October Macro and Asset Class Views

Economic

Summary:

China’s Politburo has expressed newfound urgency to stabilize the housing and equity markets, as well as directly support the Chinese consumer.

When the top policymakers in the world’s two largest economies are determined to support economic growth, it pays to listen. On September 18, the Fed kicked off its easing cycle with a 50 basis point cut, delivering a strong message that the central bank will not hesitate to act aggressively to ensure a soft landing. A week later, China’s Politburo delivered a forceful message that fiscal policy will be engaged to reduce downside risks to growth, notably by directly supporting the Chinese consumer in earnest for the first time under President Xi. While there remain lingering concerns on US labor market momentum and policy implementation in China, we would not underestimate renewed policymaker resolve to cut off the left tail on domestic and effectively global growth. We believe that there is further room for markets to price out recession risk across asset classes.

A proactive Fed

After the Fed kicked off its easing cycle with an uncharacteristically large 50 basis point cut, Fed Chair Powell said: “the labor market is actually in solid condition. And our intention with our policy move today is to keep it there.” Powell clearly wanted to signal a Fed reaction function that will be proactive, and was able to convince the rest of the FOMC to back it up with a powerful action. This suggests that the bar is low for the Fed to continue easing at an aggressive pace should the labor market disappoint even somewhat in the near term.

At the same time, we are not convinced the Fed will need to ultimately deliver on all the rate cuts that are priced into the market over the coming year. Hard economic data have been surprising to the upside for weeks, with consumption looking robust and initial jobless claims remaining low. Even though the Fed has only just cut rates, there are nascent signs that the easing of financial conditions earlier this year are having a positive effect on the housing market, with new home sales, housing starts and building permits all surprising to the upside of late. Finally, the US Bureau of Economic Analysis just meaningfully revised its measurements of Gross Domestic Income, leading to a sharp upward revision in the estimated US savings rate from 3.3% to 5.2% for Q2. This had been a key argument used by US economy bears that the US consumer was spending beyond its means and due for a sharp retrenchment. In short, the Fed does not look like it is behind the curve.

Exhibit 1: The personal Savings Rate was revised significantly upwards

Source: Source: BEA, UBS Asset Management. As of September 2024

An inflection point for China

Until last week, China’s stimulus measures have been woefully inadequate to cushion the economy against ongoing deleveraging in the property market and deflationary pressures. The underlying economy has suffered from low private sector confidence, which policymakers had been reluctant to support in full, amid a preference to direct resources at the supply side (infrastructure investment) over demand side (consumption) of the economy.

That said, the coordinated set of monetary and fiscal policy announcements last week designed to support the housing market, capital markets and the consumer do signal a shift in strategy from the government to revive sentiment and dynamism in the private sector. In the spirit of listening carefully when policymakers speak, we note that the September Politburo, which was the first unscheduled meeting of China’s top economic policymakers since the depths of COVID in March 2020, used forceful and focused language on steps to revive the economy.

Leaving out prior Politburo references to structural issues, moral hazard and national security, the readout showed determination to achieve its ‘around 5%’ real GDP target, stop the real estate market from falling, and acting with urgency to ensure necessary fiscal support for the economy. Most notably, language and news since the statement suggest the first genuine direct support for consumers themselves, something that had seemed ideologically off limits in prior communications. Also notable, was the stated need to ‘respond to the concerns of the people;’ this may suggest the Politburo’s growing concerns over social stability, which could have motivated a shift to demand-supportive policies where there was previous reluctance.

While there are many details to be ironed out, including questions on the size and scope of fiscal support, we think the shift in language signals a genuine turn in China’s policymaking reaction function. There is a clear message to address downside risks, and potential for additional stimulus measures announced in coming weeks.

Defensives at risk

Policy shifts from the Fed and Politburo come just as investors had started to send a wave of money towards more defensive assets. According to the popular Bank of America fund manager survey, investors in September reported their biggest overweight to defensives vs. cyclicals since May of 2020. Indeed, the UBS cyclicals vs. defensives equity basket had fallen sharply over recent months; we think it has further room to rebound from here. Separately, asset managers have built up a large overweight position in US government bonds, according to the CFTC and J.P. Morgan’s client survey. Regionally, we have downgraded US Treasuries from overweight to neutral as the US economy looks resilient. The more proactive the Fed is today, the less they will need to ultimately deliver further out in time.

Exhibit 2: Still room for cyclicals to outperform defensives

Source: Bloomberg, UBS Asset Management. As of September 2024

In equities, we have upgraded China and emerging markets, which remain attractively valued even after China’s stimulus announcements. According to fund flows specialists EPFR, China allocations in active equity funds were close to 10-year lows at the end of August. While European equities should also receive some boost from China’s stimulus, particularly exporters of luxury goods, Germany’s economic weakening and ongoing manufacturing headwinds keep us underweight. US equities remain overvalued, but as mentioned above, we see further upside for more cyclical sectors versus defensives.

More broadly, we favor overweights to Asia and European credit, where there is more attractive carry than in US credit. We also are long the Brazilian Real and South African Rand, which offer carry and further potential upside as China reduces global growth risks. Our overall position in duration is neutral, but we remain short JGBs as the market continues to underprice the further tightening we expect from the Bank of Japan.

