Day: 22 May 2023

Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute, together with Vivek Paul – Head of Portfolio Research, Amanda Lynam – Head of Macro Credit Research, and Devan Nathwani – 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

Public vs. private: We prefer private to public credit long term on better return potential. It’s the mirror image in equity: We prefer public stocks as risks fade in the medium term.

Market backdrop: U.S. stocks hit 2023 highs on hopes for a debt ceiling deal. Yields climbed on odds of another rate hike versus a pause or cuts. We don’t see rate cuts this year.

Week ahead: U.S. PCE this week will help gauge inflation’s persistence. We see wage pressure from worker shortages keeping inflation above policy targets for some time.

The banking tumult has reshaped opportunities for income: We now favor private over public credit on a strategic horizon of five years and longer. We think private credit could help fill a void left by banks pulling back on some lending and offer potentially attractive yields to investors. We see a mirror image in equity, strategically preferring public to private: Public stocks have repriced more than markets like private equity, and we see risks fading over a medium-term horizon.

Investing in private markets takes time. So we see the repricing in private credit as an opportunity to be nimble with our strategic views and tap into our expectation that private credit can help fill a lending gap left by banks after the recent turmoil. Yields in direct lending, a subset of private credit, have risen (dark orange line in chart). These higher yields may better compensate investors for the risks we see ahead – even after factoring in lower credit quality. U.S. high yield and investment grade (IG) credit yields have faded from highs (yellow and pink lines), but we think they will rise eventually. We go overweight private credit as a result and move to neutral on global IG. Private markets overall are complex, with high risk and volatility, and aren’t suitable for all investors.

The fallout from the banking sector troubles and further tightening of credit conditions adds to the pressure on public credit but could be a potential boon for private credit, in our view. We think the rising interest rate environment and increased competition for deposits will put pressure on banks – and cause them to pull back some lending. We see this making room for non-bank lending and private credit to play a greater role.

Private credit appeal

Private credit refers to a wide range of investments, from direct lending to infrastructure and venture debt. We’re focused on direct lending – financing that is typically negotiated directly between a non-bank lender and a borrower, often a small to mid-sized company. This private credit is mostly made up of floating rate debt that adjusts with policy rates that we see staying high. We think there are potential benefits from a borrower’s perspective in seeking out non-bank lending. Dealing with one private lender could be easier than a broad group of banks as in public markets. The private nature could also help avoid spooking financial markets, such as with the risks that come with tapping funds from public markets at inopportune times. This demand from borrowers creates an investment opportunity for lenders, in our view: more attractive pricing and deal terms than would have been the case before.

But we think seeking out quality borrowers is key: That means a keen eye on deal terms and lending standards. We have had a conservative view on our assumptions about private credit default losses in our strategic views for some time because private credit is not immune to the credit risk from an economic downturn. Yet even after allowing for these more prudent assumptions that would be a drag on returns, the wider set of opportunities for private lenders in the wake of the banking fallout, coupled with the divergence between private and public credit yields is enough to spur an upgrade.

Our strategic view on equities is the mirror image of credit: We prefer public to private. We’re still strategically overweight developed market (DM) equities but underweight on a six- to 12-month tactical horizon because a strategic investor can look past some of the near-term pain. And the pressure from tighter credit conditions is also likely to have relented down the road. We remain strategically underweight growth private markets such as private equity. Private equity has started to reprice the tougher macro environment but not as much as publicly traded equities.

Our bottom line

We see the appeal of income in the new regime of greater macro and market volatility and favor private over public credit on a strategic horizon. We see a mirror image in equity, strategically preferring public to private.

Market backdrop

U.S. stocks hit 2023 highs last week on hopes for a debt ceiling solution. Yields climbed on expectations the Federal Reserve could hike rates again instead of pausing at its next meeting. First-quarter earnings contracted for the second-straight quarter – but less than expected. Inflation helped revenue and margins as firms passed on higher prices to a still-strong consumer. We think higher financing costs and dwindling savings could start to bite: Earnings expectations look too rosy.

We’re watching U.S. PCE closely this week, the preferred inflation gauge of the Federal Reserve. We expect inflation to remain above 2% policy targets for some time – that’s why we don’t see the Fed cutting rates this year. Global PMIs will help us gauge how much interest rate hikes are hitting economic activity in developed markets.

Week Ahead

May 22: Euro area consumer confidence

May 23: Global flash PMIs

May 24: UK CPI

May 26: U.S. PCE inflation

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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 22^nd May, 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.

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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 positive for equity markets as hopes for a resolution to the US debt ceiling issues increased. In addition, it was a quieter week with regards to the US regional banks, although press reports that US Treasury Secretary Janet Yellen sees further mergers in the space pulled the KBW Regional Banking Index trade lower on Friday. In Europe, it was quieter with some market holidays for Ascension Day. In Asia, Japanese equities continued to grab headlines as their march higher continued. Last week, the MSCI World Index closed up 1.2%; the Stoxx Europe 600 Index was up 0.7%; the S&P 500 Index was up 1.6%; and the MSCI Asia Pacific was up 0.8%.

Week in review

United States

US equities saw their first weekly move of +/-1% since March, with the S&P 500 Index testing a key technical resistance level at 4200.

The tech-heavy Nasdaq 100 Index also surged last week, up 3.5%. With that move, the Nasdaq 100 has made a 52-week high for the first time since November 2021. The tech sector’s strong performance is interesting, as its correlation with bond yields seems to have broken down somewhat. Some observers have suggested that tech stocks have performed well because investors are growing more comfortable with the idea that US interest rates have peaked for now, which is seen as supportive for highly leveraged balance sheets. On top of this, the buzz around artificial intelligence (AI) has attracted interest in the sector. That said, market breadth was poor, with a small number of tech heavyweights accounting for the bulk of the move higher.

