Markets Weekly Podcast - 29 Oct 2020
This week our host, Gerald Moser, Chief Market Strategist at Barclays Private Bank, speaks to Russ Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners, about Europe, discussing the risks and opportunities he sees in the months ahead.
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Welcome to your Markets Weekly podcast. The US housing market appears to be alive and well, according to the US National Association of Home Builders Housing Market Index, which was released last Monday. In fact, the sentiment index, which is based on current sales and potential future sales, hit an all-time high in early October. We saw an equally resilient picture for the housing market in the UK, Sweden and the euro area.
However, broader economic outlooks remain clouded by uncertainty. With the recent rise in COVID-19 infections, Europe is once again at the centre of the pandemic. Governments have announced further restrictions and financial support to try and control case numbers while also limiting economic damage.
This week our host, Gerald Moser, Chief Market Strategist at Barclays Private Bank, speaks to Russ Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners, about Europe , discussing the risks and opportunities he sees in the months ahead.
Gerald Moser (GM): Hello, it's Monday the 26th of October and welcome to the Barclays Private Bank Markets Weekly podcast, the weekly recording that will guide you through the turmoil of the global economy and financial market.
My name is Gerald Moser, Chief Market Strategist for Barclays Private Bank and each week we will be joined by guests to discuss both risks and opportunities for investors. This recording will last around 15 minutes, broken down into three parts.
Firstly, I'll analyse the events that moved the markets and grabbed the headlines over the course of the past week and then move on onto our focus section where we spend a few minutes discussing a specific investment theme.
This week I'm pleased to say or special guest is Russ Steenberg, Managing Director and Global Head of BlackRock Private Equity Partners. We will focus on the pros and cons of investing in Europe and the key themes that have emerged since the start of the year.
Finally, I'll conclude by previewing the major events and data releases that are likely to shape the week ahead.
So let's start by reviewing the market last week. US and European equity benchmarks were little changed while US government bond yields move higher throughout the week. Oil and gold were also relatively stable.
While financial markets, with the exception of government bond yields, might have lacked direction there were a few developments that are newsworthy. We got several data points highlighting that the US housing market is well and alive.
First on Monday the US National Association of home builders housing market index, a blend of current sales and signals for future sales, hit another all-time high in early October, easily surpassing levels seen for example during the housing bubble in 2006/2007.
That survey was backed up with hard data later in the week with the September housing report. Single family starts and single family house permits both reached their strongest level since 2007.
The one casualty of the Covid crisis are multi units start i.e. apartments. Numbers there are still 50% below where they were in January. Another hard data supporting the positive trend in US housing market came from existing cells, they hit 6.5 million in September the highest monthly level since May 2006.
Housing is the market which is the most directly linked to the central bank policy, with rates at a record low it is likely that this market will continue to thrive until rising home prices curbed the enthusiasm. Data last week in the UK, Sweden, and the euro area painted an equally resilient picture for housing market in those regions.
Elsewhere the focus has been on US stimulus discussion, US election, earning season and the resurgence in Covid-19 cases. Throughout the week news coming out from Washington suggested that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were getting closer to an agreement regarding a fifth coronavirus relief bill.
But whether such a package could pass the Senate before the US election early November is relatively uncertain. Talking about the US election the last debate took place last Thursday. With one week to go Joe Biden continues to lead Donald Trump in the polls.
Two important differences with 2016 is the much lower number of undecided voters and the fact that more than 35 million Americans have already casted their vote.
Now moving on to the earnings season, we are now about a third through the third quarter of earnings report season. We now have a clearer picture as to how results are shaping up.
Numbers are coming in better than anticipated although to a lesser extent than in the second quarter. Three themes are emerging. First, most of the upside happened below the line with sales surprising by only 3% on average, raising the question of the sustainability of these beats.
So one area where companies have controlled, is on costs and managements have used this to improve their earnings number. Second, outlooks remained clouded by uncertainty and we get very little guidance from company at the moment.
And third, the relationship between beats and performance is very limited, showing the extent to which macro factors such as the stimulus, the Covid-19 infections or the US election seemed to be more relevant for equity market at the moment.
That brings us to our final point which is the rise in Covid-19 infections. Europe is once again at the centre of the pandemic and governments have announced further restrictive measures as well as financial support to try and bring cases numbers under control while also limiting economic damages.
However, the latest survey data out last Friday suggests that the economy is contracting again in Europe especially in the service sector. This brings me to our focus section with Russ Steenberg. Russ thank you for being with us today.
Russ Steenberg (RS): Thank you Gerald it's a pleasure to be with you.
GM: Well it's a pleasure on our side and I would like to use your expertise on Europe to ask you a few questions regarding that region. Europe has witnessed a lot of volatility with the global pandemic but also geopolitical uncertainty. What do you think of Europe and what do you see as key risks for the region?
RS: Well, first of all Europe is not the only geographic area in the world that is facing these challenges that you have articulated. Certainly the whole western world is, in the developed world in Asia as well.
The pace of dealing with the pandemic, the first major risk that's facing the world here of many, is certainly different in the region that you're in whereas in Asia right now, since it started there, they are doing significantly better with the opening of their economies in dealing with the pandemic as a result.