We acknowledge that after the recent surge, there is risk of disappointment with policy delivery in China, not to mention geopolitical risks including the potential for a US election victory for President Trump who has threatened a surge in tariffs on China. The MSCI China Index is much more heavily weighted towards the domestic services economy and therefore would be less directly impacted by tariffs on Chinese exports. Still, there are risks that a shock to confidence could be a headwind for the current global reallocation back into China. As always we will be monitoring the risks to our position into upcoming risk events.

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Owen Li

Economic

As job growth has slowed and unemployment has crept up, some economists have pointed to a sign of confidence among employers: They are, for the most part, holding on to their existing workers.

Despite headline-grabbing job cuts at a few big companies, overall layoffs remain below their levels during the strong economy before the pandemic. Applications for unemployment benefits, which drifted up in the spring and summer, have recently been falling.

But past recessions suggest that layoff data alone should not offer much comfort about the labour market. Historically, job cuts have come only once an economic downturn was well under way.

The milder recession in 2001 offers an even clearer example. The unemployment rate rose steadily from 4.3 per cent in May to 5.7 per cent at the end of the year. But apart from a brief spike in the fall, layoffs hardly rose.

Earlier recessions followed a similar pattern, for what economists say is a straightforward reason: Layoffs are disruptive, expensive and bad for morale. So companies try to avoid cutting jobs until they have no choice – sometimes waiting longer than financial logic would dictate.

“It’s costly to lay someone off,” said Mr Parker Ross, global chief economist at Arch Capital, an insurer. “That’s something that generally firms turn to as a last resort.”

Companies may be unusually reluctant to lay off workers now because many struggled to hire after the pandemic recession. Even if business slows, Mr Ross said, employers may prefer to retain workers rather than risk being short staffed again if the economy rebounds.

That reluctance is good news for workers in the short run. But it poses a risk: If the economy worsens more than businesses anticipate, they could be forced to shed workers in a hurry. If that happens, economic conditions could unravel quickly, as job losses cause consumers to pull back on spending, leading to more losses.

“That’s what everybody worries about, because unemployment begets unemployment begets unemployment,” said Mr Andrew Challenger, senior vice-president at Challenger, Gray & Christmas, an outplacement firm that tracks labour market data.

Unemployment can rise even without a surge in layoffs, however. What really distinguishes a recession isn’t job losses, but a slowdown in hiring.

That may be counterintuitive, given how synonymous “recessions” and “job losses” are in the popular imagination. Layoffs happen even in a healthy economy – but when people lose their jobs in recessions, they struggle to find new ones.

“When a hiring manager decides not to fill a position, that doesn’t tend to make headlines” the way a plant closing might, said Professor Robert Shimer, a University of Chicago economist. But those decisions – multiplied across the economy – can lead to rising joblessness, he said. In a 2012 paper, he found that roughly three-quarters of the fluctuation in the unemployment rate resulted from shifts in the hiring rate.

In other words, it is hiring, not layoffs, that tends to signal a looming recession. And hiring has already slowed.

Employers added just 116,000 jobs per month over the past three months, down from 451,000 during the same period two years ago. Gross hiring – the total number of people hired, without subtracting those who leave their jobs or lose them – has fallen to about 5.5 million jobs per month from a record high of nearly seven million in early 2022.

In 2022, employers were still racing to staff up after the pandemic. A slowdown from that pace was inevitable.

But in recent months, hiring has fallen below the level it was before the pandemic. According to recent research from the Federal Reserve Bank of Minneapolis, that decline has contributed to the modest rise in the unemployment rate – it was 4.2 per cent in August, up from a 54-year low of 3.4 per cent in early 2023.

Economists caution that the slowdown in hiring does not mean that a recession has begun, or that one is inevitable. It is not clear to what extent patterns from before the pandemic will apply to the post-pandemic economy. And while the labour market has weakened, it is quite strong by most measures.

Still, there are signs that people who need jobs are having more trouble getting them.

The share of unemployed workers finding jobs each month has fallen. The number of Americans considered long-term unemployed – those out of work for more than six months – has risen. In surveys, workers say they are less confident than they were last year that if they lost their job, they could find a new one quickly.

“Businesses have pulled back,” Mr Ross of Arch Capital said. “There’s not as much demand for labour, and they’re not hiring at the pace they were.”

Source: Straitstimes

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FastBull Featured

Daily News

Economic

[Quick Facts]

1. Iranian President says Iran will firmly resist any threat.

2. U.S. job vacancies rise to a 3-month high, exceeding expectations.

3. ECB's Rehn says easing inflation supports case for October cut.

4. Eurozone inflation hits ECB's target for the first time in three years.

[News Details]

Iranian President says Iran will firmly resist any threat

On October 1, Iranian President Masoud Pezeshkian hailed Iran's missile attack as a 'decisive response' to Israeli 'aggression." He said Iran did not seek war but would firmly resist any threat. Pezeshkian posted on social media in the evening, saying that based on legitimate rights, and for the peace and security of Iran and the Middle East, Iran had decisively responded to Israel's "aggression." "This is only a part of our strength. Do not engage in conflict with Iran," Pezeshkian warned Israel. According to Iranian state television, the Islamic Revolutionary Guard Corps announced on October 1 that it used the Fattah hypersonic missile for the first time in an attack on Israel, with about 90% of the missiles hitting their targets.

