BlackRock stays pro-risk

BlackRock sticks to pro-risk stance: BlackRock is remaining risk-on as it looks ahead towards the resumption of Fed’s easing cycle after last week’s rate cut, which is expected to support US stocks and spur ongoing gains across the AI sector, according to its latest investment note.

Investors who stayed the course through April’s tariff-driven sell-off have been rewarded, with global equities staging a sharp rebound, BlackRock says. The firm argues that “immutable economic laws” — as supply chains remain to an extent intact — curbed the fallout from trade tensions, paving the way for risk assets to rally.

US stocks have led the charge, recovering from the tariff-induced sell-off at the start of the year. The S&P 500 is up 14% y-t-d, the Nasdaq 17%, and the Russell 2000 has broken past its 2024 peak after the Fed’s rate cut last week, the Financial Times reports. The MSCI All Country World index has hit a record, while emerging markets have outperformed developed peers.

Credit has joined the party, with spreads on high-grade US corporates now at their tightest since 1998. In Europe, some French companies are borrowing more cheaply than their government, underscoring just how far investors have chased yield. “It’s fair to say you’ve never been paid less to take risk,” one asset manager told the FT.

AI boom offsetting spending slowdown: BlackRock points to AI buildout and infrastructure as “mega forces” offsetting a slowdown in consumption and anchoring returns, with the tech sector accounting for over 40% of total return and a similar share of earnings growth, according to LSEG data. Corporate investment in data centers and chip plants is supporting US GDP growth, even as household spending cools. These durable shifts, the firm says, are replacing traditional macro anchors.

But valuations are stretched: Nvidia, Alphabet, and other AI giants have powered the gains, raising concerns over concentration risk. BlackRock cautions that further upside will hinge on productivity-driven earnings growth, not multiple expansion. “Earnings, not valuations, will drive equities higher,” the report (pdf) says.

Bond markets are flashing warning signs: Long-term yields have jumped to multi-decade highs in Japan, France, and the UK as fiscal concerns dominate. In the US, the yield curve has steepened despite Fed cuts, with investors focused on the tension between taming inflation and containing ballooning debt.

The inflation picture is equally complicated: Goods prices are rising again as tariffs feed through. BlackRock sees a “lucky alignment” — where — equities broaden beyond AI while yields ease on a softer labor market — as its baseline scenario, but warns the Fed faces tough trade-offs if inflation stays high.

Private markets are playing a bigger role in this landscape, with companies looking to them for funding as IPOs are pushed back. BlackRock highlights infrastructure equity and private credit as areas where investors can still capture attractive returns relative to public markets.

Tactically, the firm is overweight on US and Japan equities, and favors emerging markets over developed peers on select exposures. It remains underweight on global investment-grade credit, given wafer-thin spreads, but likes infrastructure credit and short-term, inflation-linked bonds as hedges against tariff-fueled price pressures.

MARKETS THIS MORNING-

Asian markets are mixed this morning, with Japan’s Nikkei leading gains as it extends a rally, and Chinese shares flat after its central bank kept loan prime rates unchanged. Over on Wall Street, futures point to another strong open after a rally across all three indices last week.

THE CLOSING BELL-

The EGX30 fell 0.4% at yesterday’s close on turnover of EGP 3.4 bn (24.1% below the 90-day average). Regional investors were the sole net sellers. The index is up 18.5% YTD.

In the green: Orascom Construction (+3.8%), Ibnsina Pharma (+3.3%), and Fawry (+3.0%).

In the red: CIB (-2.0%), Emaar Misr (-1.8%), and GB Corp (-1.8%).

CORPORATE ACTIONS-

EFG Holding’s extraordinary general assembly approved the reduction of its issued capital by EGP 118.6 mn to EGP 7.2 bn, the financial services company said in a disclosure (pdf). The move cancels 23.7 mn shares at EGP 5 apiece that it had bought as part of last year’s buyback program.

SOUND SMART- Cancelling treasury shares is typically the last step in a share buyback. A share buyback is when a company repurchases its own shares, effectively making them treasury shares and shrinking the total pool of outstanding stock in the market. Companies doing this will generally retire the shares at the end of the process. The net effect: Each remaining share becomes more valuable because earnings are spread across fewer shares, and the share price often goes up as a result. It also gives shareholders who took the buyback an easy exit. Everyone else? Enjoy the scarcity premium.