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If BitcoinBTCUSD –0.00% is crypto’s answer to gold, Ethereum is the closest thing it has to its own internet. Anyone who wants to mint a new token, launch a crypto app, or spend $150,000 on a Bored Ape nonfungible token, or NFT, probably uses the Ethereum network. More than $3 billion in transaction volume flows through Ethereum daily, traded in the network’s native token, EtherETHUSD +0.38% . About $60 billion in crypto assets sit on its blockchain through third-party apps. Aside from Bitcoin, no other network is more critical to crypto’s infrastructure or its future.

Tinkering with Ethereum is no trifling matter. Yet the network’s developers aren’t just about to tinker—they’re on the cusp of overhauling the core plumbing and mechanics of Ethereum in an upgrade that enthusiasts call The Merge.

The change, slated to happen around Sept. 15, is a big technological risk and could be a transformative moment for crypto. Companies like Coinbase Global COIN –0.41% (ticker: COIN) will feel the impact almost immediately. And there are likely to be ripple effects throughout the industry, touching everyone from crypto miners to chip makers like Nvidia NVDA –2.08% (NVDA), and investors with some Ether in their portfolios.

“The Merge is the most significant upgrade in crypto history,” says Sami Kassab, an analyst for crypto research firm Messari. “It’s similar to changing the engines on an airplane in midflight. One flaw in the code could wreak havoc on the crypto ecosystem.”

Years in the making, The Merge may be crypto’s answer to critics who say the industry is a colossal waste of energy. Ethereum, with a market value of nearly $200 billion, now uses the same method of validating transactions as Bitcoin.

In that process, known as proof of work, computers compete to solve cryptographic puzzles. The network reaches a consensus on the winner, proving that a block of transactions is valid and should be added to the chain. The winner then receives some Bitcoin, a practice known as mining.

It’s highly energy-intensive, requiring a massive amount of computing work and electricity. Ethereum was built on the same system, and it is also an energy hog, using roughly the same amount of electricity in a year as countries like the Netherlands.

Now, developers are scrapping that model and moving to a much greener system for processing transactions, called proof of stake. Instead of mining, Ether owners use their tokens as collateral to validate transactions, “staking” them to the network in exchange for a yield, paid in the Ether token. To participate, a staker must deposit 32 Ether tokens, worth about $50,000, and run some software. The system randomly selects validators, like a lottery. Crypto exchanges and other firms run staking pools, allowing anyone to participate with smaller amounts of Ether.

The shift should eliminate Ether mining. In doing so, it will cut Ethereum’s energy usage by more than 99%, according to the Ethereum Foundation, sharply reducing the network’s carbon footprint.

That’s just the start of a larger makeover. The Merge should also reduce the newly minted Ether that’s produced each year. And developers are planning more upgrades over the next few years that aim to increase Ethereum’s throughput and lower its usage fees. Ideally, they aim to turn Ethereum into the internet of crypto—a base layer for apps, financial services, and many more digital assets like NFTs.

“Today, we talk about decentralized finance. In 10 years, if we are successful, people will just call it finance, full stop,” says Justin Drake, a researcher for the Ethereum Foundation who’s helping with the project. “For almost any financial transaction, they will use Ethereum.”

Yet The Merge may also have casualties. It could cause glitches, outages, or losses of tokens as the current Ethereum blockchain merges with a new one, called Beacon. “A laundry list of elements will need to keep working seamlessly post-Merge to keep exploits and liquidations at bay,” says Sean Farrell, head of digital assets at Fundstrat Global Advisors.

The stakes are high because so much of the crypto industry has a stake in its performance—from exchanges like Coinbase to mining operations, NFT platforms, and stablecoin issuers. “Usually, when you push out a change for a website and it breaks—oh well, it’s not the end of the world. In this case, you can lose a lot of money,” says Katie Talati, director of research at Arca, a crypto-asset manager.

The most immediate effect could be on Ether’s price. Since mid-June, the token has soared more than 50%, while Bitcoin has stayed flat. Both tokens are down about 60% this year, under pressure from rising interest rates and weaker demand for highly speculative tech.

A successful Merge could make Ether ripe for another run, some analysts say. That’s partly because moving to proof of stake should reduce token issuance to about 0.5% a year, down from 4.5% currently. Reducing the issuance could push up the price. “In the current market, supply and demand is relatively in balance,” says Steve Goulden, a senior analyst for Cumberland, the crypto arm of trading firm DRW Holdings. “Post-Merge, there will be a material supply deficit.”

Demand, meanwhile, could get a lift as owners stake their tokens in return for a yield. Investors may earn 4% to 8% by staking, depending on how much revenue the network generates and other factors, according to Talati. Institutional funds with a mandate to invest in environmentally friendly assets could also buy Ether as the blockchain’s carbon emissions become less of an issue.

The upgrade could be a boon to companies like Coinbase. The exchange is developing a service that makes it easy for investors to stake their Ether, with Coinbase taking a 25% cut of any income generated. The staking business has already “grown into a great source of subscription and services revenue and is growing nicely,” said CEO Brian Armstrong on an earnings call in August.

As in any tech upgrade cycle, however, there will be a legacy of obsolescence. Some of the biggest losers in this cycle could be mining companies that spent hundreds of millions of dollars on hardware that might be rendered worthless. Leaders of Hut 8 Mining (HUT), which mines both Bitcoin and Ether, said in August that they were studying how to adapt their Ether mining machines to other tokens or projects. Hive Blockchain Technologies HIVE –1.41% (HIVE), another miner, said a shift to proof of stake “may render our mining business less competitive.”