U.S. job vacancies rise to a 3-month high, exceeding expectations

U.S. job vacancies rose to a three-month high in August, a trend that contrasts with other data indicating a slowdown in labor demand. The U.S. Bureau of Labor Statistics' Job Openings and Labor Turnover Survey (JOLTs) on Tuesday showed that the number of job vacancies increased from a revised 7.71 million in July to 8.04 million. The hiring rate fell to 3.3%, matching the lowest level since 2013, excluding the early pandemic data from 2020. The unemployment rate also dropped to 1%. Despite the increase in vacancies, other recent data show that employers have slowed their pace of hiring.

ECB's Rehn says easing inflation supports case for October cut

European Central Bank's (ECB) Governing Council member Olli Rehn said that easing inflation pressures and the deteriorating Eurozone economy support the case for a rate cut this month. "Recent statistics further confirm that inflation is slowing," the Governor of the Bank of Finland said on Tuesday. "This, at least in my view, gives more reason for a rate cut at the October meeting. The recent weakening of the euro area's growth prospects tilts the scales in the same direction."

Eurozone inflation hits ECB's target for the first time in three years

For the first time in more than three years, the Eurozone inflation rate has fallen below the European Central Bank's target, indicating that long-term efforts to control price gains may be coming to an end. Data showed that the Eurozone's CPI in September rose by 1.8% year-on-year, down from 2.2% in August. This is the first time since June 2021 that the YoY inflation rate has fallen below the ECB's 2% target. Excluding volatile energy and food prices, core inflation dipped slightly from 2.8% in August to 2.7% in September. ECB President Christine Lagarde had previously stated that inflation might rise again in the final months of this year as the base effects of energy prices fade.

[Today's Focus]

UTC+8 15:15 - ECB Vice President Luis de Guindos Speaks

UTC+8 17:30 - Bank of England Publishes Financial Policy Committee Meeting Minutes

UTC+8 17:30 - ECB Governing Council Member Kazaks Speaks

UTC+8 20:15 - U.S. ADP Report (Sept)

UTC+8 21:00 - Cleveland Fed President Loretta Mester Speaks

UTC+8 22:00 - ECB Governing Council Member Robert Holzmann Speaks

UTC+8 23:00 - Federal Reserve Governor Michelle Bowman Speaks

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Morgan Stanley

Economic

KEY TAKEAWAYS

In our opinion:

The scale of private credit—lending to companies by institutions other than banks—is not outsized when considered in the context of several factors.While spreads have tightened, the credit attributes of new deal activity have not changed dramatically in the past year.We expect deal flow will continue to increase amid generally conducive private and public financing markets, and as private equity (PE) remains poised to return investor capital.Direct lending—private credit extended primarily to middle market companies—remains an attractive market that has historically generated strong risk-adjusted returns.

The Growth of Private Credit—and Direct Lending—in Context

As banks have gradually retreated from middle-market lending, and public capital markets have skewed larger and exhibited volatility, private credit has stepped in to fill the void. Private credit expanded to approximately $1.5 trillion at the start of 2024, up from $1 trillion in 2020, and is estimated to reach $2.8 trillion by 2028.1

This growth has been supported by PE, which controls nearly $8 trillion in assets globally, including $4.1 trillion in the U.S.2 We believe these firms have significant dry powder to invest. All of this is relative to $20T in U.S. bank balance sheets, which have grown by around $7T in the last decade.3

We believe the direct lending market has always been competitive, and the current market is no different. The asset class has generated strong and stable returns for decades and, we believe, will continue to attract investor capital.

We believe that direct lending is positioned for continued growth for three fundamental reasons: (1) the U.S. middle market is large; (2) private equity dry powder remains at record high levels and refinancing volumes are expected to remain high; and (3) there are enduring structural benefits for borrowers.

Cutting through the Noise

Despite recent press on purported lack of transparency and opaque valuation policies in the direct lending space, we believe a host of regulatory, legal, accounting and other regimes dictate that managers abide by stringent valuation policies. These policies are typically multi-layered, and they leverage both internal valuation models and third-party valuation firms to value individual loans. These valuations typically take into account fundamental company performance and market factors. Their frequency will depend on the structure of the fund in which the loans are held. For instance, some perpetually offered business development companies (“BDCs”) could be valued as frequently as monthly.

It is important to remember that in the business of making first lien loans backed by a deep base of sponsor equity, the goal is return of principal.

What We’ve Been Seeing in the Direct Lending Market

DOCUMENTATION: While competition for deals remains fierce, we generally have witnessed documentation that remains prudent, with proper protections. Intensive credit underwriting and documentation have typically been a trademark of buy-and-hold investing in the direct lending market.

SPREADS: Spreads on new loans have compressed over the last two years, largely in response to improving risk sentiment and a resurgence in the public capital markets; however, base rates remain elevated, generally resulting in total coupons of ~10%+.

CREDIT QUALITY: Credit quality has not changed dramatically in the past year. We believe that the sector has performed extremely well throughout this inflationary environment, perhaps in large part due to the resilience of the underlying U.S. economy and the emerging signs that the Federal Reserve’s efforts to combat inflation has begun to work.