The US debt ceiling talks were a key focus for investors throughout the week. Sentiment see-sawed somewhat on this issue. Earlier in the week, markets jumped on much better “mood music” from the talks, with House Speaker Kevin McCarthy stating that negotiations were in a much better position, and he anticipated reaching a deal on the House floor next week. The mood then soured on Friday, as Republican negotiators ended a meeting with White House representatives, announcing that talks were now paused. Over the weekend, President Joe Biden called McCarthy from Air Force One on his way back from an international summit in Japan. McCarthy told reporters the call was “productive” as Biden noted: “It went well.”

Meanwhile, the clock continues to count down to the Federal government’s debt default deadline, with US Treasury Secretary Janet Yellen stating the government will fall short of funds to meet its obligations by mid-June.

There was some interesting Fedspeak last week. Federal Reserve (Fed) Chair Jerome Powell commented on Friday that he “strongly” favours a June pause. While the markets are pricing in Fed rate cuts this year, Atlanta Fed Bank President Raphael Bostic stated this was unlikely. In addition, St. Louis Fed Bank President James Bullard, a non-voting Federal Open Market Committee member, expressed concern about the slow pace of disinflation and suggested that the Fed could raise rates as a precautionary measure.

Until Friday, the mood around US regional banks had improved, but Friday’s press reported that Yellen said further mergers in the sector would be necessary.

Europe

It was a quieter week in Europe, with a number of markets closed on Thursday for Ascension Day and public holidays in a number of other countries (markets were open but trading volumes were poor). The path of least resistance was higher overall. As in the United States, key European indices are testing resistance levels, with the Stoxx Europe 50 Index at levels last seen in 2021. Following a strong first-quarter corporate earnings season, Germany’s DAX Index made a new all-time high Friday before closing slightly lower on the day. It was still up 2.3% overall last week.

As in the United States, European tech stocks outperformed other sectors, while real estate remained unloved, again the worst-performing sector.

There was some commentary from European Central Bank (ECB) officials last week. President Christine Lagarde stuck with the hawkish narrative. Backing this up, the European Commission raised its inflation outlook for the eurozone and acknowledged the resilience of the region’s economy, while also highlighting “persistent challenges.” EU officials now anticipate consumer price growth of 5.8% in 2023 and 2.8% in 2024.

Following the presidential election, Turkish equities ended last week down 7.2% as the country now faces a two-way vote on 28 May between incumbent Recep Tayyip Erdogan and Kemal Kilicdaroglu.

In contrast, Greece’s market rose after this weekend’s election saw a large victory for the ruling party of New Democracy. There was no seat majority, as expected. The second round will probably take place on the 25th of June.

In the United Kingdom, the GFK Consumer Confidence Index reached its highest level since February 2022, with a score of -27, matching estimates, compared to -30 in the previous month.

Finally, the Bank of America Fund manager survey came out last week. Respondents remained the most bearish so far this year.

Asia

Asian equities finished higher overall last week. Cyclicals outperformed defensives, with tech and industrials leading, while utilities and consumer staples were amongst the laggards in the region.

Japanese equities led the way as the Nikkei hit a new 33-year high, closing the week up 4.8% and notching its best week since mid-January. Strategists are currently bullish on Japanese stocks, citing  cheap valuations, better-than-expected earnings, yen weakness, and a consumer-led economic rebound. Optimism on the US debt ceiling issue and hawkish Fed commentary pushed the dollar higher against the yen as the week went on. This led to heavier buying in Japanese exporters. Japanese stocks have now seen seven consecutive weeks of buying by foreign investors.

The Shanghai Composite Index closed last week up 0.3% but sluggish economic data was a hinderance. April Industrial Production rose 5.6% year-on-year, much lower than anticipated. Retail sales rose 18.4% in April, although also slightly shy of expectations given a low base of comparison from last year. Growth in fixed-asset investment slowed to 4.7% year-on-year, also weaker than forecast. Housing metrics were also poor, with real estate investment contracting at a faster pace. With that, we saw renewed calls for further support to be given to the Chinese economy, but so far, the government hasn’t made any clear moves. In its latest Monetary Policy Operations Report, the People’s Bank of China signalled no change in policy rates is appropriate for now.

US-China tension remained in focus as Chinese authorities said products of a US chipmaker presented “significant security risks” to its critical information infrastructure supply chain. They have barred the use of its products from key infrastructure operations.

Week ahead

Talks resume on the US debt ceiling this week, so this will no doubt be a key talking point. Aside from that, the Fed May policy meeting minutes will be released on Wednesday will be closely watched. Looking to macro data, global manufacturing reports, UK inflation data and US gross domestic product (GDP) will be key. Next Monday there are a number of market holidays, including the United Kingdom, Switzerland and the United States.

Monday, 22 May

• Bi-partisan talks resume on the US debt ceiling
• Japanese core machine year-over-year

Tuesday, 23 May

• Purchasing Managers Index data: US, UK, eurozone, France, Germany

Wednesday, 24 May

• UK Consumer Price Index
• Fed meeting minutes
• Japan machine tool orders

Thursday, 25 May

• German GDP
• US GDP

Friday, 26 May

• Tokyo CPI
• UK Retail Sales
• US University of Michigan Survey on sentiment; US durable goods orders

 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

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Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 22nd May 2023, 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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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 Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.