Day: 25 August 2020

Jean Boivin, Head of BlackRock Investment Institute, together with Mike Pyle, Global Chief Investment Strategist, Vivek Paul, Senior Portfolio Strategist, and Natalie Gill, Portfolio Strategist, all 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.

The pandemic has sped up key structural trends and triggered substantial market swings, precipitating an urgent need to rethink strategic asset allocations. Among the big changes: We favor reduced exposure to nominal developed market (DM) government bonds and greater allocations to inflation-linked bonds, as interest rates approach their lower bounds and inflation risks grow in the medium term.

This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: BlackRock Investment Institute, August 2020.  Notes: The bars show our hypothetical, unconstrained, U.S. dollar-denominated portfolio built using our portfolio construction approach and capital market assumptions. Global nominal government bonds and emerging market (EM) equity allocations include respective China assets. Income private markets include infrastructure debt, direct lending, real estate mezzanine debt and U.S. core real estate. Growth private markets include global private equity buyouts and infrastructure equity. The hypothetical portfolio is intended for information purposes only and does not constitute investment advice. The indexes representing equities are the MSCI Emerging Markets and MSCI World indexes. The fixed income indexes include Bloomberg Barclays Global High Yield Total Return, U.S. MBS, Global Aggregate – Corporate and Global Treasury indexes, JP Morgan GBI-EM and EMBI Global Diversified indexes, and ICE BofA Merrill Lynch Global Inflation-Linked Government Index. Indexes are unmanaged. It is not possible to invest directly in an index. We use BlackRock proxies for selected private markets because of lack of sufficient data. These proxies represent the mix of risk factor exposures that we believe represents the economic sensitivity of the given asset class.

 

Market prices, asset valuations and economic projections have seen big swings in the space of two quarters. This, in turn, has had a sizeable impact on our expected returns and asset views. Anchoring investment views to the past is becoming less relevant, in our view, as structural trends such as rising inequality, deglobalization, the policy revolution and sustainability race toward us. We started the year with a strategic overweight in nominal DM government bonds. Today, this asset class is our biggest strategic underweight. Allocations to nominal government bonds in a hypothetical, U.S. dollar-based strategic portfolio based on our capital market assumptions have been reduced since February. See the darkest purple bars in the chart. We had flagged as early as March growing risks around inflation. Inflation-linked bonds have gone from a neutral to our biggest overweight, with greatly expanded strategic allocations.

Views on nominal government bonds and inflation are key to constructing strategic portfolios for the post-Covid world. The policy revolution to cushion the Covid shock challenges the role of nominal government bonds in strategic portfolios by lowering their returns and reducing their ballast properties. We expect negative returns across DM government bonds on a five-year horizon. Furthermore, the inverse correlation between bonds and stocks weakens as yields are near perceived lower bounds. This reduces bonds’ ballast role, or ability to cushion portfolios against risk asset sell-offs.

We see risks of higher inflation over the medium term. Central banks are already explicitly signalling a greater tolerance to let inflation overshoot their targets to make up for past misses. That could join force with other factors that we see as driving inflation in the medium term: negative supply shocks, deglobalization and reduced competition among large firms. Higher inflation could become more politically tempting as elevated debt levels make it hard to sustain materially higher rates, at a time of explicit monetary and fiscal coordination. Breakeven rates, a measure of market-based inflation expectations, are already on the rise. We see inflation-linked bonds as an increasingly attractive alternative to nominal bonds, even though its limited market size creates liquidity challenges in some markets.

Sharp market swings this year are requiring strategic views to evolve with an unusually high frequency. From late 2018 until the start of this year, we favored a barbell approach in our strategic allocation, preferring equities and government bonds to credit. In March, we made a case for leaning into equity exposures and significantly upgraded credit after a sharp risk selloff that we saw as excessive, as we expected the unprecedented policy response would make the cumulative impact of the virus shock likely a fraction of that seen after the 2008 global financial crisis. This strategic opportunity has now largely dissipated after the sharp rebound in valuations – and today we are mildly underweight global investment grade credit and DM equities. We still see an important role for private markets and Chinese assets playing in strategic portfolios.