DEFAULTS: Non-accruals and defaults for direct lending remain below historical averages—in the low-single digits. Should interest rates remain elevated, it is possible we would see expectations for defaults to increase gradually and trend to the historical averages. Conversely, repricing activity and lower rates would provide some relief to borrowers.

DEAL FLOW: Sponsored middle market loan activity remained relatively resilient during the first half of 2024, partly supported by demand for incremental or add-on financings. We remain optimistic that new middle market leveraged buyout activity may accelerate with more visibility on the trajectory for interest rates. We expect deal flow to continue to accelerate into 2025, as PE remains poised to return investor capital.

Conclusion

We believe direct lending continues to offer compelling relative value compared with other assets classes and offers an attractive diversification alternative to public fixed income. And, importantly, when considered in the context of other markets, private credit has significant room to grow.7

1Preqin, Future of Alternatives 2028 Report. As of December 2023.2Preqin, data as of December 2023.3Bank of International Settlements data, as of 2023 year end, and 2013 year end.4Sourced from the National Center for the Middle Market’s Middle Market Indicator (MMI) Overview as of December 31, 2023, and the International Monetary Fund as of December 31, 2023.5Private Equity Buyout Dry Powder is a global figure and sourced from Preqin.6Figure is as of December 30, 2023 (most recent available). Sourced from LSEG LPC’s 2Q24 US Syndicated Middle Market Review, includes maturities for the second half of 2024, through to 2029.7Preqin, Future of Alternatives 2028 Report. As of December 2023.

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ING

Economic

Energy

SAF-route is indispensable to start reducing net-emissions in aviation

The aviation industry has faced extraordinary challenges in recent years but has rebounded strongly from the pandemic, with ongoing high demand for air travel, especially in Asia, where travel propensity is high despite flights per head being far lower than in the US, for example. A constant factor is the urgent need to reduce emissions, as the sector is among the hardest to abate. Its current 2% share* in global GHG emissions could quickly rise if no changes are made and demand reduction is ignored.

Most airline emissions come from longer-haul flights over 1,500 km. Realistically, there is no clean and commercially scalable alternative technology for longer journeys yet. With the highest safety standards and significant investments in R&D, introducing a new generation of aircraft usually takes up to 20 years, and order books for the current generation already extend well into the 2030s.

Fleet renewal programmes are a crucial part of airline strategies to reduce seat emissions. However, aircraft life cycles are long, there are delays, and these measures alone are insufficient. Therefore, sustainable aviation fuels (SAF) play a critical role in making flying more sustainable despite concerns about sourcing, efficiency, and the required lifecycle assessment (LCA) for emissions, also known as 'well-to-wake'. While SAFs still emit CO2 during combustion, the CO2 savings are generated earlier in the supply chain through the use of bio-feedstock. This approach faces criticism due to land use and potential competition with other uses, but there are no easy alternatives.

The lifecycle emissions from SAFs and their feedstocks vary widely, with different levels of regional acceptance. This means some SAFs offer significantly more carbon reduction potential compared to conventional jet fuel.

*This excludes the climate impact of non-CO2 emissions (nitrogen emissions, particles, and water vapour) from jet fuel combustion at high altitudes, which is still under investigation but is estimated to be significant.

Several variants in play, with BioSAFs covering the far majority

Previously, we explored the various production routes for variants of Sustainable Aviation Fuels, their economics, and the regional blending mandates and ambitious corporate goals driving their adoption. It's evident that a stronger supply is needed to meet these ambitions. BioSAF, and particularly those produced via the HEFA process, constitutes the majority of supply and offers the best economic proposition for short-term scaling.

All SAF types are expected to remain more expensive than conventional jet fuel. Conventional jet fuel typically accounts for 20-35% of total airline costs, which is significant in the low-margin aviation sector; someone has to bear the premium cost, which is a major challenge. The global and regional supply and demand dynamics of SAF are evolving, as is the thinking about how to navigate these changes and the actions of market players.

In this piece, we will focus on regional supply and demand developments for biogenic SAFs up to 2030, as well as the feedstocks behind these SAFs. What is the current dynamic, where are we heading, and what challenges do we face in pushing for widespread adoption? Synthetic SAFs will also start to play a role, but due to high costs, availability constraints for green hydrogen, and inefficiencies, we only expect significant uptake from 2030 onwards. We have examined the economics of synthetic SAF, and you can read about it here.

The world wants sustainability, so now comes the action

The global aviation authority ICAO aims to reduce emissions by 5% in 2030 through SAF blending. On the private side, IATA targets a 6% blend, while collectives like ‘Clean Skies for Tomorrow’ and ‘One World Group’ (including airlines such as American, Qantas, and Cathay Pacific) aim for 10% by 2030. Europe’s largest airline by passenger numbers, Ryanair, has committed to 12.5%. With an expected blend rate of just 0.5% in 2024, it’s clear there’s much work to be done in the next six years.

Governments worldwide have introduced blend mandates ranging from 1% by 2025 (Malaysia) to 10% by 2030 (UK) to encourage uptake. However, these efforts are fragmented, and targets alone are insufficient. Public (‘hard’) targets are more compelling, and shortfalls may lead to fines in countries like Germany.