Chip maker Nvidia looks like another casualty. The company’s graphics chips and cards have been adopted by the industry to mine Ether. But demand now appears to be evaporating. Nvidia, whose stock is already ailing from a slowdown in gaming and other core areas, said on its recent earnings call that it couldn’t predict how reduced crypto mining might hit demand. Analysts for investment bank Baird say The Merge is likely to “generate a wave of mining GPUs [graphics processing units] on the secondhand market, compounding the inventory woes.”

Longer term, Ethereum may pose more of a threat to rival blockchain networks. Blockchains and tokens such as Solana, Avalanche, and Tezos launched with the promise of being faster and more efficient than Ethereum. All run on proof of stake and have established various uses, but if Ethereum pulls off its upgrades, they may run out of time to prove their relevance. “Now that Ethereum has caught up with proof of stake, there’s less of an argument for many other blockchains,” Kassab says.

Some crypto companies aren’t taking The Merge lying down. The threat has led a few miners to launch a competing Ethereum blockchain, called a fork, using the proof-of-work method. The idea is to create an Ether spinoff and a parallel universe of smart contracts, NFTs, and decentralized-finance, or DeFi, applications.

The potential for dueling Ether blockchains is forcing companies to choose sides or declare neutrality. Exchanges like Coinbase, Binance, and FTX say they will apply their usual listing standards to forked tokens and may allow them to trade. Creators of crypto apps such as Uniswap, Compound, and stablecoin USDC have pledged to recognize only the new Ethereum blockchain.

An Ethereum split has some crypto leaders worried that scammers could find new ways to perpetuate theft and fraud. “Somebody’s going to spend 80 real Ether on a fake Bored Ape,” says Robert Leshner, founder and CEO of Compound Labs, a DeFi company. “There will be all sorts of disasters,” he says, advising investors to wait for the kinks to be ironed out and “do nothing.”

Another unknown is how Washington will react. Officials at the Securities and Exchange Commission have indicated that Bitcoin and Ether should be treated as commodities—potentially removing those tokens from SEC oversight. But because many investors will buy Ether with the expectation of a yield, some attorneys believe it could make the token look more like a security. If the SEC agrees, crypto exchanges like Coinbase could be vulnerable to lawsuits or enforcement actions if they let it trade on their platforms anyway.

Changes of this size are an “opportunity to try to distinguish the prior analysis from the current analysis,” says Teresa Goody Guillén, a partner at BakerHostetler and former SEC attorney, who believes that Ether still wouldn’t qualify as a security. The SEC declined to comment.

As with all things in crypto, the hype around The Merge already exceeds the reality. Proponents say it could be the start of a Renaissance of useful apps and services—finally silencing the critics bemused at a multibillion-dollar industry that has yet to find a raison d’être apart from speculation. Conversely, if it flops, it would be another setback for a technology long on complexity and short on real-world utility.

“The most important part of The Merge is the narrative,” Kassab says. “It’s something that everybody is talking about that could bring people back into Web3 and crypto, assuming it’s successful.”

The crypto market is now suffering from a crisis of confidence, having lost $2 trillion in value over the past year and drawn the ire of governments worldwide. A successful Merge may not revive the market or its reputation. But it could make crypto a bit greener, at the least, on its path forward.

Stockholders have had a rough time this year, with surging inflation and fears of a recession. But there is a way to mitigate it: tobacco stock Imperial Brands .

The company (ticker: IMB.UK) offers potential total returns above 22% over the next 12 months, some analysts say. It markets cigarette brands including Winston, JPS, L&B, and Gauloises, and rolling paper Rizla. It is also developing next-generation products, or NGPs, which include vaping materials and oral nicotine.

Imperial Brands “is at the early stages of rebuilding a culture of boring reliability under its new CEO,” according to a report by RBC Capital Markets. In other words, the business is stable and not likely to produce unexpected shocks.

RBC sees the stock headed to 22 pounds sterling a share ($25.52), up 17% from its recent price of £18.95. On top of that, its annual dividend is projected at £1.40, or 7.4%. That hefty payout helps make the stock attractive during these turbulent times.

Garrett Nelson, an analyst at CFRA in Richmond, Va., says the category as a whole has historically “been one of the most recession-resistant industries.” Indeed, Imperial’s stock has rallied 17% this year. Over the same period, the FTSE 100UKX +1.86% index, which tracks the largest U.K.-listed stocks, and the S&P 500SPX –1.07% index, fell 3.2% and 17%, respectively.

The stock remains cheap, trading at 6.8 times forward earnings, which is lower than its five-year average forward price/earnings multiple of 7.5, according to Morningstar data.

At least part of the reason for the low P/E is that many institutions, especially those adhering to environmental, social, and corporate governance principles, refuse to buy tobacco shares. That practice, which is becoming more widespread, means their prices will likely remain cheap, relative to the broader market.

While cigarette smoking is waning in developed markets, such as the U.S. and Europe, the decline in sales volumes is partially being offset by higher unit prices and cost-cutting.

“Unit sales are declining in developed markets, in terms of the number of sticks [cigarettes] sold,” says Steve Clayton, a fund manager at U.K.-based HL Select. “Instead, the company is concentrating on less-developed markets.” These include South America, Africa, and Asia.

The NGP segment has shown some strength, with revenue growing 8.7% in the first half of the year, versus 0.1% for tobacco products. In all regions, the tobacco revenue dwarfs that produced by NGPs. The question is how fast the latter will grow and whether it will outpace the decline in the traditional tobacco business.

“If you are an investor in tobacco, you want to find a business that has got as durable as possible a cash flow coming out of the traditional business to support the growth in the new business,” Clayton says.

