Day: 14 November 2023

Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Ben Powell – Chief Investment Strategist for APAC, Tony Kim – Head of Global Technology Team, Fundamental Equities, and Andreea Mitrache – 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

AI revolution: We see artificial intelligence (AI) as a mega force shaping the new regime. We are overweight the AI theme in developed market stocks.

Market backdrop: U.S. stocks and 10-year Treasury yields both rose last week. We see investors demanding more compensation for the risk of holding long-term bonds.

Week ahead: U.S. CPI data is in focus this week. The presidents of the U.S. and China will meet for a summit at a time of heightened strategic competition and tensions.

The buzz about AI is getting louder, with tech shares maintaining their outperformance and major players getting ready to roll out new AI tools. We see AI as one of five mega forces, or structural shifts that can drive returns now and in the future. We are overweight the AI theme in developed market (DM) stocks. We see the implications of AI going beyond pure technology companies, transcending sectors and geographies. See our new publication, AI – beyond the buzz, for details.

Advances in computing hardware and deep learning innovations led to an inflection point for AI in late 2022. We think we are at the dawn of an intelligence revolution – with exponential advances. For example, the number of “parameters” between OpenAI’s ChatGPT-1 and GPT-4 models has likely surged exponentially in five years. See the chart. Parameters are elements of a model learned from historical data that allow it to generate text or multimedia content based on a prompt. The higher the number of parameters, the more sophisticated a model’s understanding of patterns and the more nuanced its output. We expect exponential growth to persist. The tech sector is largely benefiting so far: Mega cap tech names account for most S&P 500 returns this year, yet when stripping out their impact broader stocks are down, LSEG data show. Mega cap tech stocks have outperformed by delivering on earnings, even with the yield jump that can hurt long-term valuations.

We observe a fundamental shift in the tech industry towards AI-centric business models, igniting a competitive race among a handful of mega cap companies. We view this evolution in terms of a technology “stack,” with increasingly foundational technologies appearing closer to the bottom. The first layer covers cloud infrastructure and chipmakers – the building blocks of computing power that have already begun to reap the benefits of AI advancements. The second layer covers models, data and data infrastructure. This layer may be underappreciated as demand for digital infrastructure like hardware, data and server farm locations is likely to outstrip supply. At the pinnacle of the stack are the applications that leverage these innovations. We think we are currently somewhere between the first and second layers, with the top layer likely coming next.

Far-reaching impact

AI-powered automation has the potential to boost worker productivity, and may offer a competitive advantage to companies, sectors and economies that more adeptly adopt this technology. The implications may impact economies and markets faster than generally expected. AI’s impact is set to span multiple domains, in our view, intersecting with mega forces like aging populations and geopolitical competition. Companies will likely succeed by attracting top talent and being able to invest in scaling up computational power to harness their data. The flood of AI patents may help identify some pioneers and laggards. Our research suggests there is a positive correlation between an uptick in AI patents and earnings growth in the one-to-two years after the patent registration. Our work also finds that private companies primarily produce AI patents, making private markets another way to tap into the AI theme. While not every patent leads to commercial success, the rising market value of AI patents indicates investor enthusiasm for the potential outsized returns for companies who are working to incorporate AI.

Like any technology, AI has adoption limits. Cybersecurity risks abound yet may spawn opportunities for consultancies or start-ups that specialize in setting up secure AI environments for other firms. Generative AI, which learns from massive data sets to create new content, still faces reliability issues. The tech can be prone to “hallucinations,” generating outputs that aren’t grounded in the input data. We think future versions will likely gradually improve. Global governments are trying to address the risks – potentially slowing adoption in some sectors – and shape AI business conduct, spurring opportunities.

Bottom line

AI’s interaction with other technologies and mega forces is likely to yield the biggest investment opportunities, in our view. We see a multi-country and multi-sector AI-centered investment cycle unfolding that we think will support revenues and margins. We’re overweight the AI theme in DM stocks on a six-to-12-month horizon as we see it set to keep unfolding.

Market backdrop

U.S. stocks gained and are up 7% from their October lows. U.S. 10-year yields edged up but are still below their 16-year highs hit last month. We think the yield volatility is one reason why investors are starting to demand more compensation for the risk of holding long-term bonds. U.S. Q3 corporate earnings results have showed a handful of mega cap stocks are still propping up earnings – and analysts are downgrading expected earnings due to the cautious tone from companies.

We’re watching U.S. inflation data this week to see how much inflation falls as pandemic-driven economic mismatches keep unwinding. Yet we think tight labor markets and a shrinking workforce will keep inflation on a rollercoaster. U.S.-China tensions will be in focus with Presidents Joe Biden and Xi Jinping set to meet at a summit in San Francisco.