With SAF prices unlikely to match conventional jet fuel, more policy support is needed to turn aspirations into acceleration. Under current policies, the IEA expects bio-jet fuel to make up just 2% of global jet fuel consumption by 2030. In Europe, the emission trading scheme (ETS) helps create a more level playing field with conventional jet fuel, but additional measures are likely needed to achieve significant progress

Short term vs. long term SAF market

Airlines worldwide are beginning to blend SAF into their fuel supply. They can secure SAF supply by participating in investment initiatives, making long-term commitments, or relying on the spot market. Off-take agreements are a common method for ensuring future deliveries. These agreements also provide insight into future blend rates, demonstrating airlines’ commitment to sustainable sourcing

SAF blending has started, but more support is needed to get beyond 2%

**Expected blend rates* towards 2030 in two scenarios**

Source: BNEF, IEA, ING Research *The BNEF-scenario includes a minor fraction of synthetic SAF

Expected global SAF blend rates far from stated goals

Global conventional jet fuel consumption is projected to rise to 6.6 million barrels per day (306 million tonnes) in 2024, with further increases expected in the coming years. The current small fraction of SAF is anticipated to grow to 3.5% by 2030 in an energy transition scenario (BNEF), assuming greater policy alignment. However, under the current stated policies scenario, the IEA expects this to reach only 2%. Both projections fall short of the targets set by the global aviation industry and individual airlines.

Airlines need to speed up SAF progress

European airlines are leading the way in SAF adoption, but there are significant differences among them. DHL Group, which operates freighters, is ahead, having successfully marketed SAF to B2B clients. Air France-KLM follows as a passenger airline, while other major European airlines like IAG (including British Airways) and Lufthansa began their SAF journey in 2023. However, many other airlines are just starting by preparing their supply chains.

In 2024, we expect to see progress in SAF blending, with Ryanair, for example, increasing SAF usage on specific routes in Europe. On the other hand, the overall climate strategy has faced setbacks due to various challenges. For instance, Air New Zealand has dropped its 2030 climate target.

European airlines ahead in SAF-blending, but still need to ramp up quickly

Ranking SAF Blend rates, airlines 2023, per region

Source: Bloomberg, ING Research

Three reasons why blend rates are not yet on track to meet targets

Slower than expected realization of production facilities (particularly in Europe) ;

Global airline traffic and jet fuel demand have massively rebounded, surging 20% in 2023 and 2024 combined. Volume eventually recovered faster than expected at the point of target setting. This means SAF volumes will need to progress even more;

Airlines struggle to pass on the premium to private consumers on a voluntary basis. And the return of margin pressures also led to profit warnings in 2024. Required cost discipline could have a slowdown effect on short term blending efforts.

Europe and the US are expected to lead in SAF adoption, while Africa and Latin America lag behind. In the Asia-Pacific region, the world’s largest and fastest-growing air traffic market, SAF blending is emerging. However, due to the high pace of expected growth and fragmented policy structures, increasing blend rates is expected to progress more slowly in the years leading up to 2030.

SAF will be sourced regionally, but Europe to remain reliant on imports

Sustainable Aviation Fuel (SAF) is expected to be sourced locally and initially supplied to relevant hubs. However, global trade flows will also play a role, involving either the feedstocks or the refined products. North America, Latin America, and Asia are anticipated to be exporters, while the EU market is expected to remain in deficit and continue importing feedstocks and SAF. Additionally, the eligibility of feedstocks varies by region and country, adding another layer of complexity to these trade flows.

North America expected to be the main producer of SAF by 2030

Forecasted production capacity in million tonnes of SAF

Source: Bloomberg, SKY NRG, ING Research

A regional flavour to the feedstock mix used for SAF production

Overview of some of the most relevant types of feedstock per region, including their reduction potential compared to emissions from conventional jet fuel

Source: ICAO (CORSIA), ICCT, RSB, ING Research, *without CCS and climate smart-growing practices, ** Excluded: any SAF from food or feed crops (like palm oil / corn / sugarcane)

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Glendon

Economic

Intel Corporation (NASDAQ: INTC) has been a cornerstone in the technology sector for decades. As a leading semiconductor company, Intel has shaped the computing industry through its innovations in processors, data centers, and cloud computing technologies. While Intel has faced challenges from competitors like AMD and NVIDIA in recent years, it remains a critical player in the global tech landscape. In this article, we will dive into Intel’s recent performance, future outlook, and how it continues to hold its place in the semiconductor industry, especially for investors keeping a close eye on FintechZoom's updates.

Intel's Performance in 2024

The first half of 2024 was a mixed bag for Intel. Despite the company's aggressive cost-cutting measures and restructuring efforts, its stock performance has faced headwinds, largely due to the broader semiconductor industry downturn. Global supply chain disruptions, reduced PC demand, and intense competition have weighed on Intel’s earnings and market share. However, Intel's efforts to shift toward high-growth areas such as data centers and artificial intelligence (AI) have started to show promising signs of recovery.