Imperial isn’t the only tobacco choice for investors in European stocks. Clayton points to British American Tobacco (BATS.U.K.) as an alternative that might suit longer-term investors looking for growth at the expense of dividends. British American markets brands such as Lucky Strike, Camel, and Dunhill, all well-known in the U.S.

And BATS is betting big on the future of new products. “BAT has a strong portfolio of next-generation products,” Clayton says.

The trade-off is a lower yield. British American has a projected dividend of 6.3%, which is less than Imperial’s. It also has a higher forward P/E of 9.5, versus imperials 6.8. “You get a slightly lower yield, but greater confidence in growth,” Clayton says.

If 2022 were to end tomorrow, or the day after, it would enter the books as a dismal one for investors. The Dow Jones Industrial AverageDJIA –1.07% is down 13% year to date, the S&P 500SPX –1.07% index is off 17%, and the once-bubbly Nasdaq CompositeCOMP –1.31% is nursing a loss of 25%.

The selling could continue into the fall and beyond, given the panoply of factors eating at investor confidence and returns. Inflation is stubbornly high, the Federal Reserve is determined to raise interest rates to cool it, and the world is an even more hostile place now than at the start of the year.

Yet, this year’s turmoil also offers opportunity: Stocks are cheaper than they have been in a long time, and shares of companies with competitive business models, healthy balance sheets, and steady cash flows beckon. The fixed-income market offers even more from which to choose, with numerous categories sporting their highest yields in years. It is tempting to focus on macroeconomic forces that have depressed stocks and lifted bond yields in the first eight months of the year, and many Wall Street strategists do. But investors who pick their spots well could benefit from the prevailing negative trends.

Barron’s recently canvassed eight Wall Street strategists to get their read on the investment outlook for the rest of the year. While the average target among the group puts the S&P 500 at 4185 at year end, up 6% from recent levels, individual estimates range from 3600 to 4800. That’s an unusually large span with four months remaining in the year, and reflects widely divergent views on the strength of the economy and corporate earnings, and the Fed’s determination to fight inflation.

Some strategists, like Ed Yardeni, proprietor of Yardeni Research, see more of a muted recession than a full-blown economic contraction. “If we’re going to have a recession, it could be very shallow,” he says. “Or, it could be a rolling recession that hits different sectors at different times, like we arguably saw in the mid-1980s.”

U.S. gross domestic product contracted at an annualized 1.6% in the first quarter and 0.6% in the second, but underlying trends don’t suggest the economy is in a recession. “When I look at the underlying dynamics [of the economy], be it corporates, be it households and consumers, the real economy doesn’t look so bad outside of inflation,” says Sonal Desai, chief investment officer of Franklin Templeton Fixed Income and a member of Barron’s Roundtable.

Desai sees little evidence of a broad slowdown in economic activity—at least not yet—and says the coming year could bring more of a zero-growth, stagnant economy than a meaningfully shrinking one. Strength in the job market and consumer balance sheets have much to do with that, even though inflation is taking a bite out of incomes: Annual inflation of 8.3% is equivalent to lopping off one month of a worker’s annual salary, and savings will last only so long.

For stock market bulls, a potential peak in inflation is enough to get excited about the market’s prospects. Should inflation continue to decline, investors could look ahead to the eventual end of the Fed’s tightening cycle and expect less economic and earnings damage.

J.P. Morgan ’s chief U.S. equity strategist, Dubravko Lakos-Bujas, has a year-end S&P 500 target of 4800, reflecting a 20% gain from here, and a record high. He doesn’t expect a global recession and sees inflation easing as commodity prices decline and other pressures fade. He notes that people are underinvested: As of late August, funds’ relative exposure to the stock market was lower than 90% of historical readings. Alongside corporate share buybacks, he expects to see daily inflows into equities of several billion dollars a day over the next few months, lifting indexes.

Wells Fargo ’s head of equity strategy, Christopher Harvey, sees the economy and earnings holding up in the second half of 2022, before a potentially more challenging 2023. He doesn’t expect the Fed to get more hawkish, and thinks the pressure on stock multiples from rising bond yields is largely played out.

“We’ve seen the top on yields, the Fed is going to decelerate, and the fundamentals aren’t as bad as feared,” says Harvey. “The places where we have begun to see some negative revisions and margin compression have been more so on the growth side. And that’s where we already saw that big derating in the first half of this year. Let’s not forget, this was the worst first half in over 50 years. A lot of the bad news is already priced in, and it wouldn’t be surprising to see a bounce.”

Harvey has maintained his 4715 year-end target for the S&P 500 all year. He recommends a growth-at-a-reasonable-price tilt, emphasizing quality in a potentially rockier economy next year. He’s bullish on the more media- and technology-leaning areas of communication services—as opposed to telecom—and bearish on software and retail stocks. Harvey also recommends creating a so-called barbell portfolio with more-defensive companies, namely in food, beverage, and tobacco. The Invesco Dynamic Food & BeveragePBJ –0.75% exchange-traded fund (ticker: PBJ) is one way to execute this idea.

Among market sectors, energy stocks have a lot of fans for the remainder of this year. Elevated oil and gas prices look likely to stick—not at $120-a-barrel oil but comfortably above the cost of production. Energy companies are harvesting profits, paying down debt, and spending more responsibly than in the past. Shareholders will continue to benefit, strategists say—energy is far and away the best-performing sector in the S&P 500 in 2022, up 41%. The Energy Select Sector SPDRXLE +1.83% ETF (XLE) provides broad exposure to the sector and yields 4.2% in dividends annually, while the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) is more concentrated in the upstream subsector.

