Day: 2 November 2020

Notes from the Trading Desk – Franklin Templeton

Posted on by daniel.briffa@medirect.com.mt

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 saw a sharp pullback for equity markets as fresh COVID-19 lockdowns in Europe and nerves over the US election outcome weighed on investor sentiment. In addition, we saw weakness in the US technology heavyweights in their third-quarter earnings reports. The week ended with the S&P 500 Index down 5.6%, the Stoxx Europe 600 Index down 5.6% and the MSCI Asia Pacific Index also down 2.5%. The MSCI World index was down 5.3% by the end of the week.

Frayed Nerves Over US Election 

Last week saw a reversal of sentiment over the potential US election outcome, with investors de-risking as fears of a contested result grew. Several weeks ago, we saw equity markets trading higher as hopes grew for a clear outcome in the elections, with Democratic nominee Joe Biden performing well in polls and chatter of a potential “Blue Wave” Democratic sweep of the Senate easing nerves. Whilst Biden still has a comfortable lead in the national polls, we have seen President Donald Trump gaining ground in key swing states, notably Florida, which is key to Trump’s re-election hopes.

Trump is still trailing Biden in the polls in the majority of these swing states, but this was also the case in the 2016 US elections, so there is a concern a late surge by Trump supporters could leave the possibility of weeks of legal wrangling over the true winner. We remember back to the 2000 US elections when it took five weeks for the courts to resolve the outcome.

In terms of the market impact, it is clear a contested election will not benefit anyone. Political unrest, lack of progress on stimulus, and a lack of leadership on COVID-19 as cases continue to soar are all negative for the markets. A clear victor either way should ease investor nerves and see markets recover ground, particularly given the recent weakness.

When will we know the result? This year’s election is like no other as we have seen a huge amount of postal voting, and in many states mail-in votes can be accepted for a period after election day (Ohio will accept them up to 13 November). The longer the wait for a result drags, the worse it will be for equity markets.

From a European perspective, some argue a Biden win would be positive for European assets given the reduced trade and geopolitical uncertainties, stronger US-Europe political and economic ties and major fiscal stimulus (infrastructure, clean energy and communications).

Fresh COVID-19 Lockdowns in Europe

With new COVID-19 cases spiking across Europe last week, most of the region imposed new lockdown measures, including all the major economies. Most countries are stopping short of the full lockdown we saw in March, with most leaving schools and factories open. Despite this, the worsening of the pandemic situation has caught many investors off guard.

On the back of these fresh lockdowns, we have seen some revised growth projections for the region.

In the United Kingdom, although there are regional nuances, most of the country is essentially already in lockdown or will enter it this week. Over the weekend, the UK government announced England will go into lockdown for four weeks on 5 November. While schools and universities will remain open this time around, restaurants, pubs, non-essential retail stores, leisure and entertainment will once again be forced to shut.

The UK has extended its job furlough scheme to offset the impact of the new lockdown, but there will be pressure on UK Chancellor Rishi Sunak to announce further support.

Week in Review

Europe

Last week was tough for European equities, with negative news and uncertainty causing  the STOXX Europe 600 Index to close the week down 5.6%. The euro also came under pressure, down 1.8% vs. US dollar. The focus was on further lockdowns across the region, as discussed. With the second wave of COVID-19 now here, European equities saw their largest outflows in five months last week. Better macro data towards the end of the week showed that eurozone economies recovered more than expected in September, but this has failed to boost sentiment, with fresh restrictions likely to undermine recovery in the rest of the year.

Eurozone gross domestic product (GDP) grew 12.7% in  the third quarter, ahead of  expectations, but this is backward-looking, and we know further challenges remain. The German DAX Index was the clear underperformer, not helped by a profit warning from heavyweight SAP, which  closed the week down 27%. It has a significant weighting in both the DAX and the Euro Stoxx 50, exacerbating losses for both indices.

There seemed to be a lack of fresh buyers on the move lower in Europe, which ties in with a severe lack of risk appetite driven by the political uncertainty in both the United States and Europe, given the Brexit backdrop.

It was a quieter week in terms of Brexit news, but there were some reports that negotiators have made progress on some of the biggest sticking points. Both sides are said to have begun working on the text of an agreement on the level competitive playing field and are close to finalising a joint document covering state aid. This sounds positive, but differences are said to remain.

European Central Bank (ECB): December in Focus

There was little surprise at last Thursday’s ECB meeting, with all policy measures left unchanged and dovish commentary. The central bank signaled that a package of easing measures would come at its December meeting, alongside new economic forecasts. A new paragraph was added to the introductory statement, which importantly said that on the basis of its December assessment, “the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation”. ECB President Christine Lagarde said that the risks to the economy are “clearly titled to the downside”.

