MARKET INSIGHTS

Weekly market commentary

Oct 14, 2024 | Blackrock Investment Institute
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Our conviction in global stocks

­Market take

Weekly video_20241014

Ben Powell

Opening frame: What’s driving markets? Market take

Camera frame

The recent surge in Chinese equities shows the benefits of investing in global stocks.

Title slide: Our conviction in global stocks

1: The case for going global

We still like U.S. stocks and the broad AI theme as corporate earnings growth expands beyond tech. Yet valuation concerns can drive market volatility.

This calls for adding global exposure where we see attractive relative valuations and where catalysts emerge. But selectivity is key.

2: Seizing opportunities

Signals for major fiscal policy stimulus on the way in China gave us room to turn modestly overweight Chinese stocks. That doesn’t change the long-term, structural challenges we are concerned about.

We stay overweight Japanese stocks. The macro outlook is brightening and corporate reforms are driving improved corporate earnings and shareholder returns.

We are overweight UK stocks but have less conviction as the economy stagnates and heading into the new government’s budget announcement.

3: Signposts for change

We lean into risk yet monitor signposts that could cause market volatility, such as escalating geopolitical tensions and uncertainty over the U.S. presidential election.

We see mega forces driving regional opportunities and risks that span beyond the very near term.

Outro: Here’s our Market take

We stay overweight U.S. stocks as the artificial intelligence theme broadens out.

Outside the U.S., we lean into high-conviction ideas, such as in Japanese and Chinese stocks.

Closing frame: Read details: blackrock.com/weekly-commentary

Going global

We see opportunities in global stocks trading at attractive relative valuations with potential catalysts for price appreciation – like in China and Japan.

Market backdrop

U.S. stocks hit all-time highs. U.S. 10-year yields rose further after the U.S. core CPI data prompted markets to trim expectations for Federal Reserve rate cuts.

Week ahead

This week, we expect the European Central Bank to cut interest rates. We think it has more room to cut rates than the Fed because it tightened policy more. 

China’s share surge shows the upside of keying on opportunities in global stocks when clear catalysts emerge. We keep our U.S. equity overweight on the artificial intelligence (AI) theme broadening. Outside the U.S., we favor markets where we have high conviction. We’re overweight Japanese stocks on a solid macro outlook and corporate reforms. We stay overweight UK stocks with less conviction. We upgrade UK gilts and see room for sharper policy rate cuts than markets expect.

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Market commentary Assets class view
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Diverging valuations
Dispersion in global ex-U.S. 12-month forward valuations, 2003-2024

The chart shows a widening gap in economic performance and equity valuations across global stock markets outside of the U.S., based on 12-month forward price-to-earnings ratios.

It is not possible to invest directly in an index. Indexes are unmanaged and index performance does not account for fees. Source: BlackRock Investment Institute, MSCI, with data from LSEG Datastream, October 2024. Notes: The chart shows the dispersion of non-U.S. equity valuations, using 12-month forward price-to-earnings ratios. The dispersion score takes the normalized average of the standard deviation, interquartile and interdecile ranges of the valuations. Index proxies: MSCI developed and emerging market regional indexes, excluding Ireland, Greece and Peru.

China is the latest example of how cheap valuations can turn into a stock market rally once a catalyst emerges. Chinese shares have surged since the September politburo meeting on hopes that major fiscal stimulus may be on the way. A lack of details so far has disappointed some investors, so we eye policy announcements for more clarity. This potential exists elsewhere, waiting for a catalyst to give a spark, we think. But selectivity is key. We see a widening gap in economic performance and equity valuations across regions – a function of a more volatile macro backdrop and uneven restart coming out of the pandemic. See the chart. We still like U.S. stocks and the broad AI theme as corporate earnings growth expands beyond tech. Yet fears over stretched valuations can drive brief selloffs. This calls for considering global exposure where we see cheap valuations and potential catalysts.

Staying nimble allows us to seize on opportunities in global equities when catalysts emerge. China’s signal on policy stimulus prompted us to go modestly overweight, especially given depressed valuations. Details have been scant, so we could change our view if future announcements disappoint. We still think China faces long-term, structural challenges – like economic and geopolitical competition with the West, government debt and population aging. We have stayed overweight Japan stocks on a sunnier macro backdrop and corporate reforms driving strong earnings and shareholder returns. We trimmed our overweight in August due to the potential drag on earnings from a stronger yen and Bank of Japan policy missteps – yet we stay positive.

How we're staying selective

Even in regions where the growth outlook is more challenging, we see selective investment opportunities. With 11% gains this year, European stocks have lagged major markets – yet European banks have surged 31% and we still like the sector as we have since the start of 2024. We have less conviction in UK stocks on a soft economy and heading into the new government’s budget announcement, yet we stay overweight for now. We go overweight UK gilts as we see the Bank of England having to cut policy rates more than markets are pricing given the soft economy.