Healthcare is another popular recommendation among investment strategists. The sector is increasingly tech-focused, with enviable secular growth characteristics. But it doesn’t trade for an overly pricey valuation multiple, perhaps due to concerns about government legislation, including a drug-price negotiation program in the just-passed Inflation Reduction Act.

“Healthcare provides some protection against an ailing economy, and you don’t have to overpay,” says Mike Wilson, chief investment officer and chief U.S. equity strategist at Morgan Stanley . “Outside of biotech, it’s underowned, I think, because there’s still concern around the government coming in with a heavy hand on pricing.”

The Health Care Select Sector SPDR ETF (XLV) includes all S&P 500 stocks in the sector. The iShares U.S. Healthcare Providers ETF (IHF) is more focused on insurers and providers, which have a pent-up-demand tailwind postpandemic—rather than pharma companies or medical-device makers.

Wilson has a June 2023 target of 3900 for the S&P 500, down 2% from recent levels. He’s worried about earnings, which reached a record high in the second quarter. “While the Fed is still raising rates, that’s not going to be the main driver of equity prices from here,” Wilson says, “The valuation damage from rates going up, that’s not really the issue. The issue now is that earnings are going to come down a lot.”

Wilson expects Wall Street analysts to reduce their earnings estimates in the coming months, dragging down stock prices. That process began with second-quarter reporting season, and he notes that earnings-revision cycles tend to last for three or four quarters. The fall conference-call season and third-quarter results could be the catalyst for downward revisions, if management teams offer gloomy forecasts or reduce guidance. That’s also an opportunity to separate winners from losers.

“Where the first-half selloff was just a blunt instrument that hurt all stock valuations, it becomes more idiosyncratic from here,” Wilson says. “Stocks can separate themselves depending on which companies can operate better in this environment…but we’re bearish on the index level over the next three to six months.”

Wilson is focused on some of the least flashy but most stable sectors of the market: utilities, real estate, and healthcare. His recommended underweights are consumer-discretionary stocks and cyclical areas of technology, including semiconductors and hardware firms.

Like Wilson, Savita Subramanian, BofA Securities’ head of U.S. equity and quantitative strategy, sees plenty of room for earnings estimates to come down. “Consensus estimates are far too optimistic,” she says. “Consensus is forecasting 8% growth next year, and we think that it’s going to be probably more like minus 8%. This is consistent with our view that there’s going to be a recession.”

Subramanian, who has a target price of 3600 on the S&P 500, advises looking for companies that are inexpensive based on their ratio of enterprise value to free cash flow. That approach emphasizes businesses that can best continue to generate cash despite rising cost pressures and without reliance on too much debt, which is getting more expensive.

“As you move into the later stages of an economic cycle, you’ve got inflation and the Fed tightening,” says Subramanian. “Maybe earnings hold up OK, maybe sales hold up. But free cash flow starts to become scarce because companies are forced to spend on higher costs, capital expenditure, or higher interest on their debt.”

Screening for companies that are cheap based on enterprise value to free cash flow yields mostly energy companies in the S&P 500, including Exxon Mobil (XOM), Chevron (CVX), Marathon Petroleum (MPC), and EOG Resources (EOG). Pharma companies such as Pfizer (PFE) and Moderna (MRNA) are other examples, as are Dow (DOW) and LyondellBasell Industries (LYB), in chemicals. The Pacer US Cash Cows 100 ETF (COWZ) includes a basket of Russell 1000 companies that meet similar criteria.

Subramanian’s sector picks have a value tilt, and include energy, financials, healthcare, and consumer staples. But she says there may be some opportunities in profitable growth companies that have sold off this year; many tech names have lost 50% or more, and could appeal to those with a longer-term investment horizon. PayPal Holdings (PYPL), Adobe (ADBE), and Salesforce (CRM), for instance, have positive free cash flow and are down at least 33% in 2022.

Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock , recommends another way to add a quality tilt to your portfolio: the iShares Core High Dividend ETF (HDV), which yields about 2.3%. Top holdings include Exxon Mobil, Johnson & Johnson (JNJ), and Verizon Communications (VZ).

For fixed-income investors, it’s a new era: The asset class is generating income after a lengthy drought. The S&P U.S. Treasury Bond index has declined 8.5% this year, U.S. investment-grade corporate bonds have lost 14%, and mortgage-back securities have slid 9%. But that has lifted yields, which move inversely to a bond’s price.

Nuveen’s chief investment officer of global fixed income, Anders Persson, believes that most of the damage in higher-quality areas of the bond market, such as Treasuries and investment-grade corporate bonds, is done, while high-yield bonds and other riskier categories may have more downside. He doesn’t see any screaming bargains and stresses a focus on income generation and diversification.

“It’s not going to be a beta market,” Persson says. “It’s more of an alpha market, where you have to really do your work as an active manager, looking for those industries and names that can hold up best.”

He points to the TIAA-CREF Core Plus Bond fund (TIBFX), which yields 3.4% and includes a variety of fixed-income assets such as U.S. and foreign sovereign debt, investment-grade and high-yield corporate bonds, preferred stock, and asset and mortgage-backed securities.

Persson singles out the Nuveen Preferred Securities and Income fund (NPSRX), with a 5.7% yield. It includes preferred shares from mainly banks and other financial institutions with strong underlying credit quality helped by heightened regulations since the 2008-09 financial crisis. Persson also likes the Nuveen Floating Rate Income fund (NFRIX), lower in credit quality but with a yield of 5.2%. The loan portfolio’s floating rates provide some insulation from a rising-rate environment, although the risk of defaults in an adverse economy is greater.

