Financial News Digest May 26: US Debt May Default in Early June

Financial News Digest May 26: US Debt May Default in Early June

Yellen says the US is about to miss early June payments unless the debt ceiling is raised

Though there are less than 10 days before the US reaches the “X-date”—the date when the US government cannot pay its debts—Treasury Secretary Janet Yellen says the US is likely to miss the early June payment only if the debt ceiling is raised.

However, the market seems to be shrugging off the potential default risk. Why is this happening? And what actions should investors take during times like this? Let’s hear some advice from Morgan Stanley’s investment manager, Jim Karon.

Viewpoints from Morgan Stanley’s investment manager

Jim Karon, a portfolio manager specializing in fixed income at Morgan Stanley Investment Management, has shared some investment viewpoints on the US debt ceiling crisis:

  • Predicting what’s happening behind closed doors in Washington, DC, is challenging, so people are left to make their best assumptions.
  • The most likely scenario is that a deal on a rising debt ceiling will be reached because the alternative is much worse.
  • After the deal is reached, the market needs to focus on what happens in the future.
  • In the short term, some of the market’s strength can be attributed to “buy the rumor” speculation. It remains to be seen whether this will lead to a “sell the news” event once we get through a debt ceiling agreement.
  • A slowdown in the US economy is worrisome, and if economic data declines and is combined with some fiscal tightening, a negative narrative could develop and impact the marketplace.

So what does that mean from an investment standpoint?

According to Karon, the Fed will hold off on rate hikes, favoring the credit and fixed-income markets. The rate pause creates a good investment opportunity to consider high-yield yields of around 7.5% or 8% or investment-grade yields of around 5.25%. These yields are reasonable, with potential returns by the end of the year, making it an interesting investment opportunity.

An extra note is the portfolio proportion: having a balanced portfolio is more important than being defensive during these times. A balanced portfolio can help mitigate risks and prepare for favorable and unfavorable outcomes. If you choose a defensive investment strategy for your portfolio, it shows that you are ready for adverse economic conditions. However, that portfolio might not help you capture the gains if the market goes positive.

Diversify your portfolio with opportunities outside the US

So, how to balance the portfolio? Karon also mentioned opportunities outside the US, particularly in the Eurozone.

Europe has had a strong performance, with European equity markets seeing gains between 12% and 15%. The European equity market’s value makes it a reasonably attractive investment option. Greece, in particular, has presented promising investment opportunities, with recent Prime Minister Kyriakos Mitsotakis’s election victory resulting in a more investment-friendly outcome.

Despite the possibility of global economic conditions slowing down, there is still a lot of positive momentum within the Eurozone. But note that central banks in the Eurozone are hiking interest rates, which has kept some investors on the sidelines.

Chipmaker Micron is banned in China for failing a cybersecurity review

On Sunday, the Chinese government announced that companies handling sensitive information could not purchase microchips from the US-based company Micron, which is the biggest US memory chipmaker. With the Chinese government’s allegation that the chips pose cybersecurity risks, several US chip makers are under pressure this week, with Micron being one of the hardest hit and closing off nearly 3% on Monday.

Micron, which earned approximately 11% of its revenue from semiconductor sales in mainland China during the previous fiscal year, expressed its interest in maintaining an open dialogue with the Chinese government.

China’s move limits chip production options

This banning move by Beijing sends negative signals to foreign investors because there is no clarity regarding the rules and protocols under which certain companies are targeted.

However, China has limited options, particularly in terms of chip production, because they rely on chip makers not just from the US but also from Europe. Last month, the Financial Times reported that the White House requested that South Korea encourage their chipmakers, who are the largest producers of memory chips in the world, not to occupy any market openings in China in the event of sales restrictions on Micron products.

Chinese economy might take a hit in the second half of the year

China’s economy had a robust beginning in 2023 as consumers resumed spending after 3 years of strict pandemic restrictions. Gross domestic product increased by 4.5% in the first quarter, according to the National Bureau of Statistics’s report released in April.

However, there are concerns regarding the Chinese economic recovery. Despite the return of revenge spending and a strong property market, the official Manufacturing Purchasing Managers’ Index (PMI) fell below the 50-point mark to 49.2 in April, indicating a contraction in the production sector, and it is expected to slow down in the second half of the year.

Several headwinds are building up against the economic recovery in China. These include the continued conflict between the US and China, foreign investors getting scared off, and rising geopolitical tensions. Combining these factors creates a negative outlook for the Chinese economy.

(Please note that the content of this webpage should not be construed as investment advice, nor should it be considered an offer, solicitation, or recommendation of any investment product.)

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