BlackRock Commentary: High conviction: inflation-linked debt

Jean Bovin, Head of BlackRock Investment Institute, together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Michael Dilmanian – Investment 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

Leaning in: We upped our overweight of inflation-linked bonds in March to quickly take advantage of the market pricing lower inflation – our new playbook in action.

Market backdrop: Bond yields rose after data showed a still-tight U.S. labor market. We think that keeps inflation sticky and makes Federal Reserve rate cuts this year unlikely.

Week ahead: U.S. inflation data this week will show core inflation remaining well above the Fed’s 2% target. We don’t see the Fed hiking enough to get it all the way to 2%.

Major central banks are hiking rates into recession to try to get inflation to policy targets. Inflation fell when past recessions hit. Pushing inflation to target now calls for a major recession. We expect a recession to help cool inflation but think the Fed will stop hiking before it gets severe. This week’s data is likely to show U.S. inflation staying sticky. We think market pricing is underappreciating persistent inflation and took advantage of the dip in expected inflation in March to up our overweight.

Inflation-linked government bonds behaved more like risk assets in the past, underperforming nominal government bonds in economic downturns. Concerns about bank stability and recession spurred a return of this old behavior last month. That’s the old playbook, in our view. U.S. core inflation is not on track to fall to the Fed’s 2% target, like markets expect (see the green dot above). February Personal Consumption Expenditures (PCE) data confirmed this. We expect the Consumer Price Index (CPI) data out this week to do the same. Lower energy prices and falling goods inflation as consumer spending shifted back to services initially led a decline in core CPI inflation (yellow line). But some goods inflation is already ticking back up. A tight labor market that’s boosting wage growth and services inflation is also making core inflation stubborn. Plus, supply shocks – like the surprise OPEC+ oil production cut – may cause brief spikes in headline inflation (dark orange line).

The Fed is sticking to hiking rates to get inflation down to target, even as financial cracks start to appear. We think the Fed will eventually stop hiking when the damage becomes more apparent. That means it won’t have done enough to create the deep recession needed to achieve its inflation goal, so it will be living with some above-target inflation. Updated Fed forecasts last month noted as much, with PCE inflation floating around 3% at year-end – even as the Fed expects growth to stall.

New playbook in action

The breakeven inflation rate – or the market’s pricing of future inflation – narrowed in March as markets saw inflation falling to 2% given the bank turmoil and nearing recession. We were already tactically overweight inflation-linked bonds. We used the repricing to go more overweight. Any old-playbook-style underperformance of inflation-linked versus nominal bonds presents opportunities, in our view. We think the market pricing in repeated rate cuts suggests investors are underestimating inflation’s persistence and expecting central banks to come to the rescue. We see sticky inflation preventing cuts in 2023. The magnitude of our tactical overweight is now closer to our longstanding overweight from a strategic view of five years and beyond as structural trends like aging populations, geopolitical tension and the energy transition keep inflation higher.

We are neutral on euro area inflation-linked government bonds and prefer U.S. counterparts. The reason: European inflation is more likely to reach the European Central Bank’s (ECB) 2% target. Not because inflation is less persistent – getting inflation to 2% will take a recession, just as in the U.S. But unlike the Fed, we see the ECB going full steam ahead with rate hikes to get inflation to target – regardless of the damage that entails. Consumers seem to agree, with their inflation expectations over three years ticking down closer to the ECB policy target, according to February ECB survey data. But at the moment, euro area inflation pricing is even higher than in the U.S. – and thus less attractive, in our view.

Our bottom line 

We think U.S. inflation will remain above the Fed’s target for some time. We wield our new playbook and seized the opportunity to add to our existing tactical overweight to inflation-linked bonds in March – one of our highest conviction views. We see structural trends supporting higher inflation, so we’ve been overweight strategically for a few years. We like other assets that help portfolios with higher inflation. Infrastructure assets have the potential to hedge some of the effects of inflation, too. We remain tactically underweight developed market shares and expect corporate earnings to come under pressure – and the upcoming earnings season starting this week may reveal such damage. We prefer emerging market peers that better price in the economic damage we expect.

Market backdrop

U.S. and European equity indexes ended largely unchanged on the week heading into the Easter holiday. U.S. Treasury yields ticked back up after the U.S. jobs report showed another solid gain in payrolls, with the unemployment rate dropping back near a five-decade low. The market priced back in a potential Fed hike in May but is still eyeing multiple rate cuts later in the year. We don’t see the Fed cutting policy rates later this year and prefer short-term government paper for income.