In Q3 2024, Intel's stock saw a modest rise, as the company reported better-than-expected earnings, driven by its data center business and growing demand for AI applications. Revenue from its Client Computing Group, which includes PC chips, saw some softness, but its AI and data center divisions were strong performers. Intel has been investing heavily in AI technologies, with a focus on creating advanced chips that power data centers and high-performance computing systems.

Competitive Landscape

Intel’s competitive position in the semiconductor market has been increasingly challenged by rivals like AMD and NVIDIA. AMD has made significant inroads with its Ryzen processors and EPYC data center chips, which have been gaining market share due to their superior performance. Similarly, NVIDIA's dominance in the AI and graphics processing unit (GPU) markets continues to pressure Intel’s business.

However, Intel has not been sitting idle. The company is making a massive bet on its IDM 2.0 strategy, which involves building new manufacturing facilities and ramping up its chip production capacity to meet future demand. This approach is crucial as Intel seeks to reduce reliance on external suppliers and regain its leadership in the global semiconductor market. Intel's upcoming Meteor Lake processors, set to launch in 2025, are expected to be a game-changer for the company, featuring advanced architecture and AI integration designed to outperform current-generation chips.

Intel's Financials and Valuation

Despite the competitive pressures, Intel remains a financially sound company with a strong balance sheet. In 2024, Intel’s revenue reached $80 billion, with its data center segment contributing significantly to growth. The company also announced a $10 billion stock buyback program, showcasing its confidence in the long-term value of its shares. Intel’s dividend yield of around 3.5% remains attractive for income investors, further adding to its appeal as a stock with both growth and income potential.

Intel’s forward price-to-earnings (P/E) ratio currently sits at around 15, making it relatively undervalued compared to peers like NVIDIA, which trades at a much higher multiple. For value investors, Intel offers an attractive entry point, particularly as the company continues to push forward with its restructuring and innovation strategies.

Challenges Ahead

While Intel’s long-term outlook remains promising, the company faces several short-term challenges. Supply chain constraints and a global slowdown in PC demand could hinder its revenue growth. Additionally, Intel's ability to execute on its ambitious IDM 2.0 strategy will be critical in determining its future success. If Intel can ramp up its manufacturing capabilities and deliver on its next-generation processors, it could reclaim lost market share from AMD and NVIDIA.

Another key challenge for Intel is geopolitical tensions. The U.S.-China trade war and restrictions on semiconductor exports have created uncertainty for global tech companies, including Intel. With China being a significant market for semiconductor products, any further escalations could impact Intel's revenues and future growth prospects.

Industry Trends and Market Sentiment

Intel's long-term success hinges on its ability to capitalize on several key industry trends. AI, 5G, and the Internet of Things (IoT) are areas where Intel has been investing heavily. The company’s AI strategy involves developing high-performance chips that power data centers, cloud computing, and autonomous vehicles. Intel's leadership in AI could position it as a key player in the next wave of technological advancements, driving revenue growth in the years to come.

Moreover, Intel's partnership with various tech giants, including Google and Microsoft, positions it well to capitalize on the growing demand for data centers and cloud infrastructure. As more companies move their operations to the cloud, the demand for high-performance chips that power these services is expected to rise, which bodes well for Intel's data center business.

FastBull's Perspective on Intel’s Outlook

According to FastBull, a global financial information platform, Intel's stock is currently considered undervalued compared to its peers. FastBull analysts highlight Intel's strong focus on research and development, particularly in the AI and data center spaces, as a positive catalyst for future growth. They point out that while Intel has faced competition, its strategic investments and commitment to regaining market leadership are reasons for long-term optimism. FastBull's reports suggest that investors looking for exposure to AI and data center growth should consider Intel as a potential buy, especially given its attractive valuation and dividend yield.

FastBull also notes that Intel's IDM 2.0 strategy could significantly enhance its production capabilities, reducing reliance on external suppliers and boosting profitability in the long run. The platform remains cautiously optimistic about Intel's ability to navigate its short-term challenges and deliver value to shareholders.

Conclusion

Intel remains a compelling stock for long-term investors, particularly those looking for exposure to the semiconductor industry, AI, and data center technologies. While competition from AMD and NVIDIA remains fierce, Intel's focus on innovation, restructuring, and strategic investments positions it well for future growth. The company's stock is attractively priced, with a solid dividend yield that appeals to income-focused investors.

As FintechZoom has noted in its analysis, Intel’s future success will depend on its ability to execute on its IDM 2.0 strategy, ramp up manufacturing, and deliver cutting-edge products that meet the growing demand for AI and cloud computing. Investors willing to take a long-term view may find Intel to be an excellent addition to their portfolios in 2024 and beyond.

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Economic

A shared diagnosis

The significance of the report on the future of European competitiveness, drawn up by former Italian prime minister and European Central Bank governor Mario Draghi (Draghi, 2024), is that it offers a thorough diagnosis of the weaknesses and opportunities of the economic and institutional setting of the European Union. The report, published 9 September, rightly points out that, given the negative long-term demographic trends facing the EU and the lack of a common integrated policy on migration, the only driver of sustainable European growth is labour productivity, and mainly its elusive but crucial component represented by total factor productivity.

