Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Vivek Paul – Global Head of Portfolio Research, Ben Powell – Chief Investment Strategist for the Middle East and APAC, Lilla Petroczki – Portfolio Research all forming part of the BlackRock Investment Institute and Simon Durkin – Global Head of Research and Analytics from BlackRock Real Estate 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
Tide turning: The outlook for real estate is brightening as values start to stabilize and mega forces stoke demand. We key on important nuances by region and sector.
Market backdrop: Chinese onshore shares shot to their largest weekly gains since 2008 last week on stimulus expectations. U.S. stocks hit new record highs.
Week ahead: U.S. nonfarm payrolls for September are out this week. We think the Fed faces a trade-off between inflation and growth once immigration’s boost to labor fades.
The outlook for the $13.2 trillion real estate market is brightening as values broadly start to stabilize after a difficult two years – a decline we had expected. This creates opportunities that go beyond lower interest rates, we think. Sticky inflation makes real estate more attractive medium term. We also see structural changes from mega forces driving demand. We get granular across regions and sectors. Separately, Beijing’s fiscal stimulus signal spurs us to upgrade Chinese stocks.
The global real estate market – a part of many portfolios that totals $13.2 trillion, according to MSCI data – is perking up. We had long expected a tough backdrop for core real estate due to the fastest central bank rate hikes in decades. That’s why we went underweight U.S. open-end funds, those that allow periodic investment and redemption, in strategic portfolios in Q2 2022. Property values have declined in line with our view across developed markets (DMs). See the chart. While values are still falling in the U.S., they are bottoming in Europe and rising in the UK. Tremors in this market can have an economy-wide impact, seen last year in the selloff of regional banks on worries about their exposure to commercial real estate mortgages and mortgage-backed securities. Yet broad real estate concerns have started to ease on policy rate cuts: Transaction volumes are rising from recent lows in most sectors.
As rates come down, lower financing costs and reduced yields in other markets like credit and money markets should boost real estate’s relative appeal. Capitalization rates for public real estate investment trusts had surged as real estate values retreated in recent years, but now they are starting to fall, reflecting rising valuations on expected cash flows, Green Street data show. Yet some open-ended core real estate vehicles don’t yet fully reflect the past drop in public real estate values, according to MSCI and NCREIF data. As a result, we think real estate funds deploying capital in coming years can benefit from better starting values. Outcomes can vary widely, making implementation key. We see mega forces – structural shifts impacting returns now and in the future – driving demand long term in areas such as logistics. Geopolitical fragmentation pushes companies to bring production closer to home. New green building regulations are spurring energy-efficient refurbishments or new builds. The supply disruption from mega forces underpins our view of sticky inflation – and also makes real estate attractive as the asset class benefits from inflation-linked cash flows. We find opportunities by getting granular by region and sector. The real estate recovery looks further along in Europe and UK than the U.S. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.
Evolving views on China
Falling property prices have been a key factor in China’s sluggish growth and deflation. We favored U.S. and DM stocks over China – even as China’s valuations turned attractive – as policy support to the economy proved piecemeal. The policy signal from the September politburo meeting suggests major fiscal stimulus may be on the way. That doesn’t change the long-term, structural challenges we are concerned about. But we see room to turn modestly overweight Chinese stocks in the near term given their near-record discount to DM shares – even with last week’s surge – and a catalyst that could spur investors to step back in. We stay nimble and could change our view if the stimulus details disappoint or a ratcheting up of trade restrictions appears likely. The structural challenges include risks from geopolitical and economic competition, the need to reform its indebted economy and an aging population. We do not think the latest policy announcements will address those challenges.
Our bottom line
We see a brightening outlook for real estate. We look for opportunities in areas that took a bigger hit from higher rates – and from nuances at the regional and sector level. We upgrade Chinese stocks on expected fiscal stimulus.
Market backdrop
Official pledges for fiscal stimulus in China sparked a nearly 16% surge in the benchmark CSI 300 index – its biggest one-week gain since late 2008. Hong Kong-listed H shares jumped 14% for the biggest weekly gain in 13 years. U.S. stocks hit new record highs as still-low jobless claims pointed to a solid labor market. We think recession fears tied to softening job gains are overdone – and see next week’s payrolls data confirming that.
U.S. payrolls for September are on tap this week. The U.S. economy is still adding jobs at a healthy pace thanks to a boost from immigration – even if that pace has slowed in recent months. We don’t think some of the recession fears sparked by the slowing in job gains are justified. Once immigration normalizes, the economy will not be able to add jobs as quickly without stoking inflation due to an aging workforce. That means the Federal Reserve will likely keep policy rates higher for longer.
Week Ahead
Oct. 1 : Euro area HICP; Japan unemployment data
Oct. 2 : Euro area unemployment
Oct. 4 : U.S. payrolls
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 30th September, 2024 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 is intended for retail clients however, it 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.