The focus is on the U.S. CPI this week. It is likely to show that inflation is proving sticky and not on track to quickly fall to the Fed’s 2% target. We think the market is underappreciating how persistent core inflation is proving. U.S. retail sales and consumer sentiment could offer signs of how much the Fed’s rate hikes are cooling economic activity.

Week Ahead

April 10-17: China total social financing

April 11: China CPI

April 12: U.S. CPI

April 14: U.S. retail sales; U.S. consumer sentiment survey


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 10th April, 2023 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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

What is social engineering and how does it work?

In the context of IT security, social engineering means the use of deception to manipulate individuals into divulging confidential or personal information that may be used for fraudulent purposes. While systems become progressively more secure, humans unfortunately remain vulnerable to manipulation. This is because criminals can take advantage of people’s emotions to persuade them to provide personal or other sensitive information, that they would not usually share.

How does social engineering work?

Scammers use human emotions; curiosity, fear, and greed, to make people take actions they would normally avoid. A social engineering attack can take place in the real world as much as in the digital one, but they are always designed to make the victim share information or download malicious software.

One of the most common tactics used is baiting. This happens when the target of an attack is tempted into downloading malware or sharing information with the promise of a reward or exclusive access to specific information. Baiting happens in the real world with, for example, USB devices left in conspicuous public places. These end up being picked up by curious individuals who cannot resist the temptation to open them on their own devices to see what content they contain. More commonly, baiting happens through email or on the internet with, for example, messages telling the user that they have won a prize or been selected for some award and asking them for personal details, or to access a link, to ‘complete’ the process. If you unexpectedly receive a message claiming that you have won something or making an offer that seems too good to be true, treat it with extreme caution.

Another very common form of social engineering is phishing. Phishing normally happens via email although it can also occur by SMS (Smishing) and Voice (Vishing). A phishing attack normally focuses on fear, rather than curiosity or greed. It normally uses a sense of urgency or threat of negative consequence to push the user into sharing information or downloading malicious files. These attacks normally take the form of telling a user that an account has been compromised and details are needed ‘immediately’ to rectify the situation. The threat of a phishing attack can be minimised by ensuring you have adequate anti-virus software installed on your devices and by taking a few precautionary steps such as checking the email addresses of senders and the URLs included in messages. Also, keep in mind that legitimate communications from organisations should be addressed to you personally and should never make you feel like you must share sensitive information under pressure. When in doubt, always contact the organisation through a known safe channel.

A more sophisticated form of phishing is called spear phishing. This normally targets senior management or officials withing organisation who have access to sensitive or privileged information. In these cases, attackers spend much more time investigating their target to craft messages that include highly specific details or which appear to be sent from key individuals which make them much harder to detect as malicious. Spear phishing attacks require a lot more research and effort from hackers and can evolve over months as they build up the trust and confidence of their target. However, the potential rewards of compromising the accounts of high value targets makes spear phishing an attractive proposition for criminals.

Fear and pressure are also used in a tactic known as scareware. This tactic sees scammers bombard the user with messages while they are browsing the internet telling them that their device has been infected by malware and pushing them to click on a link to download some software to scan or clean their device. Of course, the software installed is of no benefit to the user, only to the scammer.

Stop and think!

Bad actors will always exist and attempts to gain access to your personal information or accounts are inevitable. That said, you can significantly reduce the risk not only be installing the appropriate software on your devices and keeping this up to date. Being cautious and asking yourself some simple questions like; Is this offer too good to be true?, Was I expecting this organisation to contact me this way? Do I feel under pressure to take a decision?, will also help you to spot potential social engineering attacks. Stop and think before you click.

Finally, if you receive a message that claims to be from MeDirect but you are not sure of its authenticity please contact us immediately on (+356) 2557 4400. The information you provide will be used to help reduce financial fraud.

Free medirectalk seminar to explore potential of high yield bonds in 2023

The medirectalk series returns to an in-person format this coming 18 April when representatives from the specialist fund management firm Liontrust will be discussing the potential benefits of investing in high yield bonds during 2023. The event, taking place at the Hyatt Regency Hotel in St Julian’s, will start at 6.00pm and is free to attend, subject to registration.

medirectalks offer investors and those interested in the world of finance a unique opportunity to directly hear some of the world’s leading experts discuss the main themes affecting the economy as well as various investment strategies. The speakers at this upcoming event will be Liontrust’s Co-Heads of Global Fixed Income, Phil Milburn and Donald Phillips. They will be joined by Sharmin Rahman, Investment Manager within Liontrust’s Global Fixed Income team to discuss how the current market might be creating an opportunity for long-term investors within the quality end of the high yield bond market.

The discussion, which will last approximately one hour, will also give participants the opportunity to ask questions which can be submitted prior to the event. This will then be followed by a reception during which drinks and canapés will be served and representatives from Liontrust and MeDirect will be available for any additional follow-up questions or enquiries.