The pandemic dynamics and policy revolution have had different implications on some of our tactical asset views. We still like credit over the next six to 12 months, especially high yield, due to broad policy support and still-attractive valuations. In equities our strongest preference is for high quality exposures, though we have closed our underweight to value-oriented markets broadly and still think Europe has upside among cyclical exposures.

 

Market Updates

Past performance is not a reliable indicator of current or future results. It is not possible to  invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, August 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Activity has started to normalize around the globe, albeit with renewed localized lockdowns to contain virus clusters. The unprecedented policy response has boosted risk assets. Europe has agreed on a historic recovery fund, but U.S. stimulus is now at risk of fading. Talks over the size and makeup of a new U.S. fiscal package have stalled as some key benefits expired and states face budget shortfalls. Our base case calls for a $2 trillion fiscal package that extends some federal stimulus measures through late-2020, but there is a risk no deal will materialize. Another risk: escalating U.S.-China tensions.

Week Ahead

• August 25th: German ifo Business Climate Index; U.S. consumer confidence
• August 27th to 28th: Annual Jackson Hole Kansas Fed Economic Policy Symposium
• August 28th: Euro area business and consumer survey results; German gfk consumer sentiment; ISM-Chicago Business

The annual gathering of central bankers and other policymakers will be a focus – and it will be conducted virtually and open to the public for the first time. Markets will look for clues for what potential policy framework changes might imply for the medium-term inflation outlook.

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 August 24th, 2020 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 and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Last week was quiet for equity markets with the second-quarter (Q2) 2020 earnings season now behind us and many market participants on holiday. European markets’ weekly volumes were the lowest of the year last week, and conviction was low. The MSCI World Index finished the week up +0.3%. US equities outperformed, with the S&P 500 Index up 0.7% and the technology giants once again market leaders. Elsewhere, both the STOXX Europe 600 Index and markets in the Asia Pacific (APAC) region closed the week lower.

US Technology Leading the Way Higher

It was notable that as US equity markets made fresh all-time highs, much has been made of the narrow breadth of this recovery from March lows, with a small group of technology stocks accounting for much of the rally.

Since March, the top five companies in the S&P 500 Index (Apple, Microsoft, Amazon, Alphabet and Facebook) have led the way and have seen their market capitalisation grow disproportionately.

For example, Apple’s market cap of US$2 trillion is almost equivalent to the entire UK FTSE 100 Index, which currently sits at US$2.2 trillion. The top five companies now account for more than a fifth of the S&P 500 Index, the biggest weighting for the top five securities since 1980. There has been much discussion around what is fuelling these gains; they are beneficiaries of the new “stay-at-home” norm, a tsunami of fiscal and monetary stimulus has kept government bond yields low, and the technology names have had strong balance sheet and cash-flow generation.

The question now is whether this trend will continue. The fate of tech stocks will likely be a key driver for equity markets globally into year-end. What we don’t know is whether the US presidential election in November will dent enthusiasm for these names, or how impactful the ongoing US-China trade dispute will be going forwards.

UK in Focus as Brexit Stalemate Continues

The latest round of Brexit talks ended on Friday and it was met with pessimism over the likelihood of a deal being struck in the next two months. Last week’s negotiations between the EU’s Chief Negotiator Michel Barnier and his UK counterpart, David Frost, were the latest attempt to bridge the longstanding chasm. However, progress was limited. According to reports, two of the key differences that remain relate to the so-called “level playing field” with regards to competition post-Brexit and EU access to British fishing waters.

In an attempt to speed up negotiations, the United Kingdom delivered a draft agreement to the EU to set out its version of a deal, but it appeared to be resoundingly rejected. On Friday, Barnier said it felt like progress on the negotiations were going “backwards, more than forwards”.

