Day: 2 March 2021

Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist and Carole Crozat, Head of Thematic Research, 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.

We are incorporating the effects of climate change – and of the climate transition – in our return assumptions, as we believe avoiding climate-related damages will help drive growth and improve returns for risk assets. We see climate-resilient sectors as potential beneficiaries of a “green” transition, and are strategically overweight DM equities as they are skewed toward these sectors.

For illustrative purposes only. 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, with data from Refinitiv Datastream and Bloomberg, February 2021. Notes: The chart shows the difference in U.S. dollar expected returns over the next five years from February 2021 for four sectors of the MSCI USA Index in our base case of a “green” transition (policies and actions taken to mitigate climate change and damages, and to limit temperature rises to no more than 2 degrees Celsius by 2100) vs. a no-climate-action scenario. The estimated sectoral impact is based on expected differences in economic growth, corporates earnings and asset valuations across the two scenarios. Professional investors can access full details in our Portfolio perspectives  and CMAs website.

 

We see climate change and efforts to curb it having major economic implications in the decades to come. The base case underpinning our updated capital market assumptions (CMAs) reflects a “green” transition to a low-carbon economy, with a gradual phasing-in of carbon taxes, green infrastructure spending consistent with the IMF’s recommendation, and subsidies on renewable energy. If none of these actions are taken to mitigate climate change, we estimate a cumulative loss in global output of nearly 25% in the next two decades. Our updated CMAs are driven by sectoral views, with exposure to climate risks and opportunities a key determinant. We see technology and healthcare benefiting the most from that perspective, and carbon-intensive sectors with less transition opportunities such as energy and utilities lagging. See the chart for estimated return assumptions of four sectors in our base case vs. a no-climate-action scenario. Climate is just one driver of asset returns. Other drivers such as valuation could be more powerful over the short term, as evidenced by energy’s strong performance so far this year.

Our updated CMAs are an important step in BlackRock’s journey of making sustainability core to our investment process, as highlighted in CEO Larry Fink’s annual letter. The journey started long before this year. We had laid down the case for sustainability as a driver of asset class returns in Sustainability: the tectonic shift transforming investing, and have developed new tools to assess physical risks to assets caused by climate change. We already experience the effects of climate change in our daily lives, in the form of extreme weather events and rising temperatures. Capturing the financial implications is not easy, but it cannot be ignored. Projections around climate change are highly uncertain. This is due to the complexity of modelling the dynamics and myriad dependencies between climate, carbon emissions, and economic variables. We are in uncharted territory. Systematic acknowledgement of the inherent uncertainty is therefore crucial, and is a key consideration when we consider the portfolio implications.

We refine our CMAs to include an important and often underappreciated return driver – climate change. This flows in to our CMAs through 3 channels: 1) the macroeconomic impact; 2) the repricing of assets to reflect climate risks and exposures, and; 3) the impact on corporate fundamentals. First, macro variables such as GDP growth will be different in a world that is transitioning to a low-carbon future, meaning traditional risk premia for all asset classes will change, in our view. Second, we don’t believe market prices yet reflect the coming “green” transition, meaning assets poised to benefit may have a higher return during the transition. Third, climate change and the efforts to address it will impact the profitability and growth prospects of companies, creating winners and losers.

The bottom line: We believe the transition toward a world with net-zero carbon emissions should reward companies, sectors and regions that adjust, and penalize others. These effects are now reflected in our climate-aware return assumptions. On a broad asset class level, we see DM equities positioned to capture the potential opportunities from the climate transition, at the expense of high yield and some emerging market debt. The composition of DM equity indexes is more skewed toward less carbon-intensive sectors such as tech and healthcare; equities also can better capture potential opportunities arising from the “green” transition, given that bonds have more limited scope for capital appreciation, in our view.

Market Updates

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current 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, in descending order: spot Brent crude, MSCI Emerging Markets Index, MSCI Europe Index, MSCI USA Index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY ), Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index, J.P. Morgan EMBI index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

U.S. 10-year Treasury yields hit the highest levels in nearly a year. Nominal yields have been climbing since September, but the magnitude has lagged that of the rise in inflation expectations during the period. Inflation-adjusted yields remain deep in negative territory – in line with our new nominal theme. U.S. stocks came under pressure as Treasury yields rose. We still believe the new nominal will support equities and risk assets over the next six to 12 months.

