A wall of debt, a financing crunch and plummeting building values are looming over commercial real estate, menacing investors and banks, but Goldman Sachs Asset Management is a buyer.

“Just because there are some problem properties with very high vacancies and a problem with their cost of capital or the cost of debt — that doesn’t mean that the entire asset class has something wrong with it,” said Lindsay Rosner, the head of multi-sector investing at the firm. “What we have been able to do is find a lot of opportunities in commercial mortgage-backed securities (CMBS).”

Rosner — who describes CMBS as a market that “people were nervous about” — is focused on “very special properties that are super desirable”. It pays to be picky as an across-the-board recovery in offices is unlikely with remote work persisting, she told the Bloomberg Intelligence Credit Edge podcast. 

Goldman also sees value in the debt of industrial warehouses used for logistics, and prefers CMBS to corporate bonds, according to Rosner. Despite all the doom and gloom predicting the pandemic would lead to empty buildings and a slew of defaults, commercial property debt has managed to outperform that of investment-grade corporates this year.

“Relative value is really there,” she said, referring to CMBS. “It is a good portion of our portfolio, and we think it generates a decent amount of carry.”

Rosner is generally positive on the outlook for credit markets because “there is still yield”, and while the economy is softening, she sees the odds of a US recession at only about 15% to 20%. 

In investment-grade debt, Goldman likes financial-sector issuers, which she said have outperformed on an excess-return basis. 

“It’s not just US money-centre banks,” said Rosner, who focuses on public fixed income at Goldman. “There was an opportunity in French banks where there was uncertainty around the French election.”

Goldman is meanwhile steering clear of utility-sector bonds, based on the high cost of the green transition. “That is just going to place them in a different kind of balance sheet posture than we think is advantageous to being a bondholder,” said Rosner. 

By ratings bucket, Rosner favours BBB rated companies, which have retained cash and not increased leverage. “Triple Bs are still a part of the market that we really like,” she said. 

Rosner prefers shorter-maturity Treasury bonds given the likelihood of curve steepening after the US election. 

“Neither candidate is running on a fiscal restraint programme,” Rosner said. “The Treasury curve could really steepen out,” she said, adding that maturities of three- to five-years look most appealing in that scenario.

Source: The edge markets

Fiscal profligacy

General safe haven appeal

Fed rate cuts

Geopolitics and “de-dollarization”

Mexico’s annual inflation slowed roughly in line with expectations in August as a spike in food prices faded, giving the central bank more room to consider another interest rate cut this month.

Consumer prices rose 4.99% from a year earlier, a touch below the 5.06% median estimate from analysts in a Bloomberg survey, the national statistics institute reported on last Monday.

Core inflation, which excludes volatile items such as fuel, eased to 4%, at the top of the bank’s target range of 3% plus or minus one percentage point. 

Mexico’s central bank, known as Banxico, is expected to mull its second-straight rate cut at its Sept 26 decision. Food items, including tomatoes, onions, and lemons had caused an inflation spike in recent weeks after a period of drought was followed by heavy rains. Still, that didn’t stop policymakers from lowering borrowing costs in August as economic activity weakened.

“Banxico is on track to lower its policy rate,” Kimberley Sperrfechter, emerging markets economist at Capital Economics, wrote in a research note . She expects borrowing costs to drop by another quarter-point this month, as activity shows signs of weakness and the Federal Reserve is expected to kick off its own easing campaign. 

Still, print showed “continued strength in core services inflation,” reflecting “the tightness in the labour market, which is keeping wage growth elevated.”

"Mexico’s non-core prices fell quickly in August as supply shocks faded, while core inflation extended a gradual downtrend. Price gains remained above target, but were in line with central bank forecasts for continued moderation into next year. And with tight monetary conditions, weak growth and increasing economic slack, that’s likely to be enough for most policymakers to support additional interest-rate cuts. Accumulated peso depreciation since April, higher labour costs and persistent high inflation expectations are the main risks for inflation to stay above target over the two-year monetary policy outlook," said Felipe Hernandez, Latin America economist at Bloomberg Economics.

Weather impact

Prices of fruits and vegetables were the main driver of the slightly better-than-expected print, dropping 5.21% on the month. Energy costs, on the other hand, rose 0.48% and services picked up 0.27%. central bank deputy governor Jonathan Heath said in an interview that it was uncertain how soon food price pressure would cool to bring policymakers relief.

“The impact of adverse weather conditions is gradually easing, reducing upward pressures in the non-core component,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. 

Headline inflation should cool further to 4.4% by December, as demand remains soft amid tight financial conditions, Abadia said. “The biggest risk in the short-term comes from domestic politics and its impacts to the currency,” he added. 

Recent political tensions in the Mexican Congress, where the ruling party and its allies are preparing to pass a Bill that would change the constitution and overhaul the judiciary, has added to uncertainty about the path of the currency and inflation. 

The peso has declined nearly 15% year-to-date, one of the worst performances in emerging markets, as government reforms worry investors. A weaker exchange rate risks fanning inflation by making imports more expensive.