Draghi is also correct in stating that three conditions must be met to boost EU productivity: (i) the European economy must catch up technologically with the United States and China by implementing streams of innovation to feed both the digital and green transitions; (ii) the EU needs more start-ups, which will eventually scale-up and be able to attract the highly-qualified people who today are leaving Europe; (iii) meeting these objectives should be combined with the construction of a unified security and defence framework, which is not only a necessary response to the geopolitical conflicts at the EU borders but is also needed to protect value chains and guarantee the availability of technological inputs.

This diagnosis has two implications. First, the EU should make fundamental economic and institutional changes in order to radically redesign its production model. Second, these changes are also required to safeguard the European social model that, despite a certain weakening, is still able to guarantee the world’s highest level of social inclusion.

As Draghi notes, the current EU per-capita income growth rate would not be enough to make the resources available for the additional investments needed to implement these transformations and safeguard the current level of social protection. According to Draghi (2024), combining the green and digital transitions would require around €800 billion annually in additional investment over the next decade. And the social impact of these economic changes would mean additional costs to improve education and to include the most vulnerable people (including migrants) in the new economy.

The EU must therefore improve its growth performance to free resources to finance additional investments, but it cannot boost growth without innovative and sustainable reforms and investment. Draghi puts forward a convincing set of policies to break out of this catch-22 situation, including ways to boost productivity growth.

In line with another report by a former Italian prime minister, Enrico Letta’s April ‘Much more than a market’ report (Letta, 2024), Draghi stresses the importance of completing the single market in areas where pervasive national segmentation persists. The best examples are high-tech services, such as telecommunications, and the financial sector. Overcoming market fragmentation would mean less duplication in national expenditures and would ensure that the necessary consolidation of firms to build companies at European scale does not hinder market competition. It would also allow the exploitation of economies of scale and scope and create greater opportunities for innovations and their diffusion.

A true single market in the financial sector would enable the mobilisation of the huge wealth held by European households and firms, and its allocation to the green and digital transitions. As is often repeated , the completion of EU capital markets union is crucial, as banks are unsuited to finance this type of investment, which is, so to say, long in ideas and short in collateral.

Draghi makes very granular recommendations on how to implement new sectoral and horizontal policies. His leitmotif is ‘joined-up policy-making’ to achieve a greater degree of common planning that should be articulated at all levels of decision making. For this, it is necessary to overcome unanimity requirement that often paralyses the EU by giving countries effective vetoes. Similarly to Letta (2024), Draghi suggests recourse to a ‘28th regime’ that would allow companies to opt out from national regulatory frameworks and follow rules valid everywhere in the EU.

Embracing European public goods

Draghi recognises that radical changes to the European production model to catch up with the technological frontier, succeed in the green transition and reduce dependence on external demand cannot be fully entrusted to market mechanisms and financed entirely via the mobilisation of private wealth. To deliver such a dramatic re-orientation in investment, public intervention and regulation are needed at both EU and national levels.

European policymakers face here a dilemma. The EU has agreed new fiscal rules that require the high public debts of EU countries to be put on a downward path to increase fiscal space (see Darvas et al, 2024). If policymakers apply these in a loose manner, they are unlikely to build the mutual trust necessary to step up interventions at EU level. But strict enforcement of the new fiscal framework would constrain the room for manoeuvre at national level. Overcoming the dilemma is difficult. The new fiscal rules allow more gradual fiscal adjustment but this requires commitments from governments to carry out reforms and investments, especially those in line with EU-wide priorities. Therefore, as a first step, the European Commission should implement this clause very seriously.

However, the main focus should be enabling a substantial increase in the EU budget and building a central fiscal capacity, as recommended by Buti et al (2024). On the demand side, a larger and refocussed multiannual EU budget could compensate for tighter national fiscal constraints in the short term imposed by the fiscal rules. On the supply side, a dramatically reformed EU budget would stimulate other investment and thus could be the linchpin of a new European industrial policy centred on the production of European public goods (EPGs) aimed at delivering the triple green, digital and social transition.

In our reading, Draghi’s recommendations amount to a combination of a reformed EU budget establishing a central fiscal capacity with a new European industrial policy. This combination legitimises the recurrent statement, made in his report, that the green and innovative transitions should be made compatible and should even strengthen the European social model.

This would have an overarching implication: a new European production model should not be an attempt to copy the US economy. The EU needs capital markets union and the development of private equity; however, these financial breakthroughs, if they can be achieved, must be regulated to support innovative and sustainable production and should avoid feeding market distortions.

The EU needs innovative and cross-border companies in services and manufacturing to reduce gaps relative to the US in digital activities and artificial intelligence. However, this does not imply creating excessively large companies that acquire too much power and end up threatening democracy. Therefore, while Draghi rightly criticises the excess of regulation in EU countries as a possible barrier to innovation, this should not be mistaken for advocacy of an across-the-board weakening of regulation or giving up on European regulation that is essential to combine a new production system with the EU social model.

Reforming the EU production model is also key to harmonising the EU’s domestic and international strategies. The EU can no longer benefit from purchases of cheap energy and raw materials, needed to produce goods that are mainly exported to China. European policymakers must recognise that a ‘neo-mercantilist’ growth model, relying on net exports, is incompatible with the EU’s future prosperity and the new international order. This model has negative internal and external implications. Internally, persistent current-account surpluses are not an indicator of high competitiveness but represent the flipside of insufficient aggregate investment compared to aggregate savings. Externally, the export-led model makes the EU’s economies vulnerable to the weaponisation of trade and currency by international competitors.