There are two more weeks left of negotiations in September before the EU Summit in October. The EU has noted that a deal must be ratified by the EU Summit deadline. Given last Friday’s comments, many observers see the true likelihood of a no-deal “hard” Brexit as increasing. This was reflected in the UK sterling, which finished last Friday down 90 basis points (bps) against the US dollar. UK equity performance was also mixed on Friday, with the domestically focused FTSE 250 Index up 0.2%, buoyed by the stronger-than-expected Purchasing Managers’ Index (PMI) report. Meanwhile, the exporter-heavy FTSE 100 Index was down 0.2%.

UK equities remain a global underperformer year-to-date, with both the FTSE 100 Index and FTSE 250 Index down 20% amid COVID-19 concerns and Brexit negotiations, which continue to weigh on sentiment. Comparatively, the STOXX Europe 600 Index is down just over 12% year-to-date.

Despite current bearishness  around the United Kingdom, should a Brexit deal be struck and data continue to improve dramatically in the coming months (especially versus European peers), then sentiment towards UK equities should improve.

The Week in Review

 

Europe

European equities drifted lower on lacklustre summer volumes last week, with the STOXX Europe 600 Index closing lower. Sector performance showed some defensive rotation, with health care, real estate and food and beverage outperforming. Cyclicals underperformed, with banks, energy and automobiles the week’s losers. The “risk-off” skew was also evident in bond yields, which were lower across the region. German 10-year yields, for example, closed the week towards record lows.

Thursday’s European Central Bank (ECB) minutes were a talking point and suggested there was uncertainty over the economic outlook at the most recent meeting. The ECB did highlight risks are skewed to the downside, however, saying that “the breadth and scale of the recovery remained uneven and partial”. The upcoming September meeting will be important—it was implied that the central bank should have some more clarity at that point, suggesting that we may see policy changes at that time.

Eurozone PMIs in Focus: Services Stall

The key data points last week came on Friday in the form of (flash) European and UK PMIs. The European composite readings were lower in August and the services figures suggest that recovery in this area is stalling after a strong performance in May, June and July. The releases hit the euro, although this was not much of a surprise given the weaker tourism season and re-introduction of social distancing measures following the recent surges in COVID-19 cases.

We are also seeing households trying to save more given the ongoing risks to the job market. That said, the German services figure came in at a disappointing 50.8, which is a particular blow as the country had cut its value-added tax by 3% in July and tourist trade didn’t deal as hard a blow as in other countries.

Meanwhile, the French manufacturing figure unexpectedly fell into contraction at 49 and the pace of job cuts also increased again in August in France.

The eurozone manufacturing PMI did come in below estimates, but still held steady. It is also less worrying than the services PMI as forward-looking indicators continue to trend higher, with new export orders recovering. There was a particularly bright spot in German manufacturing output, which continued to move higher, helped by strong exports to China and Turkey.

Whilst the European data disappointed, the UK release looked strong, even with a similar picture of rising cases and local lockdowns. The composite reading came in at 60.3, led by the services sector as Chancellor Rishi Sunak’s “Eat out to Help Out” scheme provided a boost in August (although likely a temporary one).

APAC

Equities in the APAC region were also mostly lower last week, with the Shanghai Composite the bright spot as the only major index in the green. The Japanese Nikkei lost 1.6% as its second-quarter gross domestic product (GDP) release showed that all growth since 2011 had been wiped out, starkly illustrating the impact of the pandemic on the economy.

The recovery in China remains uneven, with Beijing having focused on infrastructure and production rather than transferring funds to consumers. The effects of the pandemic have exacerbated the wealth gap in China, with unemployment among low to middle-income adults now estimated to be more than twice the national average of 5.7%. This demographic has also been hit harder by a drop in disposable income, whilst high income households earned more on average in Q2 year-on-year.