Still, Mexico’s economic slowdown could help damp consumer prices, with the central bank in August dialing down its forecast for 2024 gross domestic product growth to 1.5% from 2.4%.

Source: Theedgemarkets

The insight comes from EY, which found in its annual Mobility Consumer Index that only 34% of surveyed Americans planning a car purchase over the next 24 months wanted this car to be electric. That’s down from 48% in last year’s survey.

“While we’ve seen substantial increases in interest and purchasing of EVs since 2020, this year’s MCI shows dips in demand for the first time,” Steve Patton, EY Americas Automotive Leader, said.

“This decrease is due partly to a lack of consumer education around the long-term value of an EV and maintenance requirements vs. traditional ICE (internal combustion engine) vehicles,” Patton also said.

EVs have been long advertised as cheaper over the long term due to lower maintenance requirements resulting from fewer moving parts in an electric engine. However, increasingly frequent reports of battery damage that necessitates costly replacement and battery fires have put many off electric cars.

“Expensive battery replacement was the top deterrent to purchase an EV for US consumers, overtaking lack of charging stations for the first time,” EY said in its report. “This is especially true for potential first-time EV buyers, as 27% noted concerns about expensive batteries compared to 23% of current EV owners.”

At the same time, the number of people concerned about chargers is on a decline overall. While in 2023 34% worried about charger availability, this year the percentage is down to 23%. There was also a decline in the number of people worried about rage, from 30% in 2023 to 24% this year. This decline, however, does not seem to have translated into a higher willingness to buy an electric car.

Source: OILPRICE

Today’s data for the second quarter of 2024 reconfirms the first reading’s negative surprise. Private consumption annual growth picked up visibly, broadly in line with what retail sales data had already been signalling. Its overall positive contribution to growth was a solid 4.9pp to the total of 0.8% GDP growth. And as far as investment growth is concerned, it's still at robust levels, but it's slowing, contributing to GDP growth by 1.4pp. 

But here's the stinger: net exports wiped out most of the gains, subtracting a whopping 4.4pp. The strong internal demand boosted imports, subtracting 3.0pp from growth, while weak external demand led exports to subtract the remaining 1.4pp.

Net exports' negative growth contribution is increasing

Source: NSI, ING

It's clear that strong private consumption momentum and loose fiscal policy are generating a stimulus that is spreading primarily outside the local economy to the benefit of the country’s trading partners. While there is also a rapid investment boom, consisting of multiple large-scale projects with tight deadlines, this is also showing up in higher imports as the local supply side cannot match the demand.

Moreover, the fact that almost all of last year’s trade balance gains were lost as a result of the strong response of consumers to their wage increases shows that Romania’s structural supply-demand imbalances still have a long way to go before they can improve. The leu’s overvaluation, indeed useful in the fight against inflation, is also weighing on the trade situation.

In the first six months of the year, the economy has advanced by only 0.7%. The reconfirmation of the first half’s growth picture has led us to revise our 2024 GDP growth projection from 2.0% to 1.3%, which still needs fairly robust growth rates over the next two quarters. We don’t see room for major structural improvements in either the dissipation of the strong internal demand through imports or in higher external demand from key trading peers.

Given all this, the chances of one more rate cut from the NBR in the fourth quarter have increased. However, while weak GDP growth can indeed be an argument for less monetary policy restrictiveness, the strong credit activity still requires policymakers’ caution.

Former private banker Peter Georgiou has been fined $980,020 (about Dh3.6 million) for misleading conduct and his involvement in the violations of his former employer, Mirabaud (Middle East) Limited (MMEL), said the Dubai Financial Services Authority (DFSA).

Georgiou, a former private banker at MMEL, has also been banned from holding any office or working for a DFSA-authorised firm and is restricted from providing financial services in the Dubai International Financial Centre (DIFC).

The DFSA found that Georgiou lacked integrity and was unfit to work in the DIFC’s financial sector. Specifically, the authority discovered that the former banker:

Deliberately misled MMEL’s compliance team and withheld crucial information to bypass MMEL’s anti-money laundering (AML) systems and controls.Sent a forged, deceptive email to a client.Provided false information to the DFSA during an interview.

In July 2023, the DFSA fined MMEL $3 million for having inadequate AML systems and controls. Georgiou was found to have played a role in MMEL’s failure to:

Conduct proper due diligence on existing customers, especially when there were doubts about their documents or suspicions of money laundering.Assess clients’ financial markets experience adequately when classifying them as Professional Clients.

Ian Johnston, chief executive of the DFSA, said: “The DFSA expects those working in financial services within the DIFC to comply with the DFSA’s AML rules. We also expect firms and individuals to engage with the DFSA in an open and honest manner, and to uphold the highest standards of integrity.

"The DFSA remains committed to holding those who fail to meet these expectations to account. The sanctions imposed on Georgiou reflect the severity of his misconduct and serve as a strong warning to others who may consider engaging in similar behaviour.”

The DFSA's decision notice is available in the regulatory actions section of its official website.

Source: khaleejtimes