Desai similarly recommends the Franklin Income fund (FKIQX), which is about half in traditional bonds and the rest in dividend-paying stocks, preferreds, and convertibles. The fund has a yield of 5.2%.

Not much movement is expected in the long end of the Treasury curve for the remainder of this year. Strategists generally see the 10-year yield remaining range-bound and finishing 2022 around 3.00% or slightly higher, versus today’s 3.26%.

Strategists see the Fed raising interest rates by another 100 to 125 basis points (a basis point is one-hundredth of a percentage point) over its remaining three meetings this year. That would take the federal-funds rate target range to 3.50%-3.75% at year end. In 2023, the benchmark rate could rise a bit more. Then the Fed might pause. None of the strategists with whom Barron’s spoke see the Fed cutting rates early next year, as futures markets had been pricing in before Fed Chairman Jerome Powell’s Jackson Hole speech on Aug. 26.

Addressing the central bank’s annual economic policy symposium in Wyoming, Powell emphasized that inflation fighting is the No. 1 priority, and that some economic pain would be required. That means slower or potentially negative real GDP growth and an increase in the unemployment rate, currently 3.7%. Markets will test the Fed’s resolve once job losses begin to pick up, Desai says.

“Historically, people have always said ‘don’t fight the Fed,’ ” she says. “This time around, everyone wants to fight the Fed.”

That will be a recipe for more volatility in stock and bond markets. BlackRock’s Chaudhuri expects the S&P 500 to land at 3800 by year end, after a volatile stretch. She recommends staying invested to take advantage of sharp rallies that might occur.

Chaudhuri cites iShares MSCI USA Min Vol Factor ETF (USMV) as one way to insulate a portfolio from greater volatility. Its top holdings include Eli Lilly (LLY), Microsoft (MSFT), Accenture (ACN), and T-Mobile US (TMUS).

One thing to worry about this fall is quantitative tightening, or QT, by which the Fed shrinks its balance sheet and drains liquidity from the financial system. “People are underestimating the impact of liquidity risk to the market and the real economy [due to QT],” Wilson says. “Just like quantitative easing was like grease to the engine, QT is more like a wrench in the engine.”

Rising rates, more volatility, and engine wrenches don’t sound like a recipe for the large gains investors saw in the past two years. But judicious stock-picking and smart fixed-income investments could go a long way to avoiding the season’s biggest risks.

Veteran banker warns that rates could remain as high as 4% for ‘6 to 12 months’

Investors should be cautious for the rest of 2022 about US equity and credit as markets have not absorbed the Federal Reserve’s determination to keep interest rates as high as 4 per cent, advises Greg Fleming, the veteran banker who heads Rockefeller Capital Management.

The firm points to 50 years of historical evidence to support this view. Since the 1970s, the Fed has always waited for headline annual inflation rates to fall below the fed funds rate before shifting to loosening monetary policy. Inflation is now at 8.5 per cent and the Fed’s target range is 2.25 to 2.50 per cent.

“The fed funds rate has to cross before the Fed starts to pull back. They are going to want to make sure they’ve got inflation under control,” Fleming said. “It could stay 3.5 to 4 per cent for six to 12 months.”

“I’m medium-term positive on the US but . . . for the last four months of the year, the markets will stay volatile,” he said. “Markets will be trying to read into every speech, every data point.”

The group’s chief investment officer, Jimmy Chang, has recommended long-short hedge funds, precious metals and long-duration Treasuries to clients in a recent note, writing: “I doubt that a new bull market has started and would remain patient, selective, and defensive”.

Fleming, previously a senior executive at Merrill Lynch and Morgan Stanley, has run Rockefeller since Viking Global Investors bought the Rockefeller family office and relaunched it as a bigger business in March 2018

Since then, Fleming has overseen the transformation and growth of the 140-year-old business from a $18.3bn firm to a $90bn asset and wealth manager focused on modern day Rockefellers — wealthy and ultra rich clients.

Asset accumulation has at times been slower than hoped, Fleming said. “We’re still a work in progress here. There is a level of expectation when clients walk through the door and you’ve got to be sure you’ve got the ability to deliver.”

The company is gradually expanding its physical presence. It has gone from three initial offices to 40 and plans to add more, with new outposts in growing wealthy cities such as Nashville, Charlotte and Orlando. It is also expanding the range of services offered to cover everything from bill paying and financial education of its clients’ adult children to investment banking and strategy advice for the companies the clients own.

Despite attacks on investing based on environmental, social and governance factors from conservative politicians in states such as Texas, Rockefeller’s asset management arm is sticking with its historical emphasis on ESG funds. “We have clients like my Gen Z children who care about investing in a certain way. We think that is a secular shift; it’s a growth business,” Fleming says.

Inflation and bumpy markets have sharpened the firm’s already strong focus on alternatives. Fleming says that the valuations of both private equity and private credit are starting to come down, as investment committees take into account the first-half price drops in public markets and the Fed’s plans to stay hawkish.

“There’s still a ways to go here,” Fleming said of the Fed’s inflation plan. “So we’re cautious — cautious about equity markets, cautious on debt markets . . . for the rest of 2022, and then we’ll see.”

Now is not the time to water down financial regulation

A UK government bill proposes to strip away Mifid 2 rules in the midst of an energy and cost of living crisis

The furore over Vladimir Putin’s closure of the already well-maintained Nord Stream 1 pipeline for further maintenance added to panic about rising energy prices. Yet the German benchmark power price halved in a week, revealing the real dynamic.

Despite Putin’s chest-thumping, wholesale providers of oil — autocratic leaders and chief executives of oil majors — lack the power to fix the price of their products.