Week Ahead

Nov. 14: U.S. CPI; euro area and Japan GDP

Nov. 15: Presidents Biden, Xi meet; UK CPI; Japan trade;

Nov. 17: Euro area 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 13^th November, 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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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.

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 Investments 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 global equities were choppy following the sharp bounce higher the prior week. There was some dispersion amongst regions, with the US market outperforming, largely thanks to decent performance in the tech sector. In contrast, equities in Asia and Europe saw small declines, with weak Chinese macro data a focus in Asia. In terms of themes, central banker commentary had an impact, with a slightly more hawkish narrative from some policymakers weighing on sentiment. The MSCI World Index rose 0.6%, the Stoxx Europe 600 Index declined 0.2%, the S&P 500 Index rose 1.3% and the MSCI Asia Pacific Index declined 0.5%.

Week in review

United States

The S&P 500 Index was up 1.3% last week, adding to the 5.8% gain in the week prior. It was encouraging to see the index move back above its 50-day moving average and above the important psychological level of 4400. However, it should be noted that gains were not broad-based, with much of the strength coming from the tech sector. The Nasdaq 100 Index was up 2.8%, with the FANG+ Index up 4.5%, as artificial intelligence names performed well. In contrast, the Russell 2000 small cap index was down 3.1% and the Dow Jones Industrial Average saw muted gains, up 0.7%.

Fedspeak was a focus, with more hawkish comments from Federal Reserve (Fed) Chair Jerome Powell towards the end of the week weighing on sentiment. Powell emphasised the ongoing and uncertain task of bringing down inflation, stating “…we are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labour market and in bringing inflation down, which could warrant a response from monetary policy”.

Other members of the Fed echoed the hawkish sentiment; for example, Atlanta Fed Bank President Raphael Bostic stated Fed policymakers will maintain a restrictive policy until inflation reaches 2%, or until they are confident it will happen.

Going back to the contrasting index moves, the prospect of rates being “higher for longer” weighed on the Russell 2000 Index, and given it rose 7.5% in the prior week, it was perhaps not too surprising to see a pullback.

The US 10-year Treasury yield increased by eight basis points (bps) last week. Powell’s more hawkish stance was likely a factor, as well as weak demand for the 30-year bond auction mid-week. Interestingly, some reporters suggested that a cyberattack on a New York unit of Industrial and Commercial Bank of China (ICBC) may have negatively impacted the bond auction; the cyberattack reportedly impacted ICBC’s ability to settle Treasury trades. ICBC’s US unit reportedly needed an injection of US$9 billion from its parent company to help settle trades. US Treasury Secretary Janet Yellen said she had spoken to the Chinese vice president and the Treasury had given “as much assistance as we possibly can” to ICBC. A reminder of potential vulnerabilities to the financial ecosystem.

Another focus for US investors is the 17 November “fiscal cliff” and threat of US government shutdown. As the deadline approaches, political groups in Congress remain at loggerheads on a resolution.

After Friday’s close, Moody’s downgraded its outlook for the US credit rating to negative from stable. They highlighted rising debt servicing costs and “entrenched political polarisation.” Moody’s did keep the US’s AAA rating, the only one of the top three rating agencies to do so.

Europe

European equities were close to flat, with the STOXX Europe 600 Index down 0.2% last week. After the bounce off its lows last week, we did not see much evidence of conviction in the move higher this week.

Sector-wise, defence names performed well again, and China-exposed names lagged. The luxury space also struggled amidst a profit warning in the space.

Given the backdrop of central bank chatter and discussion around peak interest rates, equity markets seem to be at the mercy of moves in bond yields, so it’s certainly worth keeping a close eye on yields for signs of the next move. The Treasury auctions last week were going very well, until the 30-year saw weaker demand.

Sadly, looking at fund flows, European equities saw another weekly outflow, making it 35 weeks in a row.

Iberian politics garnered some attention. Portugal’s prime minister resigned after corruption charges were levied at his chief of staff. We did see GALP move lower on this (liquid proxy for Portugal). In Spain, Prime Minister Pedro Sanchez is trying to form a government backed by Catalan separatists, prompting some overnight protests. Sanchez’s Socialist Party on Thursday agreed to amnesties for hundreds of Catalan separatists who tried to break up Spain six years ago. In exchange, the 51-year-old socialist will get the parliamentary support he needs to take office for a third term.

In the United Kingdom, Bank of England (BoE) Chief Economist Huw Pill talked down the need for further interest rate hikes. However, he didn’t suggest rate cuts were on the horizon, either. In addition, BoE Governor Andrew Bailey said that policymakers are becoming more confident they can bring inflation to target but will keep interest rates at their current level for an extended period.