In Europe particularly when you're now seeing the 2nd wave; in the US the issue is whether it's a second wave or still the 1st wave, so this is still one of the huge issues facing us and one of the major risks that we see.
Second risk is of course the, as you mentioned in your numbers, the social needs of workers. With the pandemic many people not being able to work has created real problems relative to the service industries which have been hurt very badly.
And as a result that area if it has anything to do with service, whether it's travel, whether it's restaurants, whether it's the entertainment area, whether it's large events where people gather, this has certainly been impacted in a huge way, which also impacts major sectors of the economy which of course we would be looking to invest in.
Now this also can provide the opportunities because, indeed if one, through due diligence, through knowledge of the sectors can identify those organisations in companies within the sectors badly affected and then can provide liquidity and/or help in providing a stronger balance sheet to get through this then indeed they will be the companies that will emerge the winners and probably will be very good areas to invest in.
The geopolitical risks within Europe also are something that you have to think very carefully about. There is significant difference in the North to the South relative to economies and relative to the way governments are approaching dealing with the pandemic.
Certainly you have Brexit continuing to happen with the negotiation. Is it going to be a totally hard Brexit or is there going to be here at the last minute a deal that works for all parties?
So you also have electoral risk that exist, as you do here in the US with the upcoming presidential election. So there are a number of risks that one has to look at very carefully to analyse what the risk is to potential the area and the asset that you're going to invest in, and weighing against the opportunity that might be apparent as a result of the risks that do exist around the world and in Europe itself.
GM: Thank you and you mentioned at the beginning that Europe is not the only region facing those challenges. How has Europe fared so far this year versus US and Asia, and what have been the emerging themes in the region?
RS: Well quite clearly the trends or the themes that have emerged in the world of private equity around the world were fairly well established before the pandemic. In many ways the pandemic has accelerated those trends and let me let me name a few.
Quite clearly technology, and all things related to technology, has been a dominant theme really since 2000 and certainly accelerated by the global financial crisis in 2008. And here with the pandemic greater acceleration relative to how people interact with simple things like buying their groceries or instead of being able to go to a restaurant, ordering it in and having it delivered, shopping online.
The other side of it, anything that has to do with hardware and software, with cloud development and as companies integrate technology into their everyday workflow. So today what's a technology company and what's a company that has just integrated technology into their operations because it's necessary to survive and to thrive in today's world.
These definitions are becoming very, very much blurred so that definitely has been a very, very strong trend and a very positive trend for all things related to the software or hardware in the development of technology that allows this expansion into our everyday lives.
And as a result you're seeing very high prices in this sector and as a result they are also very capital light. And as a result it is an area right now that is receiving a lot of attention and also receiving a whole lot of capital. So that is one dominant theme.
The other theme is that clearly the pandemic in certain sectors has certainly been incredibly harmful to companies in that sector; travel being one, all things related to the auto industry, all things relative to the aerospace industry, as an example.
In this kind of environment, as we have seen in any major downturn where certain sectors are impacted more than others, the strong get stronger. And as a result liquidity and as a result a strong balance sheet become the things that allow you to get stronger through this environment.
And we're seeing that companies are moving rapidly to ensure their liquidity needs here going forward in a very uncertain time period in front of us and they are also making sure their balance sheet is rock solid, so that they can take advantage of the opportunity sets that will emerge.
And that's another major theme that you're starting to see. Those would be the two major themes that I would focus on here this morning.
GM: OK thank you it's indeed, some long term themes that have been there before and will probably continue to be there after. Talking about after, what do you expect in 2021 for European markets and economies?
RS: Well Gerald, your crystal ball is as good as mine and we’ll probably both be wrong. Having said that when we look at 2021 and we look at where companies are today around the world, but specifically for Europe as we're talking about that today, the issue is when does society in the different geographies, when are they able to deal with the pandemic such that we open up the economies to the point we get to the new normal, whatever normal is going to be, which is undetermined this particular point.
So the question then becomes what's the timeline that gets you there and what is the progress of cash flow and earnings over that timeline to get to the new normal. So liquidity and balance sheet as I mentioned before become very important in this environment.
So the projections by sector all vary as to when you're going to get to this new normal. The airline industry or travel as an example has a much longer time frame attached to it than others do.
And what I think we're seeing in the public markets, and we're certainly seeing in the projections with individual companies and management teams in our portfolio and in companies in the private world in Europe as well, is that 2021 is a very uncertain time period.
And people don't expect getting back to whatever the new normal is until late 2021 or into 2022. And I do think that the market, if you listen to all of the pundits and the market relative to its response in since the end of March, is pretty much looking past 2021 into 2022 and beyond.
Now the whole key there in the private market in Europe as well as the rest of the world is if you're the CEO of one of these companies, private or public, the issue is are we so structured with our business plan in our capital structure so that we can survive and get to the new normal, and that's the fundamental question today for see CEOs around the world.
GM: Russ thank you very much for taking the time today to share your views with us, much appreciated.
RS: My pleasure.
GM: So turning to this week. It will be heavy on the data front. In the US we will get indication on the consumer sentiment with the University of Michigan survey as well as the Conference Board consumer confidence index.
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