This has not prevented widespread condemnation of oil majors in the current crisis. But such criticism is misdirected. Given global capital mobility and the nature of deregulated and financialised commodity markets, nationalisation of commodity producers and windfall taxes would not lower prices. Instead increased regulation of global markets is needed. But this week the British parliament proposes doing the very opposite — deregulating markets and worsening the cost of living crisis.

Real power over commodity prices lies in the “paper markets” — not with wholesalers. Wall Street and Chicago Mercantile Exchange investors deploy vast sums in speculation on movements in the price of both food and energy prices. It’s a profitable game. Net revenues at Wall Street banks rocketed in the first half of 2022.

Wheat futures prices traded in Chicago jumped more than 50 per cent in March, to as high as $13.40 a bushel one Friday. At the same time the share of non-commercial speculators holding long positions in hard wheat and corn rose sharply to 50 per cent. And as Lighthouse Reports revealed in April 2022, investors pumped $1.2bn into two major agricultural exchange traded funds, compared with just $197mn for the whole of 2021.

Prices for food, oil and gas are determined independently of both wholesalers and costs. And despite standard economic theory, they are fixed independently of the supply and demand for oil — as the recent fall in German prices amply demonstrates.

The paper market has inflicted real losses on oil exporters and the oil and gas majors. Both suffered tremendous losses in 2014, 2015, and 2020. In 2020 the five integrated supermajors — ExxonMobil, BP, Shell, Chevron, and Total — lost $76bn. Oil prices plunged into negative territory in 2020. Saudi Arabian energy minister Prince Abdulaziz bin Salman had it right: “the paper and physical markets have become increasingly disconnected”. 

Rocketing inflation and the rising burden of both food and energy prices have led to global economic and political chaos — especially in low-income countries. We can trace the problem back to Clinton-era deregulation that allowed new players and new derivatives to overwhelm the price stability and discovery functions. The 2008 financial crisis, which forced millions into economic hardship and poverty, can be laid at the door of those anarchic markets.

To deal with the crisis, the EU passed the Mifid 2 regulations and mandated limits on positions. Today’s chaos is largely a result of watering down those regulations. Global commodity markets are broken, no longer working for those who actually need them — the food and energy producers and consumers.

The UK government’s proposals in the Financial Services and Markets bill, which returns to the House of Commons on Wednesday, will foment global market volatility by weakening the financial stability mandate of the Bank of England. The bill proposes to give the Prudential Regulation Authority and Financial Conduct Authority roles as cheerleaders of volatile global markets, by adding secondary objectives for “economic growth and competitiveness”.

Rather than stabilising price volatility, the government will use this moment of market turmoil to exacerbate the crisis.

Group of oil producers is expected to keep levels steady at its meeting Monday

Russia doesn’t support an oil-production cut at this time, and it is likely OPEC+ will keep its output steady when it meets Monday, people familiar with the matter said, as Moscow maneuvers to thwart Western attempts to limit its oil revenue following its invasion of Ukraine.

Russian opposition to a production cut highlights a debate within the Organization of the Petroleum Exporting Countries and Moscow-led allies, collectively known as OPEC+, as oil consumers globally brace for a showdown this winter with the Kremlin over the price of its crude. Oil prices soared above $100 a barrel after Russia invaded Ukraine, hurting Western consumers and filling Moscow’s coffers.

Saudi Arabia, the group’s biggest exporter, floated the idea recently that the alliance could consider reducing output. OPEC members such as the Republic of Congo, Sudan and Equatorial Guinea have said they are open to the idea, as they are already pumping as much as they can and oil prices have fallen in recent weeks. An OPEC+ production cut often lifts prices.

But Russia is concerned that a production cut would signal to oil buyers that crude supply is outstripping global demand—a position that would reduce its leverage with oil-consuming nations that are still buying its petroleum but at big discounts, the people familiar with the matter said. Though Russia has benefited from high oil prices since the Ukraine invasion, Moscow is more concerned about maintaining influence in negotiations with Asian buyers who bought its crude after Europeans and the U.S. began shunning it this year, the people said.

Last week, the Group of Seven wealthy nations rolled out a plan to ban the insurance and financing of shipments of Russian oil and petroleum products unless they are sold under a set price cap. Russia has threatened to stop supplying countries that participate in the price-cap plan.

According to the people familiar with the matter, Russia’s objections to an OPEC+ production cut became clear last week at an internal OPEC+ meeting where the group’s baseline scenario showed the world’s oil supplies would be about 900,000 barrels oil a day above demand this year and next, a potentially bearish projection for prices.

Officials from Russia and other countries said the numbers were misleading because they assumed that each OPEC+ member would pump the full amount allowed under their agreement, the people said. In fact, OPEC+ members have fallen about 3 million barrels a day short of those targets in recent months. The commission revised its numbers after the objections, predicting a smaller surplus of 400,000 barrels a day by the end of 2022 and a deficit in 2023.

and with buyers just as it negotiates to deter them from adopting the price cap.”

OPEC+ won’t decide until Monday how to proceed with oil production, and an output cut can’t be ruled out, said OPEC+ delegates from multiple countries. But the revision in data undermines the case for a production cut, they said, and delegates said there was no appetite for raising output, as the U.S. and Europe have called for.

“Most members can’t boost production so if we had kept widening quotas, we would have a credibility problem,” said an OPEC delegate. “It’s not sustainable.”

A spokeswoman for the Russian Energy Ministry didn’t respond to a request for comment.

Last month, OPEC+ agreed to a smaller-than-expected production increase earlier in August.