In a similar fashion, European Central Bank President Christine Lagarde suggested a “higher for longer” scenario. This sentiment collectively pushed European bond yields higher last week: The UK 10-year bond was up 4.7 bps, the German 10-year was up 7.2 bps, the Italian 10-year was up 6.5 bps, and Spanish 10-year was up 8.5 bps.

Asia

Asian equities were mixed last week. The MSCI Asia Pacific index closed the week down 0.53%, whilst Japan’s market outperformed again, up 1.93%, while Hong Kong’s market underperformed, down 2.61%.

Key news in Asia this week:

• China’s Consumer Price Index (CPI) slipped into deflation for the second time this year, falling 0.2% year-over-year (y/y) in October. The Producer Price Index (PPI) stayed in annual deflation territory, falling 2.6% y/y in October.
• The Reserve Bank of Australia hiked its key interest rate 25 bps to 4.35%, in line with expectations. The guidance continued to flag potential for more hikes, though this has become a bit more opaque and conditional.
• Ping An refuted reports that China’s State Council has instructed the government of Guangdong province to ask Ping An to take a controlling stake in the developer, Country Garden. Ping An has offloaded its stake in Country Garden last quarter and has no takeover plans.
• SoftBank’s Vision Fund reported a loss of US$1.7 billion with the drop in valuations at WeWork and other portfolio companies.

Japan

The Nikkei 225 Index closed last week up 1.93% on the back of further government stimulus, corporate earnings and a weaker yen, which hit its lowest level against the US dollar in about 33 years.

Speaking at a conference, Bank of Japan (BoJ) Governor Kazuo Ueda said that it is too early to determine what specifically the bank will do when it normalizes its policy stance. He added that the bank is making progress towards reaching its 2% inflation target. He also warned that normalizing short term rates would be challenging, due to the knock-on effect on the banks, borrowers etc.

This week, the government approved some further support for Prime Minister Fumio Kishida’s economic stimulus package, which includes cuts to income and residential taxes, as well as cash handouts to low earners to ease the impact of inflation on households and reinforce wage increases.

China

Chinese mainland equities rose 0.27% last week, despite economic data showing that consumer prices slipped back into contraction, reviving concerns that deflation may impact the economy. China’s October economic data was disappointing. Exports were a significant miss (-6.4%) due to decoupling threats; CPI came in -0.2%, indicating sluggish household demand (without meaningful stimulus from the central government). The latest readings add to concerns about the health of China’s economy.

The China Securities Regulatory Commission (CSRC) gave a warning to local brokers to restrict their leveraged short selling via swaps, after South Korea banned shorting until the end of June 2024.

Looking ahead, China’s President Xi Jinping and US President Joe Biden are scheduled to meet at the APEC summit this week. The market is hoping for warmer relations between the two countries.

Hong Kong

The Hang Seng Index closed last week down 2.61%, as US bond yields climbed across the curve, raising interest rates concerns.

Chinese banks underperformed after S&P highlighted the sector is grappling with bad loans. Consumption/food-related names dropped following China’s disappointing October CPI number.

Chinese Insurance names were weaker, led by Ping An, after media reports that the Chinese government has asked Ping An to take stake in Country Garden.

The Week Ahead

Some important inflation data points will dominate the narrative this week, with PPI and CPI prints from the United States, the United Kingdom and European Union later in the week. US politics will be a key focus, with the 17 November “fiscal cliff” deadline looming large. In addition, Jinping will visit the United States for the APEC Leaders Summit. Xi is expected to meet President Biden on Thursday.

Monday 13 November

• Eurozone November Economic Survey
• Germany November Economic Survey
• France November Economic Survey
• Italy November Economic Survey
• UK November Economic Survey
• Japan Machine Tool Orders

Tuesday 14 November

• UK Claimant Count & ILO Unemployment Rate
• Eurozone gross domestic product
• US CPI

Wednesday 15 November

• UK CPI & RPI
• France CPI
• Italy CPI EU Harmonized
• Italy General Government Debt
• UK House Price Index
• Eurozone Industrial Production & Trade Balance
• US Retail sales & Core PPI
• China 1-year M-T Lending Facility Rate & IP & Retail Sales & Property Investment
• Japan Trade Balance

Thursday 16 November

• Italy Trade Balance Total
• US Initial claims for unemployment insurance
• US Industrial & Manufacturing production
• US Housing Market Index

Friday 17 November

• UK Retail sales Including Auto Fuel
• Eurozone ECB Current Account
• Eurozone CPI
• US Building permits/Housing starts

 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risks, including the 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.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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 13th November 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.