TheChek News Flow

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.

Beijing expected to unleash new funding for its domestic semiconductor sector to come up with alternatives to US tech

Fresh restrictions this week on exports of US chip technology to Chinese companies have provoked an angry reaction from Beijing, but beyond the rhetoric, China is expected to unleash a new wave of funding to boost domestic production of semiconductors.

Washington has been steadily tightening the noose on China’s tech sector, limiting access to cutting-edge chip components and machinery. Its latest move is to introduce tough licensing requirements that are likely to block sales of high-end processors from US chipmakers Nvidia and AMD, which are used in artificial intelligence systems.

China’s foreign ministry accused the US on Thursday of attempting to impose a “technological blockade” on China to maintain its tech “hegemony” and said it was stretching the concept of national security. The US has said it fears its tech will be adapted for military purposes.

Unable to break such a “blockade”, “the restrictions will turbocharge China to find local replacements”, said one senior executive at a Chinese chipmaker.

The government has already poured vast sums of money into the chip sector, with state-owned investment funds targeting chip start-ups that promise to replace foreign rivals. The largesse has prompted accusations of waste, corruption and mismanagement. Chipmaker Tsinghua Unigroup defaulted on its bonds in 2020 despite receiving tens of billions of dollars in government support.

Analysts believe a string of high-profile failures will not deter Beijing in its quest for chip self-sufficiency, as Washington accelerates the encirclement of China’s tech sector with ever-tighter controls.

Putting blocks in place for the supply of cutting-edge chips from Nvidia and AMD comes weeks after the US banned the sale to China of electronic design automation (EDA) software, needed to design high-end chips. The moves will hasten Chinese firms switching to domestic chipmakers to pre-empt being cut off from foreign suppliers, wrote Shanghai-based wealth management firm HWAS Assets in a note.

In July, the US congress approved $52.7bn in grants to build chip facilities in the US for those companies agreeing not to fund high-end semi production in China, under the landmark US Chips and Science Act.

Randy Abrams, head of Asia Semiconductors research at Credit Suisse, wrote in a note that the ban on investing in advanced fab production in China would “further limit access to overseas talent and investment to build up China’s domestic semis industry”.

In the past, chip factories or “fabs” in China run by Korea’s Samsung, Intel of the US and UMC of Taiwan “have been a good source for China to help build up IP, talent and resources to develop its domestic semis industry”, he said.

Analysts at investment bank Jefferies said the biggest customers for Nvidia products that were effectively banned this week are cloud service providers, internet and AI companies. They predicted there would be an attempt to switch to local graphics processing unit (GPU) substitutes, but the widespread use of Nvidia’s Cuda “operating system for AI” software would create incompatibility issues.

The senior executive said it was only a matter of time before China developed its own functioning EDA software. The US tools “are incredibly complex and sophisticated, so you can’t replicate them overnight, but with enough money and ingenuity, you can get close,” he said.

Others disagree that China can strike out on its own. Stephen Ezell, a director at the Information Technology and Innovation Foundation in Washington, said China’s efforts to develop a “closed loop semiconductor ecosystem” had failed.

“It is self-defeating for a country in a high-tech industry to try and do everything by itself,” he said.

The devastating impact of Washington’s sanctions on Huawei, which barred the Chinese telecoms behemoth from all chips using US tech in 2020, underscores the interconnected nature of the global chip supply chain. The move crippled the company’s smartphone business.

The Netherlands has also caved in to Washington pressure and banned exports of extreme (EUV) lithography equipment to China, required to manufacture chips that power AI and blockchain technology. “China was not going to be a player once the US got the Netherlands to acquiesce,” said Douglas Fuller, an expert on the Chinese semiconductor industry.

Even as the US successfully limits China’s access to foreign chip technology, industry insiders are sceptical about Washington’s ability to shut it out completely from the global supply chain.

One industry veteran in Japan said that the last attempt by Washington to compete with an adversary ended in failure after political appetite waned and funds dried up. In the late 1980s, the US established a consortium of semiconductor companies driven by concerns that Japan had usurped its dominant position.

“It was reasonably successful for a time, mainly because large companies like Intel supported it heavily. But government funding is fickle and dries up with the change of an administration in Washington,” he said.

“The semiconductor industry is global, and it is difficult to mount an effort to help one country be competitive against its global allies and competitors.”

Surge in blank cheque company liquidations promises respite from losses due to market downturn

Investors in blank cheque vehicles are set for a liquidity boost of up to $75bn over the next six months as special purpose acquisition companies that went public at the height of a listings boom are forced to return their cash.

The expected surge in Spac liquidations will remove some of the last remnants of one of the most extreme market frenzies of recent years while giving a welcome injection of cash to many investors who have been hit by losses in this year’s broad market downturn.

Spacs aim to use the proceeds from a stock market listing to hunt for private companies to take public, but most have a two-year time limit to close an acquisition before they have to return all the raised funds to investors if they do not seek an extension.

Almost $75bn worth of Spacs are due to hit their expiry date between now and the end of February, according to data from Spac Research, with a further $36bn to come in March.

“It’s bullish for the market, the money will go back to the equity market overall because there are no Spacs to go back into,” said one senior banker who has helped blank cheque companies raise cash and find deals.

Investors have sunk more than $250bn into blank cheque companies since the start of 2020, but enthusiasm has waned after a series of high-profile disappointments and a crackdown by regulators.

Hedge funds were among the biggest investors in Spac IPOs. Some invested through multi-strategy vehicles, while others set up dedicated funds. One senior prime broker said money invested through these funds was likely to be returned to limited partners such as pension funds and university endowments. Multi-strategy funds, meanwhile, will be able to redeploy the cash into other areas — or meet redemption requests from backers who have been spooked by losses elsewhere.

Hedge funds have on average outperformed the S&P 500 so far this year but performance still fell by an average of 6.8 per cent in the second quarter, according to Citco, with investors withdrawing a net $7.8bn.

“Spacs that didn’t find a deal have outperformed most strategies outside of macro and [quant] strategies this year,” the broker said. “We do see an increase around investor redemptions, so this could help support some of those.”

“They’ll be delighted to have the cash and thrilled they didn’t put it to work in tech,” said one capital markets lawyer. “The Spac ‘forced savings account’ may well have been the luckiest investment many of them ever made.”

Some of the windfall for investors may come sooner than scheduled as they look to avoid being hit by new tax rules.

The majority of Spacs are based in the Cayman Islands, the Caribbean tax haven, but a minority are incorporated in the US state of Delaware. Lawyers fear that the wording of a new tax on stock buybacks could also apply to redemptions from Delaware-based Spacs, giving an extra incentive to redeem any funds before the tax comes into force in January.

Spacs that know they will not find a deal can call a special shareholder meeting to unwind early. Others may ask investors for extra time to get a merger over the line, such as Digital World Acquisition Corporation, which plans to merge with Donald Trump’s Trump Media & Technology Group, but doing so gives investors a chance to redeem their shares.

Even those that do strike a deal may have to return the bulk of their IPO proceeds to shareholders who can opt to redeem their shares rather than receive stock in the newly merged company.

The median redemption rate on mergers that closed in the past three months was 91.7 per cent, according to Spac Research.

“Many investors prefer to redeem and get back 100 cents on the dollar while holding on to their warrants as risk appetite is significantly lower than before,” said Mark Brod, a partner at law firm Simpson Thacher.

Brod added that, thanks to the recent stock market declines, even investors who approved of a Spac’s merger could choose to take back their cash with the expectation that they could buy the combined stock at a cheaper price in the secondary market afterwards.