Week Ahead

• March. 1 – Manufacturing purchasing managers’ index (PMI) for Japan, China, the euro area and the U.S.
• March. 3 – Services PMI for Japan, China and the U.S.;  euro area composite PMI
• March. 4 – U.S. factory orders
• March. 5 – U.S. nonfarm payrolls; China’s annual National People’s Congress session starts

U.S. nonfarm payrolls data will be in focus. Economists polled by Reuters expected February’s nonfarm payrolls to increase by 110,000 jobs, after a modest gain of 49,000 in the previous month. Global PMI data will also help shed light on the restart status, especially in the services sector where activity has been muted.

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 March 1st, 2021 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 turbulent for global equity markets as aggressive moves in bond markets unsettled investors and equity markets traded sharply lower into the end of the month. The week ended with the MSCI World Index down 2.8%, the S&P 500 Index down 2.4%, the STOXX Europe 600 Index down 2.4%, and the MSCI Asia Pacific Index down 5.3%.

Bond Market Selloff Spooks Equity Markets

Last week saw dramatic moves in the US bond market, the velocity of which spooked equity markets and prompted some aggressive rotation out of growth names and into value names. The US 10-year Treasury yield finished up seven basis points on the week to 1.407%, though it had jumped to 1.6% on Thursday, and the two-year/10-year spread is back to levels not seen since 2018.

There were several dynamics at play here, but central to this has been increasing hope of economies reopening (vaccinations progressing, new cases and hospitalisation rates heading in the right direction, amongst other things) and fresh US stimulus. The thinking is that we could see a surge in strong consumer demand for products or services, bringing sudden inflationary pressures and leading to questions over what this would mean for central bank policy. With economies potentially ‘overheating’ in that scenario, the fear is it could signal an end to the ultra-easy monetary central bank policy we currently enjoy, as central banks try to restrain surging inflation.

In this context, market expectations of the US Federal Reserve (Fed) tightening have increased. Expectations are that the Fed will need to raise rates in early 2023. Two weeks ago, expectations were for tightening in the second half of 2023, and three weeks ago observers thought it would occur in early 2024. The expectation of early interest-rate hikes is making shorter-term bonds especially sensitive to rate risk. In that context, many bond investors will sell those shorter-duration bonds.

This theme has been a talking point for some time and there were hopes that Fed Chair Jerome Powell’s Congressional testimony last week would settle nerves. His rhetoric remained dovish, but offered little new in terms of the Fed’s thinking. With sentiment already brittle, markets reacted aggressively to a seven-year US Treasury auction on Thursday, which saw record-low demand. This spooked markets and saw the US Treasury yield hit 1.6%. The velocity of this move was particularly unsettling for investors, and the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) rallied as much as 35% between the European and US market close on Thursday.

What Does This Mean for Equities?

There is a clear ‘push and pull’ in markets at the moment between better-than-expected macro reports, unprecedented levels of stimulus, and a potential end to COVID-19 lockdowns vs. stretched valuations and concerns of the impact of interest-rate increases.

Equity indices moved lower on the week, but key to note was the rotation in markets. In the United States, value outperformed growth by about 3.3% and in Europe there was notable outperformance for value, up 4.4%, vs momentum stocks, which were down 5.1%.

Some say the TINA argument for holding equities for the yield has been threatened as bond yields move higher. Income investors that were forced into equities for yield may be more likely to move back to traditional fixed income assets; history suggests 1.75% on the 10-year appears to be the tipping point at which many asset allocators begin to shift back into bonds. If rates rise further from here, there will be weakness in ‘bond proxy’ stocks held for their dividend yield.

We expect ‘reopening’ beneficiaries (value, cyclicals) vs. growth/COVID-19 beneficiaries/bond proxies rotation to be a key theme for equities that will ebb and flow in coming months.