The OPEC+ meeting takes places Monday as members are concerned Iran could bring its sanctioned crude back to markets if it strikes an agreement with global powers to revive a nuclear pact. There are also worries that oil demand could weaken if the world enters a recession or if China’s Covid-19 restrictions spur another economic slowdown there.

A U.S. official said the White House was pleased with the OPEC+ production increases over the summer and noted that Saudi Arabia is pumping at a historic high.

Saudi Arabia’s crude production rose to 10.9 million barrels a day on average in the July-to-August period, according to Kpler, compared with just under 10.7 million barrels a day in June. The kingdom’s increase was the main driver behind an overall OPEC+ boost of 400,000 barrels a day to 43.5 million barrels a day in the past two months, the data-intelligence company said.

Amos Hochstein, the U.S. special presidential coordinator for global infrastructure and energy security, said he welcomed production increases carried out in the summer by Saudi Arabia and OPEC.

“Current production in the United States and around the world is not sufficient to meet the strong economic recovery from the pandemic and the threats posed by Russia’s continued war against Ukraine and its use of energy as a weapon,” Mr. Hochstein said.

As the kingdom builds a tourism industry from scratch, intrepid first movers are finding a travel destination not quite ready for them

DIRIYAH, Saudi Arabia—Retired Arkansas accountant Dora Jane Flesher wanted a postpandemic adventure off the beaten track. In Saudi Arabia she was mesmerized by ancient tombs carved into sandstone outcroppings in Al-Ula. She was less impressed by a museum featuring a collection of old TVs and touch-tone phones plus rocks from every U.S. state.

“We got to see the country at the beginning of its opening up,” said Ms. Flesher, 65. “But that meant we saw a lot of random things that will not be popular tourist destinations.”

Welcome to one of the world’s newest tourist frontiers.

Saudi Arabia, home to Islam’s holiest sites, has welcomed Muslim pilgrims for centuries, but conservative mores and wariness of outsiders have long thwarted the growth of a traditional tourism industry and turned off prospective visitors.

Now, the government plans to spend $1 trillion over the next decade to turn Saudi Arabia into a mass-market tourist destination, part of efforts to diversify its oil-dependent economy. A nascent cruise sector, luxury Red Sea resorts and eco-lodges in the desert are all in the works.

The first Western tourists are getting a more rough-and-ready experience.

Since Saudi Arabia lifted its last Covid-related travel restrictions in March, intrepid tourists have trickled into the country three times the size of Texas to discover its sprawling capital, six far-flung Unesco World Heritage sites and traditional Arab hospitality.

Pioneering travelers are arriving in a country not quite ready for them. Tour guides need to be trained and hotels built. Not all the heritage sites are open full time.

The Saudis are “trying to figure out ‘What are we doing with tourists?’” said Ms. Flesher, who visited with a boutique U.S. tour company.

Add to that, Saudi Arabia’s sensitivity to criticism. A new law prohibits “damaging the reputation of tourism,” a vague and ominous ruling in a country whose human-rights record is already a turnoff to many. Authorities executed 81 people in one day earlier this year for various crimes.

In the past month, two Saudi women convicted over social-media posts each received jail sentences of more than 30 years, according to rights groups. The Saudi Media Ministry didn’t immediately respond to a request for comment on the sentences.

The 2018 killing of dissident journalist Jamal Khashoggi also looms large for Western visitors. “The question of Khashoggi always comes up,” said Bill Jones, who has led three American tour groups to Saudi Arabia since 2019.

He said he tries to introduce his clients to ordinary Saudis who can tell them what life is like. Still, “Selling Saudi Arabia for us…is never going to be easy.”

U.S. intelligence concluded de facto Saudi ruler Crown Prince Mohammed bin Salman likely ordered the killing. He denies any involvement. Tourists now taking the plunge in Saudi Arabia say they want to see the country for themselves.

Even as the crown prince was moving to lift restrictions such as a ban on women drivers, authorities jailed women’s rights activists who campaigned for such freedoms. San Antonio startup investor Jean Cheever said she was delighted when her tour group came across one of Saudi Arabia’s women-only driving schools.

She joined the learners as they cruised around a desert parking lot. “They were just giddy,” said Ms. Cheever, who is in her 60s. “They were honking at each other, driving around, it was hilarious.”

The cloistered kingdom offered its first tourist visas in late 2019. More than 400,000 were issued before the pandemic shut down travel.

As part of plans to create new economic sectors unrelated to oil, Prince Mohammed wants to attract 55 million international tourists annually by 2030, just over half the number that visited France, the world’s most popular destination, in 2019. Nearly 3.5 million foreigners came last year—excluding religious pilgrims—and 6.1 million in the first half of 2022.

A surge in domestic tourism during the pandemic laid bare an infrastructure shortage, so the government committed $4 billion to encourage private-sector investment. Hotel chain Radisson Hospitality Inc., which has 26 properties in Saudi Arabia, now plans to open 20 more within the next three years and Hilton Worldwide Holdings Inc. wants to add 75 over a decade to its existing 16.

Even though some social strictures—such as a ban on unrelated men and women mixing in public—have been relaxed, alcohol is illegal and the dress code for women restrictive even at most beaches. Temperatures top 120 degrees in summer, and until a few months ago, Yemeni rebels were lobbing missiles and armed drones across the border at cities and civilian airports.

What’s more, Mecca—the country’s most globally renowned site—is only for Muslims.

“That was a bit frustrating,” said Ms. Flesher, the retired accountant, who watched pilgrims in Mecca on a TV in her Jeddah hotel room 40 miles away.

