HY issuance recovers but net new credit largely absent

Spreads in the US high yield market are near the tightest levels ever, providing a constructive read on the US economy. Tight spreads and lower rates have led to a pickup in HY issuance, which recently approached more normal levels, but that has since slowed as rates moved up. And much of the issuance seen has been used for refinancing. The positive is that there could be another leg for issuance as companies sell debt to finance capex or acquisitions. This is the Fed transmission mechanism at work. Oleg discusses the impediments to such a shift and the implications of getting the election behind us. We also discuss private credit, how rapid growth in that market impacts high yield and where Oleg sees the best opportunities.

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"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

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Insurance is in the news again following two damaging storms. Sadly, for many homeowners, much of the damage won't likely be covered by insurance given that it's flood-related and nationally, only about 4% of homeowners have flood coverage. Some homeowners will choose to add flood, adding to the cost of homeownership, but especially in Florida, there was wind damage too. This damage was inflicted on a FL insurance market where 15-20% of policies are written by Citizens Insurance, controlled by the state. Josh Shanker believes that Citizens has underpriced policies and as FL looks to shift these policies to the private market, insurance premiums should rise, adding to what are already the highest insurance premiums in the country. Josh also discusses strides made by the state of FL in reducing fraud in the state's insurance market, the impact that could have on pricing and the latest outlook for auto insurance where he's been bullish on pricing for several years.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

Last month, BofA Global Research hosted its annual Japan conference. Over 500 investors joined, and attendance was up 2% versus the prior year. Japan equities rallied sharply through July, but then a rate hike from the BoJ and a stronger Yen disrupted the upward momentum. Daisuke Takato suggests there was more evidence of positive change at the conference. He reiterates Japan Equity Strategist Masashi Akutsu view that 2025 will be another leg higher in Japan's equity story as inflation helps drive higher wages, efficiencies and corporate transformation. Semiconductors could help Japan equity returns as Mikio Hirakawa believes Japan's semicap test equipment have and will benefit from AI-related demand for GPUs and memory.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

US electricity demand growth in 2024 has run at a faster pace than GDP. This follows a decade in which demand hardly grew. And while data centers are an important driver of this recent growth, there are other, more important factors, namely building electrification. Reshoring and electric vehicles have also been a boost. The point is that the factors behind this growth are many, meaning that a slowdown in one area isn't likely to derail what should be years of increasing power needs. Our analysts discuss the challenges that nuclear faces in meeting US demand needs, the role of natural gas and the capital equipment that will be needed for both the grid and data centers. We also discuss the importance of renewables and how limitations keep them from being an around-the-clock baseload power solution anytime soon. Renewables do raise grid complexity and power price volatility, a benefit for the companies offering solutions.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

A ready-mix of positives for real estate

Last month, BofA hosted its annual Global Real Estate conference with record client attendance. Jeff Spector suggests that while investors have been underweight real estate the last couple of years as rates rose, recent outperformance is beginning to draw investors into the group. The fall in rates make REIT yields look more attractive, all else equal, and also come with a number of fundamental positives which we discuss within. REIT executives at the conference see the market for real estate transactions picking up, historically a positive for REIT valuations. And office, aside from being a particular beneficiary of rate cuts, received some positive commentary from real estate executives. Return to office mandates are leading to improvement in certain key US markets including Midtown Manhattan, which is presently one of the strongest office markets in the country. Also, high rates and pessimism on the part of developers in areas including office and retail has meant supply is muted.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

Mortgage rates have dropped by more than 100bps since last fall and housing stocks have responded. But while lower rates should in theory be good for demand, signs of improvement are modest so far. Many buyers remain on the sidelines as they await a further drop in rates. On the supply side, the new rate regime should reduce lock-in and allow more existing homes to come to market. This might seem to balance the increased demand, but Rafe Jadrosich also points out that home sellers usually become buyers. Plus, lower rates could drive the many high-income renters into the housing market. A pickup in transactions and housing turnover should benefit building products stocks from a cyclical standpoint. And some of these products also benefit from secular tailwinds.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

Construction spending, excluding housing, is running at a rate of about $1-$1.2 billion annually, near record levels. Much of this spend is driven by recently passed legislative acts, according to Mike Feniger. But reshoring and AI are also having significant positive impact and the annualized capex for big tech has increased from $138 billion to $229 billion in just a year. Still, despite the headline strength, there are areas of construction which are weak, including warehouses, retail shopping centers and private office. The number of mega projects is slowing. Rate cuts and election certainty could be a catalyst for some of these lagging areas. Typically, housing benefits from rate cuts first and commercial construction sees a boost 1-2 years later but a lack of overcapacity in commercial construction could mean that there's less of a lag this time. Mike believes that large equipment rental companies are likely to benefit from this improvement, a view he discusses within.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.

Alkesh Shah views Generative AI (GenAI) as the beginning of the third major tech cycle of the past 50 years. Over the past 10 years, development of more powerful chips and a new neural network architecture has raised the upper bounds of storage and computation exponentially, consequently reducing the time and cost to train increasingly large models powering apps like ChatGPT. Alkesh expects GenAI to catalyze a revolution in corporate efficiency and productivity that will occur far more rapidly than past disruptive technologies, which investors anticipate. Alkesh surveyed 157 equity analysts and macro strategists on AI's financial and economic disruption. Survey responses indicate that enterprise AI implementation could boost S&P operating margins by 200bps over the next five years. AI beneficiaries will likely expand from Semis and Cloud Service Providers in the first wave; Tech Hardware, Software and Capital Goods in the second wave; and ultimately touch every sector globally.

You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.

"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.

©2024 Bank of America Corporation. All rights reserved.