European Bank Focus

European banks tried to put on a positive front last week, with HSBC, Santander and Lloyds all with optimistic outlooks. European banking stocks have hit record lows in recent weeks and whether certain regulators will allow banks to resume the payment of dividends this year remains a hot topic. Swiss banks look the most optimistic. Some are advising caution and focusing on the importance of conserving capital until the full repercussions of the pandemic are clearer. There is also an argument that instead of indiscriminate bans, the issue of dividends should be dealt with on a case-by-case basis.

United States

The US election uncertainty and lack of stimulus caused all three major US indices to close lower last week. It was also a busy week for third-quarter earnings. Despite a large number of better-than-expected results, the fourth-quarter outlook remains very uncertain. This was apparent as big technology company earnings have also failed to boost sentiment. Alphabet, Apple, Amazon, and Facebook all released results after Thursday’s close.

Despite sales beating estimates across the board, there were concerns over outlook for Amazon, uncertainty for Facebook, and iPhone China sales for Apple, which saw all three move sharply lower on Friday, leaving the NYSE FANG+ Index down 5.9%. The small number of firms who have missed vs. earnings-per-share (EPS) estimates have also been hit hard, with the average price reaction the worst seen in five years.

Crude oil also came under pressure last week as renewed lockdown measures threaten an already-shaky recovery for demand. West Texas Intermediate (WTI) was down over 10% on the week, with October seeing the largest monthly drop since March.

Asia Pacific (APAC)

Equities in the APAC region failed to escape the global selloff, although losses were less extreme than in the United States and Europe, as the region continues to recover from the pandemic. On Sunday, Australia recorded its first day with no local cases of coronavirus transmission since June. China is also the only big economy expected to show growth this year, with the International Monetary Fund (IMF) projecting growth of 1.9% (and +8.2% in 2021). The outcome of this week’s US election stands to have an impact on China’s outlook as it will set the trajectory for trade tensions going forward.

Ant Group’s initial public offering (IPO) was a focus last week, with the dual bookbuild complete in Hong Kong on 28 October (a day earlier than planned in a reflection of just how much demand there is) and Shanghai on 29 October. The deal is set to be the world’s largest-ever stock sale. As well as institutional demand, there has been a frenzy among retail investors, with many willing to borrow large chunks of cash in order to secure shares. The stock is set to begin trading on 4 November.

The Bank of Japan (BOJ) kept monetary policy on hold at its meeting last week. The central bank did trim growth forecasts for 2020, but predicted a stronger rebound in 2021. It seems that caution remains in Japan, both for consumers and businesses, even though COVID-19 is largely under control domestically. Subdued auto demand continues to weigh on sentiment. BOJ Governor Haruhiko Kuroda said that the economic outlook remains highly uncertain and flagged “big downside risks” at the press conference following the meeting.

Week Ahead

This week is all about the US election and the ongoing pandemic. We also hear from the Bank of England (BoE) and the US Federal Reserve on Thursday. It’s also another big week for earnings in the United States and Europe.

Monday 2 November:

  • Macro: Global manufacturing Purchasing Managers’ Index (PMI); Japan vehicle sales

Tuesday 3 November:

  • Politics: US Election
  • Macro: US Factory Orders

Wednesday 4 November:

  • Macro: Global services and composite PMI

Thursday 5 November:

  • Macro: US initial jobless claims; Germany factory orders; Eurozone retail sales
  • Monetary Policy: BoE policy meeting (interest-rates expected to remain unchanged, asset purchase program expected to be increased by £100 billion), Federal Open Market Committee interest-rate announcement (no change expected).

Friday 6 November:

  • Macro: US nonfarm payrolls; Germany industrial production; Italy retail sales

 

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 2nd November 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.

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

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

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

Morningstar Views: How Could the Election Impact U.S. Equities?

Posted on by daniel.briffa@medirect.com.mt

In the event of a Biden win, aftertax earnings could take a hit from higher corporate taxes.

What could happen to U.S. equities overall after the election? In order to answer this question, we first take a closer look at the drivers of stock market performance in the last several years. The chart below shows cumulative growth in the S&P 500 market capitalization split into key drivers. The S&P 500 market capitalization is the product of 1) U.S. gross domestic product, 2) the ratio of pretax profits to GDP, 3) the corporate tax rate, and 4) the P/E multiple. 

