Investments: what BlackRock expects for the rest of the year

The manager recalls that at the beginning of 2024 many stock markets were close to all-time highs, as investors anticipated that major central banks would cut rates several times over the next 12 months. However, until mid-year, only the European Central Bank (ECB) was the only major central bank to cut rates and markets have continued to rise. Because? “We believe stocks have been supported by a benign macroeconomic environment, since inflation has come down from peaks and recessions have been largely avoidedand profits have been resilient and are forecast to rise globally by 8% in 2024.

In particular, believe interest rate cuts could lead to a broader set of opportunities for stock picking experts to find a new set of market winners. To do this, BlackRock Fundamentals Equities explored cyclical and economically sensitive sectors that are also supported in the long term by the movement towards decarbonization, reshoring and the rise of AI. At the same time, he wonders whether now is not the time to consider Europe and the United Kingdom, given that better profits, better economic prospects and cheap valuations are on the horizon.

Four areas of investment focus

With cyclical sectors, especially in Europe, expected to benefit from falling rates and healthier economic activity, they explored areas that may receive a cyclical push in the right direction, and yet are also supported in the long term by structural changes.

On the one hand Renewable energies and public serviceswhere they believe both sectors stand to benefit from falling rates, as well as long-term investment in the transition to a low-carbon economy. Secondly, Semiconductorswhere they see signs of a cyclical rebound in the semiconductor industry, which is also supported by increasing demand for artificial intelligence and data centers. Thirdly, the Construction and renovationwhere they see construction volumes likely to recover from low levels and also benefit from investment in building renovation, relocation and data center demand.

Is the building ready for a rebuild?

• Renewable energies and public services: Renewable projects require a large amount of initial investment and higher rates have hampered the financing of these projects. Renewables also require a lot of raw materials (wind power needs up to five times more steel than gas, for example) and rising inflation is putting pressure on costs. Wind turbine manufacturers They have already passed the worst point of material cost inflationaccording to BlackRock analysis, and one of the world’s largest turbine makers said in its most recent earnings report that more projects delivered at higher prices should boost 2024 revenue. Structurally, demand should remain strong in the long term. A focus on energy security in Europe has supported policy measures such as REPowerEU, the Net Zero Industrial Law and recent attempts to reduce permitting time for new renewable energy projects. Spending on renewable energy in the US Inflation Reduction Act It should also benefit companies with global reach. Additionally, utility companies are sometimes considered “bond proxies” because they offer a steady stream of income. These returns have seemed less attractive while the risk-free rate has been around 5%. If rates go down, then the attractiveness of your secure income streams increases. Performance has lagged so far this year and we see room for this to recover. Therefore, they believe that ‘green utilities’ crucial to energy transitionwhich means long-term earnings resilience. However, it is important to be selective. Our investors, the investment fund maintains, look for those public service companies that are capable of consistently generating returns on renewable energy projects that exceed their weighted cost of capital, or expected rate of return.

• Semiconductors: Different parts of the semiconductor industry have been in different cycles. Chips needed for smartphones and personal computers lagged after a surge in demand during COVID, and this year has seen the start of a recovery. Demand for automotive-related semiconductors has been strongalthough there are some concerns here as EV sales growth slows. Overall, we expect the industry to benefit from a cyclical rebound this year and in 2025. As such, they expect data center demand, linked to the rise of AI, to provide a long-term boost to several companies within the semiconductor industry. Many of the world’s largest technology companies are investing heavily in this area. Analysis of earnings reports shows that capital expenditures in 2024 will be up to 50% higher than in 2023. We expect that much of this spending benefit semiconductor companies, especially those companies in Europe that have dominant positions in the semiconductor equipment market, as well as smartphone and PC chip makers, as AI drives demand for more memory.

• Construction and renovation: Construction volumes in Europe hit a 14-year low. As rates in Europe fall, and if economic activity continues to recover, we would expect a rebound from these levels. At the same time, supplies of some materials, such as cement, remain tight, which should result in a strong pricing environment for construction and building materials companies. Buildings account for 40% of global carbon emissions, and three quarters of this figure is due to heating, cooling and lighting. Companies offering energy efficiency solutions in these areas are well positioned to make strong long-term profits as governments and businesses race to achieve net zero emissions goals. The demand for data centers and the trend towards reshoring also provide long-term opportunities. Many of the world’s leading companies expected to benefit from these trends are based in Europe.