James Beddall, Head of International Sales at Liontrust, said, “We are very much looking forward to returning to Malta for an in-person medirectalk. Our team will be sharing Liontrust’s insights on the overall macro situation, our 2023 strategy and why we think the high yield bond market could provide some interesting returns in the months ahead. It will be interesting for us to also hear the perspective of Maltese investors, who traditionally have favoured bonds as an investment vehicle, on how they see the market evolving and what they think about our own views.”

Ingrid Micallef, Head – Products & Marketing at MeDirect Malta, said, “The medirectalk series, whether in-person or online, continues to prove popular as it is one of the few opportunities Maltese investors have to hear from, and ask questions to, some of the most successful fund and asset managers in Europe. These events are a real learning opportunity for anyone who wants to grow their wealth by understanding how different asset classes behave and what the potential risks and rewards are. I am very confident this will be a very interesting and informative event.”

To register, free of charge, for the upcoming medirectalk click here.

Live streaming will be available for those unable to attend in person through MeDirect Malta’s Facebook and LinkedIn pages. Further information on medirectalk can be found here: https://medirect.com.mt/invest/medirectalk.

 

Registration is on a first come first serve basis due to space limitation. A confirmation email will be sent in reply within 24 hours to your registration confirming reservation of seat/s. The seminar will be held at the Hyatt Regency Hotel. You will be requested to read and sign the event terms & conditions before entering the venue.

The speakers themselves, personally or on behalf of the institutions they are representing, are not responsible for the opinions they express during the discussions.

The information given during these talks is for general information purposes only and is neither intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information given during the talks 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 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 the product being discussed, 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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

MeDirect Bank (Malta) plc, company registration number C34125, is licensed to undertake the business of banking in terms of the Banking Act (Cap. 371) and investment services under the Investment Services Act (Cap. 370).


 

medirectalk se jesplora l-potenzjal ta’ high yields bonds matul l-2023

Is-serje medirectalk tirritorna lura b’seminar fit-18 ta’ April fejn rappreżentanti mill-kumpanija speċjalizzata tal-ġestjoni tal-fondi Liontrust se jiddiskutu l-benefiċċji potenzjali tal-investiment f’high yield bonds matul l-2023. L-attivita’, li se sseħħ fil-lukanda Hyatt Regency f’San Ġiljan, tibda fis-6.00pm u l-attendenza hi bla ħlas, suġġett għar-reġistrazzjoni.

medirectalks joffru opportunità unika lill-investituri u lil dawk interessati fid-dinja finanzjarja sabiex jisimgħu esperti jiddiskutu b’mod dirett it-temi mportanti li jaffettwaw l-ekonomija kif ukoll jgħatu l-opinjoni tagħhom dwar diversi strateġiji ta’ investiment.

Il-kelliema f’dan l-avveniment ser ikunu l-Ko-Kapijiet Phil Milburn u Donald Phillips mit-tim tal-Global Fixed Income ta’ Liontrust. Magħhom se tingħaqad Sharmin Rahman, Maniġer tal-Investiment fi ħdan l-istes tim sabiex jiddiskutu kif is-swieq attwali jista’ jkun qed joħolqu opportunità għal investituri  biex jinvestu high yield bonds ta’ kwalita għolja.

Id-diskussjoni, li se ddum madwar siegħa, se tagħti wkoll opportunità lill-parteċipanti  biex jistaqsu mistoqsijiet li jistgħu jiġu sottomessi qabel l-avveniment. Wara s-seminar se jkun hemm riċeviment li matulu ser jiġu servuti xorb u canapés. Rappreżentanti minn Liontrust u MeDirect se jkunu disponibbli biex iwieġbu kwalunkwe mistoqsijiet li wieħed jista jkollu.

James Beddall, Head – International Sales ta’ Liontrust, qal, “Aħna ħerqana li nirritornaw Malta għal dan il-medirectalk. It-tim tagħna se jkun qed jaqsam l-għarfien ta’ Liontrust dwar is-sitwazzjoni tas-swieq bhalissa, l-istrateġija tagħna għal-2023 u għaliex naħsbu li s-suq tal-bonds high yield jista’ jipprovdi renditu nteressanti fix-xhur li ġejjin. Ikun interessanti għalina li nisimgħu ukoll il-perspettiva tal-investituri Maltin, li tradizzjonalment jiffavurixxu l-bonds bħala investiment, dwar kif jaraw l-evoluzzjoni tas-swieq u x’jaħsbu dwar il-fehmiet tagħna stess.”