European Yields: European Central Bank (ECB) Attempts to Stem Bond Sell-Off

Despite attempts from central banks to calm the recent rise in bond yields, we have seen continued moves higher. The global bond market has had its worst start to a year since 2015 amid elevated inflation expectations and hopes for a stronger economic rebound. The Fed, European Central Bank (ECB), and Bank of England (BoE) all tried to dampen expectations, but the inflation trade was firmly back on earlier this week. European government bond yields rose to their highest levels in nearly six months this week, with the German 10-year yield hitting levels last seen last March.

Last Thursday, ECB Chief Economist Philip Lane echoed comments from ECB President Christine Lagarde earlier in the week that the central bank is ‘closely monitoring’ longer-term yields, adding that its asset purchases will aim to ‘preserve favourable financing conditions’. The implication is that the ECB may increase its pace of asset purchases under the pandemic emergency purchase programme (PEPP) if financing conditions tighten too much too soon and threaten the economic rebound.

ECB Board Member Isabel Schnabel was specifically quoted as saying that the ECB may need to add support if yields hurt growth. The commentary was briefly supportive last Thursday, but investors have largely ignored the attempt to calm things so far.

Whilst the recent moves are extreme and have garnered a few dramatic headlines, we must also remember that we are talking about moving from ultra-low European yields to still low-levels and that the central banks remain ready to step in.

Week in Review

United States

It was a wild ride for US markets last week, with the S&P 500 Index closing the week down 2.4%. The focus was on the recent surge in bond yields, which drove some sizeable moves in equity markets. As a result, the VIX closed the week up 27%. Increased fiscal stimulus, the Fed’s willingness to let the recovery run hot and improving COVID-19 trends and vaccine distribution have also been supportive of the pro-cyclical rotation in equities. Energy was the only sector to finish in the green last week, up a notable 4.3% as oil prices rallied. All other sectors finished in the red with utilities, consumer discretionary and technology the notable laggards. Also, notably, the NYFANG Index closed the week down 6.3%.

Behind the sector performance, the reflation rotation was evident with crowded growth positioning being adjusted following sharp moves in rates. One of the big reasons for higher growth forecasts in the United States has been President Joe Biden’s stimulus package. However, the Senate ruled on Thursday that one of the key components of the plan, which is an increase in the minimum wage to US$15, could not be included in the bill if it’s going to be passed via the reconciliation process that only needs a simple majority. So, either the bill would need to be passed with 60 votes (this will require Republicans to be on board), or the minimum-wage hike would need to be taken out. In response, Senator Bernie Sanders, who chairs the Senate Budget Committee, said that he would seek to make it a more fiscal measure so that it could still be included in the bill, saying that he would remove tax deductions ‘from large, profitable corporations’ who don’t pay their workers as much, and incentivize small businesses to raise wages.

In terms of COVID-19, the picture continues to improve overall. However, the recent fall in new cases showed signs of stalling last week. The seven-day average hovers just under 70,000 infections per day. Nonetheless, the rate of hospitalisations continues to improve, with the number hospitalised with the disease on Saturday and Sunday below 50,000 per day for the first time since 2 November.

The United States continues to ramp up vaccinations, now at a seven-day average of 1.74 million per day, now firmly ahead of the 1.5 million doses per day President Biden had promised to administer.

Europe

Volatility returned to European equity markets last week, driven by those sizeable shifts in global bond yields. Headline indices were mixed, with divergent sector performance through the week. We are witnessing a clear push-and-pull in markets at the moment between better-than-expected macro reports, unprecedented levels of stimulus and a potential end to COVID-19 lockdowns vs. stretched valuations and concerns of the impact of interest-rate increases. This was amplified as the week went on.

In terms of index moves, the broader STOXX Europe 600 Index actually underperformed due to its hefty health care weighting, down 2.4%. The Spanish IBEX 35 Index outperformed, up 0.7%, with travel and leisure and the banks better off as investors bought value. The UK FTSE100 Index was dragged lower, down 2.1% last week as health care lagged. Sterling also came under pressure towards the end of the week.

