The market viewed the package as a government shift to a more accommodative policy stance, adding to positive changes to the COVID-19 prevention and control policy. News of positive talks between President Xi Jinping and US President Joe Biden at the G20 summit in Bali also helped sentiment.

The Hang Seng China Enterprises index entered bull market territory, up 20% from October lows. Chinese macro data underwhelmed on Tuesday, with industrial production data missing estimates and retail sales unexpectedly shrinking.

The Hang Seng outperformed in the region last week on reopening hopes and on news of the Chinese real estate package. There was also positive news in the gaming sector after the National Press and Publication Administration (NPPA) approved 70 new games on Thursday. There was broad strength in education stocks too after the Ministry of Education issued a new plan requiring that the construction of vocational school infrastructure was to be strengthened.

In Japan, the Nikkei closed the week down 1.3% as core inflation hit a 40-year high of 3.6% year-on-year in October. Whilst core and underlying measures are both above the Bank of Japan’s (BoJ’s) 2% target, board members have repeated that they expect inflation to fall back from next year, reflecting an unwind of energy prices and subsidies in the latest fiscal stimulus package. Following the CPI report, BoJ Governor Kuroda reiterated the need to maintain an ultra-loose policy.

Week Ahead

Expect a quiet end to the week for markets with the US closed for Thanksgiving on Thursday and closed a half day on Friday. This should lead to quieter market volumes globally; for example, European volumes on US Thanksgiving Day have averaged 30% lower since 2010. With the holiday, all the US macro data is out Monday-Wednesday, including the Fed meeting minutes, which will be a focus.

In Asia, COVID-19 cases are on the rise in China, so this is a dynamic to keep a close eye on.

In Europe, we have the European Central Bank meeting minutes, a Riksbank monetary policy meeting, European and UK Purchasing Managers Index (PMI) data, and German IFO data.

Monday 21 November

• Germany PPI

Tuesday 22 November

• China Bloomberg November China Economic Survey
• UK Public Finances (PSNCR)
• ECB Current Account SA
• Eurozone OECD Publishes Economic Outlook
• Eurozone Consumer Confidence
• US Richmond Fed Manufacturing Index
• Australian PMI

Wednesday 23 November

• German, UK, France, eurozone PMI data
• US MBA Mortgage Applications; Durable Goods Orders, PMI, Initial Jobless Claims, University of Michigan Sentiment; Federal Open Market Committee meeting minutes

Thursday 24 November

• Japan PMI; Machine Tool Orders year over year
• France Business Confidence
• Germany IFO Business Climate

Friday 25 November

• Germany GfK Consumer Confidence, GDP

 

Franklin Templeton Key risks & Disclaimers:

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This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 22 November 2022, 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.

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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.