Ingrid Micallef, Head – Products & Marketing ta’ MeDirect Malta, qalet, “Is-sensiela medirectalk, qed tikber fil-popolarita’ kemm jekk nkunu qed norganizzaw seminars u anke meta d-diskussjoni tkun onlajn. Din hi waħda mill-ftit opportunitajiet li l-investituri Maltin għandhom biex jisimgħu minn, u jistaqsu mistoqsijiet lil uħud mill-esperti nternazzjonali fid-dinja finanzjarja. Dawn l-avvenimenti huma opportunità ta’ tagħlim reali għal kull min irid ikabbar l-għarfien tiegħu billi jifhem kif jaħdmu u jirreagixxu assi differenti f’ċirkustanzi different, kif ukoll x’inhuma r-riskji u l-vantaġġi potenzjali ta’ tipi differenti ta investimenti. Ninsab kunfidenti ħafna li dan se jkun serminar interessanti u informattiv ħafna.”

Biex tirreġistra, mingħajr ħlas, għall-medirectalk li jmiss zur https://promo.medirect.com.mt/medirectalk/.

l-attivita’ se tkun live streamed fuq il-paġni ta’ Facebook u LinkedIn ta’ MeDirect Malta għal dawk kollha li ma jistgħux jattendu personalment. Aktar informazzjoni dwar medirectalk tinsab hawn: https://medirect.com.mt/invest/medirectalk.

Ir-reġistrazzjonijiet se jkunu aċċettati fuq bażi ta’ min japplika l-ewwel minħabba limitazzjonijiet ta’ spazju. F’24 siegħa mill-ħin ta’ l-applikazzjoni għandek tirċievi imejl bil-konferma tar-registrazzjoni.  Is-seminar se jsir il-Hyatt Regency Hotel. Inti mitlub/a li taqra u tiffirma t-termini u l-kundizzjonijiet ta’ l-avveniment qabel ma tidħol fis-sala.Il-kelliema nfushom, personalment jew f’isem l-istituzzjonijiet li qed jirrappreżentaw, mhumiex responsabbli għall-opinjonijiet li jesprimu waqt id-diskussjonijiet.

L-informazzjoni mogħtija waqt dawn it-taħditiet hija għal skopijiet ta’ tagħrif ġenerali biss u mhix maħsuba ghal skopijiet legali jew pariri professjonali oħra u lanqas ma tikkommetti lil MeDirect Bank (Malta) plc għall-ebda obbligu.  L-informazzjoni mgħoddija waqt it-taħditiet mhijiex maħsuba biex tkun suġġeriment, rakkomandazzjoni jew solleċitazzjoni biex dak li jkun jixtri, iżżomm jew ibigħ xi titoli u l-eżattezza jew il-kompletezza tagħha mhix garantita.  L-istrumenti finanzjarji diskussi jistgħu ma jkunux jgħoddu għall-investituri kollha u l-investituri għandhom jieħdu d-deċiżjonijiet  tagħhom fuq il-bażi ta’ informazzjoni u pariri li jkunu kisbu huma stess dwar kemm ikun xieraq għalihom  li jinvestu fi strumenti finanzjarji jew li jimplimentaw  l-istrateġiji diskussi f’dan il-webinar.

Jekk tinvesti fil-prodott li qed jiġi diskuss, tista’ titlef ftit jew il-flus kollha li tinvesti. Il-valur ta’ l-investiment tiegħek jista’ jinżel kif ukoll jitla. Tista’ tiġi ċċarġjat kummissjoni jew tariffa fil-ħin tax-xiri inizjali għal investiment. Kwalunkwe dħul li tikseb minn dan l-investiment jista’ jinżel kif ukoll jitla. Dan il-prodott jista’ jiġi affettwat minn bidliet fil-movimenti tar-rata tal-kambju tal-munita u b’hekk jaffettwaw ir-ritorn tal-investiment tiegħek. Iċ-ċifri tal-prestazzjoni kkwotati jirreferu għall-prestazzjoni tal-passat u m’humiex garanzija jew gwida affidabbli għall-prestazzjoni futura. Kwalunkwe deċiżjoni ta’ investiment f’fond għandha dejjem tkun ibbażata fuq id-dettalji li jinstabu fil-Prospett u fil-Key Information Document (KID), li jistgħu jinkisbu mingħand MeDirect Bank (Malta) plc.

MeDirect Bank (Malta) plc, huwa liċenzjat biex joffri servizzi bankarji skont it-termini tal-Att dwar Il-kummerċ Bankarju (Kap. 371) u servizzi ta’ investiment skont it-termini tal-Att dwar is-Servizzi ta’ Investiment (Kap. 370).

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