There was a clear reflation trade last week, which drove notable outperformance for value in Europe vs momentum stocks. As a result, travel and leisure stocks were better off, with airlines particularly strong amid clarity on the roadmap for the UK’s exit from COVID-19 restrictions and some better-than-expected earnings in the space. Oil and gas stocks were also stronger, benefitting from the rise in the price of brent crude oil. Technology stocks lagged in Europe, taking a cue from weakness in the United States. Outside of that, it was the defensive sectors that were weaker, with food and beverage, health care, and personal and household goods all lower.

An announcement from the UK government on how it foresees the route out of current lockdown helped the reopening trade. Prime Minister Boris Johnson announced a cautious roadmap that should see England fully reopened by 21 June, which gave the domestic hospitality sector a little more clarity on when business may resume. Over the weekend, it was reported that over 20 million people in the United Kingdom had received their first vaccination.

In Germany, Chancellor Angela Merkel will meet with state leaders on 3 March to discuss reopening efforts. State leaders had already begun to announce small reopening measures, but Merkel noted last week that Germany was in a ‘third wave’ and urged caution. On the vaccination front, progress is slow in Germany but might increase pace in the coming weeks; government health advisors could possibly remove their recommendation for people over the age of 65 to avoid the Astrazeneca vaccine. By the weekend, Germany had administered just 25% of the Astrazeneca doses which had been delivered.

In France, stubbornly high infection rates in particular regions of the country have prevented further easing measures. France has a 6 pm-6 am curfew in operation which has received criticism for failing to deliver good results—by last Wednesday the government reported 31,000 new COVID-19 cases, the highest since November.

Asia and Pacific (APAC)

Equities in the APAC region underperformed their US and European counterparts, with a more extreme selloff in the MSCI APAC Index, which closed last week down 5.3%. Both mainland China and Hong Kong were the worst-hit, although we would note that this comes after the Shanghai Composite hit highs not seen since 2015 last week.

In China, there are some concerns over a gradual tightening in lending conditions as the country continues its impressive economic recovery. However, over the weekend, data did show something of a holiday hiccup, with the recovery slowing in February as factories shut for the Lunar New Year and virus restrictions curtailed the usually busy travel season. The official manufacturing Purchasing Managers’ Index (PMI) fell to a nine-month low of 50.6 from 51.3 in January as export orders plunged.

Geopolitical tensions remain an overhang. Last week, the European Union’s (EU) Foreign Policy Chief Josep Borrell urged China to allow ‘meaningful access’ to Xinjiang for the United Nation’s (UN) Human Rights Chief Michelle Bachelet. China’s foreign minister Wang Yi urged Washington to lift US sanctions last week, but Biden’s administration has signalled it has no intention of doing so in the near term.

On Wednesday, reports that Beijing was planning to impose a new national security law on Hong Kong weighed on the Hang Seng Index. Shares in Hong Kong’s bourse operator (HKEX) were also hit hard after the government announced a stamp duty increase on equity trades for the first time in 30 years. HKEX said it was disappointed in the government’s decision but recognized the levy as an important source of government income. Worth noting here, the HKEX had touched record highs the prior week.

The Hang Seng will also be in focus at the start of this week as the results of a review are announced which, if approved, would increase the number of member constituents, capitalisation weightings of individual companies and fast-track new listings. It has the potential to be one of the biggest overhauls of the index in its 51-year history.

The Week Ahead

Monday 1 March

• Global: (February) Final manufacturing PMI
• Fed’s John Williams, Raphael Bostic, Loretta Mester & Neel Kashkari; ECB’s Luis de Guindos, Gabriel Makhlouf & François Villeroy de Galhau

Tuesday 2 March

• Eurozone Consumer Price Index
• Reserve Bank of Australia policy decision

Wednesday 3 March

• Eurozone Producer Price Index
• Global: (February) Final services & composite PMI
• BoE’s Silvana Tenreyro speaks on Negative rate policies; Fed’s Patrick Harker & Charles Evans
• UK Budget – Rishi Sunak to set out economic support in budget
• Fed Beige book

Thursday 4 March

• OPEC+ Meeting

Friday 5 March

• US February monthly employment data, including non-farm payrolls, unemployment rate
• China’s annual session of its National People’s Congress begins
• BoE’s Jonathan Haskel speaks

 

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 1st March 2021, 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.