Restrictions on drinking and women’s access to some hotel pools are other aspects of a Saudi vacation that visitors found hard to swallow.

Prince Mohammed’s ambitions, imagined with help from Western consultants, are being put to the test. As he emerges from diplomatic isolation following Mr. Khashoggi’s killing, the crown prince’s domestic standing hinges largely on economic promises such as 1 million new tourism-related jobs.

Persuading tourists to visit also tests the kingdom’s ability to attract high-skilled foreigners as it looks to overtake Dubai as the Middle East’s commercial hub.

To meet its tourist targets, Saudi Arabia needs to appeal to the mass market, not just travel junkies and well-heeled retirees.

One of those helping the crown prince in that direction is Jerry Inzerillo, a renowned hospitality and tourism executive from Brooklyn who has launched hotels and resorts from the Bahamas to South Africa.

He was hired in 2018 to run Diriyah, a $40 billion development project that has echoes of Colonial Williamsburg plus luxury hotels and Michelin-starred restaurants. Based around a mud-brick settlement near Riyadh where the ruling family took power in the 1700s, it aims to cement the origin story of Saudi Arabia, for both domestic consumption and international appeal.

“In a world of wonders, there’s only one Diriyah” is Mr. Inzerillo’s catchphrase to market the attraction, which has little name recognition outside of Saudi Arabia.

The 68-year-old is brand ambassador as the kingdom looks to cultivate a more inviting image.

“Saudi has one of the largest gaps between public perception and reality,” he said. “We will welcome people and allow them to make up their own mind.”

Mr. Inzerillo was one of few Western executives to stand by Saudi Arabia following Mr. Khashoggi’s murder. Even as U.S.-Saudi ties wavered over the killing, he says he spent “abundant personal time” with Prince Mohammed.

Diriyah is now among the most advanced of a string of massive building projects that includes a skyscraper set to stretch for 75 miles. It is closed to the public for renovation, but the aim is to reopen the historic district—one of the kingdom’s Unesco sites—before the end of the year with the goal of pulling in 27 million visitors annually by 2030.

Rate rises and recession fears lift costs for riskier borrowers

Risky US corporate borrowers are facing a renewed jump in borrowing costs as concerns that further sharp Federal Reserve rate rises will weigh heavily on the world’s biggest economy grip markets.

Yields on US junk bonds have jumped to almost 8.6 per cent from a mid-August low of 7.4 per cent, according to an Ice Data Services index. The rise reflects a significant decline in the price of the debt.

The fresh selling in high-yield bonds comes after a brief summer respite, in which most risky assets recovered somewhat from a dismal first half of 2022. Traders had hoped the Fed would take a softer approach to rate rises, but concerns the central bank will step up its fight against inflation have shattered the calm.

“As this summer of optimism draws to a close, the Fed path and recession fears are returning to the fore,” said Srikanth Sankaran, strategist at Morgan Stanley.

As a result, investors have raced out of funds that buy junk-rated US corporate bonds, with $8.7bn withdrawn from accounts over the past two weeks, according to flows tracked by EPFR. Redemptions in the past week ranked as the sixth-biggest weekly outflow since the coronavirus pandemic rocked US financial markets in 2020.

Lotfi Karoui, a strategist at Goldman Sachs, said Jay Powell’s speech in late August at the Jackson Hole economic summit in which the Fed chair vowed to “keep at it” in the central bank’s tightening of monetary policy to fight inflation spooked investors.

“Powell’s annual speech . . . delivered an unambiguous message that a dovish pivot is not in sight,” Karoui said. “For markets, this means a return to square one as investors readjust their expectations to a growth, inflation, and policy mix that is likely to stay unfriendly for quite some time.”

The rise in junk bond yields reflects an increase in rate rise expectations that have affected the entire US debt market and intensifying jitters about lower-rated companies’ ability to make good on their obligations. Traders now expect the Fed to lift rates to nearly 4 per cent by early next year, up from between 2.25 and 2.5 per cent today.

The gap between the yields on US junk bonds and ultra low risk US government debt has jumped to slightly above 5 percentage points from 4.2 percentage points in mid-August. It started the year at about 3 percentage points. The widening spread suggests “the growth outlook is getting worse, that the probability of recession is creeping up,” said Ed Smith, co-chief investment officer at Rathbone Investment Management.

Morgan Stanley’s Sankaran noted, however, that while the current level points to a more “stressed market”, it would need to rise significantly further to fully price in recession risks.

Defaults have generally remained low, with many companies having used the period of historically low interest rates in the wake of the coronavirus crisis to decrease their borrowing costs and push back when payments of the original amounts borrowed will come due.

However, cracks are beginning to show. There were default events affecting $4.7bn worth of bonds and loans in the US market in August, the third-highest total since November 2020, according to JPMorgan Chase data. The Wall Street bank noted August marked the sixth straight month of default activity exceeding $3.3bn compared with an average of $1.3bn per month from November 2020 to February 2022.

Sankaran added that while the second-quarter earnings season, which provided the most recent snapshot of corporate America’s fundamentals, “was not overwhelmingly negative . . . evidence of weakening demand, shifts in consumer spending and inventory pressures for retailers were abundant”.

The sell-off comes at a poor time for major banks across Wall Street, which are expected to begin pitching tens of billions of dollars worth of bond sales to investors next week. Money managers are paying particular close attention to a $15bn financing package banks led by Bank of America are planning to launch to fund Vista Equity Partners and Elliott Management’s $16.5bn takeover of software company Citrix.

The banks are staring down losses that could exceed $1bn on the deal, which is seen as a bellwether for the terms lenders will demand on new junk debt.