We lean into risk yet monitor signposts that could cause us to change our views. Geopolitical risk is elevated as tensions flare in the Middle East. Regional escalation could drive oil prices higher, highlighting this is a world shaped by supply constraints. We have seen oil price spikes drive bond yields higher, showing long-term bonds still aren’t providing reliable portfolio diversification, in our view. This makes quality key in fixed income, we think. The U.S. election will have global ramifications, especially for key trade partners like Mexico. Yet mega forces, structural shifts impacting returns now and in the future, are driving opportunities beyond the near-term risks. For example, the rewiring of supply chains is benefiting multi-aligned trading partners like Vietnam and Indonesia, both seeing a significant increase in trade and investment flows.

Our bottom line

We stay nimble to seize high-conviction global opportunities. We recently turned modestly overweight Chinese equities and stay overweight Japanese and UK equities. We up UK gilts to overweight and stay cautious on U.S. Treasuries.

Market backdrop

U.S. stocks hit all-time highs, with tech shares leading gains, as the Q3 earnings season kicked off. U.S. 10-year Treasury yields climbed further to their highest since July near 4.10%, up about 50 basis points in the past month. U.S. core inflation topped expectations in September, showing sticky services inflation and leading markets to trim expected Federal Reserve rate cuts. China onshore shares fell 3% last week, forfeiting some recent gains as investors eye fiscal stimulus details.

We expect the European Central Bank (ECB) to cut interest rates at its policy meeting this week. September core inflation was below ECB projections, indicating inflation is still on track to hit the central bank’s 2% target. We think the euro area’s substantially weaker growth and employment indicators will push the ECB to cut rates again in October. The ECB will likely remain focused on incoming data but it has more room to cut than the Fed because it tightened policy more, in our view.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while the German 10-year Bund is the worst.

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 LSEG Datastream as of Oct. 10, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point 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: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

Oct. 14

China trade data

Oct. 15

UK employment data

Oct. 16

UK CPI

Oct. 17

ECB policy decision; Philly Fed business index; Japan trade data

Read our past weekly commentaries here.

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Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, October 2024

  Reasons
Tactical  
AI and U.S. equities We see the AI buildout and adoption creating opportunities across sectors. We get selective, moving toward beneficiaries outside the tech sector. Broad-based earnings growth and a quality tilt make us overweight U.S. stocks overall.
Japanese equities A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Income in fixed income The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term credit. We’re neutral long-term U.S. Treasuries.
Strategic  
Private credit We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk.
Fixed income granularity We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook.

Note: Views are from a U.S. dollar perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Asset Tactical view Commentary
Equities      
United States United States: tactical Overweight +1 We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins.
Europe Europe: tactical Underweight -1 We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
U.K. U.K.: tactical Overweight +1 We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Japan Japan: Overweight 1 We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Emerging markets Emerging markets: tactical Neutral We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high.
China China: Overweight+1 We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges.
Fixed income      
Short U.S. Treasuries Short U.S. Treasuries: tactical underweight -1 We are underweight. We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term.
Long U.S. Treasuries Long U.S. Treasuries: Neutral We are neutral. Markets are pricing in sharp Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on incoming data. We prefer intermediate maturities less vulnerable to investors demanding greater term premium.
Global inflation-linked bonds Global inflation -linked bonds : Neutral We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds European bonds: tactical Neutral We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
UK Gilts U.K. gilts: tactical Overweight+1 We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Japan government bonds Japan government bonds: tactical Underweight -2 We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
China government bonds China government bonds: tactical Neutral We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS U.S. agency MBS: tactical neutral 01 We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG.
Short-term IG credit Short-term IG credit: tactical Overweight +1 We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S.
Long-term IG credit Long-term IG credit: tactical Underweight -1 We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global high yield Global high yield: tactical Neutral We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
Asia credit Asia credit: tactical Neutral We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging market - hard currency Emerging market-hard currency: tactical Neutral 00 We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
Emerging market - local currency Emerging market-local currency: tactical neutral We are neutral. Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security. 

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
Germany Germany: tactical neutral0-1 We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions.
France France: tactical Underweight -1 We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity.
Italy Italy: tactical Underweight -1 We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years.
Spain Spain: tactical neutral0-1 We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI.
Netherlands Netherlands: tactical Underweight -1 We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers.
Switzerland Switzerland: tactical Underweight 11 We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think.
UK UK: tactical neutral 00 We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Fixed income    
Euro area government bonds Euro area government bonds: tactical neutral 00 We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
German bunds German bunds: tactical neutral 00 We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs.
French OATs French OATs: tactical neutral 00 We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges.
Italian BTPs Italian BTPs: tactical Neutral 0 We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields.
UK gilts UK gilts: tactical overweight+1 We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Swiss government bonds Swiss government bonds: tactical neutral 00 We are neutral. The Swiss National Bank cut policy rates twice this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here.
European inflation-linked bonds Euro area inflation-lined bonds: tactical neutral0-1 We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive.
European investment grade credit European investment grade credit: tactical Neutral We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the U.S. given spreads are not as tight.
European high yield European high yield: tactical Overweight +1 We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the U.S. Spreads compensate for risks of a potential pick-up in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Authors
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Roelof Salomons
Roelof Salomons
Chief Investment Strategist for the Netherlands – BlackRock Investment Institute
Ben Powell
Ben Powell
Chief Investment Strategist for the Middle East and APAC — BlackRock Investment Institute
Devan Nathwani
Devan Nathwani
Portfolio Strategist – BlackRock Investment Institute