With this, consumer confidence in the lower income brackets remains low, whilst luxury brands have staged an impressive recovery in China. More than a dozen luxury Western brands reported double-digit revenue growth in China in Q2 (vs Q2 2019), whilst sales in other regions were hit dramatically. The spending of the higher income bracket is not enough to offset lower consumer spending in the rest of the population, however, and China’s retail sales have fallen for five consecutive months since the pandemic spread in February.

Tensions remain between China and the United States. The US broadened its sanctions, adding 38 new affiliates of Huawei to its economic blacklist in order to try to push Huawei out of the American technology supply chain, limiting the adoption of its 5G technology. Over the weekend, there were reports that Huawei and ZTE have now slowed down their 5G base station installation in the country, implying that US attempts to quash China’s technology ambitions appear to be working.

United States

US equities outperformed their global peers last week with the S&P Index hitting new all-time highs, led by the technology giants. The S&P Index 500 Index finished up 0.7%, the Dow Jones Industrial Average finished flat on the week and the Nasdaq Composite closed up 3.5%. The variance in performance was quite stark.

US sector performance was interesting last week, with everything pointing to momentum. As noted, technology, the year-to-date outperformer, led the way once again, followed by consumer discretionary and communication services. It was the same at the other end, with the year-to-date laggard, energy, once again bottom of the pile, followed by financials and utilities.

Interestingly, the Chicago Board Options Exchange’s (CBOE) Volatility Index (commonly called the “fear index”) rose last week despite the gains in the major indexes. CNN’s Fear and Greed Index has also moved in recent months, with sentiment around equity markets creeping back towards Extreme Greed.

Last week’s July Federal Open Market Committee meeting minutes were largely a non-event.

There was a slight sentiment shift with regards to optimism around US economic growth in the second half of 2020, pointing to a highly uncertain path for the virus through autumn and winter. It is worth noting that uncertainty would be all the more impactful on the US economy if there is no progress on fiscal stimulus talks between the Democrats and the Republicans. With that, the desire of the Democrats to get a full deal agreed so close to the election has been questioned as any such deal may be seen to prop up support for the existing administration. The two sides are still locked in an impasse at the moment.

In terms of last week’s data, it started mixed, with the Empire Manufacturing Index for August missing expectations. However, homebuilder sentiment matched a record high. On Tuesday, data on housing starts and building permits came in ahead of expectations and are now back around pre-pandemic levels. On Friday, PMIs surprised to the upside as business activity improved dramatically. The composite figure came in at 54.7, which is the highest since February 2019, and points to a further recovery in economic growth from July’s figure of 50.3.

Week Ahead

It is likely to be another quiet week. Focus in the United States will be on a the Federal Reserve’s virtual gathering in Jackson Hole, Wyoming, and the Republican Party convention.

Calendar

Market holidays: 

• UK holiday – 31 August
• US Labour Day Holiday – 7 September

Monday 24 August:

• Economic/Political: The United Kingdom and the EU kick off a week-long informal meeting negotiating their future Brexit relationship.

Tuesday 25 August:

• Economic/Political:
• Data: Germany: (August) IFO, US consumer confidence

Wednesday 26 August:

• Economic/Political: Bank of England’s (BoE) Andy Haldane speaks; ECB’s Isabel Schnabel speaks
• Data: France: (August) consumer conference, US durable goods

Thursday 27 August:  

• Economic/Political: Bank of Korea interest-rate decision
• Data: France: (August) business and manufacturing conference; Italy: (June) industrial orders

Friday 28 August:

• Economic/Political: Band of England Governor Andrew Bailey speaks
• Data: Germany: (September) Gfk consumer conference; France: (Aug, preliminary) CPI; Italy: (August) consumer conference, manufacturing conference, (August) economic sent; eurozone: (August) economic survey; University of Michigan confidence survey

 

Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 24th August 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your 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.