The stock market took off following the election of Donald Trump in November 2016. Altogether, the S&P 500 was up 58% by year-end 2019 versus year-end 2015 levels. This actually was not an extraordinary amount of price appreciation compared with the prior four years (which delivered 63% in cumulative returns). Still, prior to the 2016 election, many investors were wondering how much room was left for stock market gains. This was especially the case given that in the years prior the election, much of the gains were driven by multiple expansion (as shown in the chart below), which cannot continue indefinitely.

Could a Trump defeat lead to an unwind of the tremendous equity gains in the past four years? By and large, we don’t think so. The chart below shows that the main drivers of equity performance from 2016 to 2019 were continued GDP growth, a rebound in the ratio of pretax profits to GDP, and a decrease in the corporate tax rate. Only the last factor was driven directly by Trump’s election, as the 2017 Tax Cuts and Jobs Act led to a cut in the U.S. statutory tax rate to 21% from 35% previously. This caused the average effective tax rate on S&P 500 companies to fall to 18% from 28%, according to S&P.

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Certainly, Biden’s plans to raise corporate taxes will have some negative impact on U.S. equities overall if enacted. By reducing the effective tax rate by 1,000 basis points, Trump’s corporate tax cuts increased aftertax earnings on the S&P 500 by 14% overall. A reversal of those tax cuts should lead to a reduction in average aftertax earnings by a similar magnitude.

In the event that the Democrats capture a large Senate majority (five-plus seats), we think the scale of the corporate tax increase could be quite large. In this scenario, our back-of-the envelope analysis suggests a hit to average equity valuations on the order of 10%. Biden plans on upping the statutory rate to 28% from 21% and implementing new measures to increase taxes on companies located in offshore tax-havens. We expect the ratio of corporate taxes to U.S. GDP to increase by about 60 basis points by 2025, whereas this ratio fell about 80 basis points following the corporate tax cuts of the Tax Cuts and Jobs Act. This suggests that 75% (dividing 60/80) of the recent fall in effective tax rates will reverse. Effective tax rates fell by 1,000 basis points (18% from 28%), so a 75% rebound would be 750 basis points (25.5% from 18%). All else held equal, this should reduce aftertax earnings by 9% (= (1-.255)/(1-.18) -1). Average U.S. equity valuations should fall by just shy of that 9%.

With that said, we wouldn’t expect equities to fall by 9% on the day after the election if the Democrats achieve a clean sweep. First, some of the tax hike is probably baked into equities at the moment. More important, it’s likely that the tax increase would be smaller if the Democrats capture a smaller majority than the five-plus seat scenario discussed above. In particular, implementing the measures to crackdown on offshore tax-havens presents some thorny issues that a slim majority could be unable to resolve. If we were only to see an increase in the statutory rate to 28% from 21% but no other measures, that would likely translate into about a 500-basis-point increase to effective tax rates. In turn, that would reduce aftertax earnings by only about 6%.

 

Morningstar Disclaimers:

Since its original publication on Morningstar.com, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in.

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

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This information has been accurately reproduced, as received from Morningstar, Inc. 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. Any decision to invest 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 Thoughts: US Elections, Global Stimulus, and 2021 Growth

Posted on by daniel.briffa@medirect.com.mt

With the November 3rd US elections just days away, the most discussed topic remains how its results may affect investment decisions. No one knows the election results yet or when the losing candidates will concede. However, we are considering many possible scenarios, including:

  • We believe there is a possibility that US taxes will not be raised initially. When President Barack Obama took office during the Great Financial Crisis (GFC), the Obama Administration focused on government spending first, then tax policy later. If this holds true, we can expect growth to likely increase in the first half of 2021.
  • Substantial post-election stimulus packages will likely include infrastructure, and if Joe Biden is elected US president, we believe healthcare and environmental initiatives will be supported, including green bonds.
  • We believe the US Federal Reserve’s (Fed’s) current zero interest-rate policy, and that of many central banks with negative rates globally, will continue for a meaningful period of time. The Fed’s macro policies of buying bonds for liquidity, and incredibly low interest rates until full employment returns, are both positive for corporate credit. We think that it will take time before we return to previous rates of inflation.
  • Today, many developed countries offer near-zero yields or negative interest rates, whereas China’s markets offer government bonds with around 3% yields.
  • We believe China’s long-term plan is to become a serious US economic competitor, and it is on that path. China’s opening of its bond and equity markets, and its currency addition to the International Monetary Fund’s basket, are steps to becoming a bigger part of the global financial community.


Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

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 outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

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. For stocks paying dividends, dividends are not guaranteed, and can increase, decrease or be totally eliminated without notice. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.


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.

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