In short, to achieve a balance between efficiency, security and equity, and between fiscal, environmental and social sustainability, the EU must follow its own path without trying to imitate the US economic and social model.

Conditions for sharing economic sovereignty

In our reading of Draghi (2024), the centralised financing and production of EPGs would become the core of the new European model. But it is sure to be difficult to convince EU governments to pursue this opportunity.

Finding a way forward should involve recognition of two factors (Buti and Messori, 2024). First, it should be acknowledged that the financing and production of EPGs require transfers of national sovereignty, with different costs for EU countries, depending on the relative strengths of their national states and intermediate institutions: countries at the extreme ends of the spectrum (ie very strong and very weak countries) tend to have smaller costs than countries in between.

Second, there are different types of EPG. The simplest way to capture this is to distinguish between EPGs that would boost innovation (EPG-I) and EPGs that pursue greater solidarity (EPG-S) (Buti and Messori, 2024). The varying national appreciations of the net benefits of EPGs (the difference between their benefits and costs) arise because EU countries have different preferences in relation to the two EPG types: countries closer to the technology frontier prefer EPG-I while weaker countries prefer EPG-S.

This results in a diversified combination of national interests that will be difficult to reconcile. However, it can be done. Over and above the recommendations in Draghi (2024), the EU must ensure a balanced combination of EPG-Is and EPG-Ss. Closing the gap to the technological frontier is a priority and so it might be tempting to put all the political capital in the EPG-I basket. However, this would not forge the necessary consensus between EU countries and would be insufficient to safeguard the European social model.

Some concrete steps to ease the reconciliation of national interests (Buti and Messori, 2024) are:

EPGs must not lead to the ‘transfers union’ so greatly feared by northern EU countries. An example of a politically acceptable EPG-S is the SURE programme launched during the pandemic to shore up labour markets . SURE could be reactivated, with an additional clause on minimum investments in education and the re-skilling of human resources (migrants included), specifically targeted at the green and digital transition.

To overcome the resistance of sceptical countries to transfers of sovereignty to the EU, the selection of both EPG-I and EPG-S must create tangible added value that generates sizeable net benefits, to compensate for the high costs of sharing sovereignty. An example could be the construction of a ‘European Railway Silk Road’, ensuring fast and efficient connections across the EU for freight transport.

Though the most fragile EU countries tend to prefer EPG-S, their preferences can shift and become more aligned with those of stronger countries if they can close their gaps to the technological frontier. Reaching this result is a joint responsibility: weaker countries should effectively implement their post-pandemic National Recovery and Resilience Plans, while the EU should put in place an efficient system for diffusion of innovative outputs.

Meeting the ambitious goals set out Draghi (2024) requires the EU to change gear. Implementing Draghi’s main proposals would amount to signing a new political and institutional contract between member states and EU institutions. Agreeing and implementing this contract will be difficult – but it’s not impossible.

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October Macro and Asset Class Views

A proactive Fed

Source: Source: BEA, UBS Asset Management. As of September 2024

An inflection point for China

Defensives at risk

Source: Bloomberg, UBS Asset Management. As of September 2024

Layoffs are Few in The US, So Why are Jobs Harder to Find?

Source: Straitstimes

October 2nd Financial News

[Quick Facts]

[News Details]

[Today's Focus]

Outlook for Direct Lending

Sustainable Aviation Fuels Are The Greener Option That Must Take Flight

SAF-route is indispensable to start reducing net-emissions in aviation

Several variants in play, with BioSAFs covering the far majority

The world wants sustainability, so now comes the action

Short term vs. long term SAF market

SAF blending has started, but more support is needed to get beyond 2%

Expected blend rates* towards 2030 in two scenarios

Source: BNEF, IEA, ING Research *The BNEF-scenario includes a minor fraction of synthetic SAF

Expected global SAF blend rates far from stated goals

Airlines need to speed up SAF progress

European airlines ahead in SAF-blending, but still need to ramp up quickly

Ranking SAF Blend rates, airlines 2023, per region

Source: Bloomberg, ING Research

Three reasons why blend rates are not yet on track to meet targets

SAF will be sourced regionally, but Europe to remain reliant on imports

North America expected to be the main producer of SAF by 2030

Forecasted production capacity in million tonnes of SAF

Source: Bloomberg, SKY NRG, ING Research

A regional flavour to the feedstock mix used for SAF production

Source: ICAO (CORSIA), ICCT, RSB, ING Research, *without CCS and climate smart-growing practices, ** Excluded: any SAF from food or feed crops (like palm oil / corn / sugarcane)

FintechZoom Intel Stock: Is LCID Stock the Next Big Thing in EVs

Intel's Performance in 2024

Competitive Landscape

Intel's Financials and Valuation

Challenges Ahead

Industry Trends and Market Sentiment

FastBull's Perspective on Intel’s Outlook

Conclusion

Sharing Economic Sovereignty is Hard but Possible

A shared diagnosis

Embracing European public goods

Conditions for sharing economic sovereignty

Risk Disclosure

**Expected blend rates* towards 2030 in two scenarios**