Before the bell: concerns over US debt

Interest rates in the US hit 5% across many maturities. Alphabet is reinventing itself. Belgian real estate firms continue to impress.

Wall Street closed in the red for the second day in a row, while European markets ended more or less flat again. The decline in New York was triggered by an auction of 20-year government bonds. The United States had to offer a 5% yield to attract enough buyers—the highest level in five years. The yield on 20-year bonds is now nearly equal to the 5.08% yield on 30-year bonds. Yesterday, the 10-year yield also rose by 10 basis points to 4.60%. There has been lingering concern over the ballooning US national debt. That concern is now intensifying, especially as Trump II shows no urgency in tackling the country’s massive budget deficit. His antagonistic stance toward other nations only adds to the tension, particularly given that countries like Japan and China hold a significant share of US government bonds. Higher interest rates are also a negative for stocks and real estate, as investors then demand proportionally higher returns. That return is most easily achieved if asset prices fall: company profits or rental income remain the same, but with a lower asset price, the yield increases. Of course, this only benefits new buyers—existing shareholders simply see their holdings decline in value. This process, naturally, doesn’t unfold so cleanly.

In Asia this morning, the Hang Seng Index in Hong Kong is down 0.8%, and Japan’s Topix slips 0.6%. In Brussels, Ageas is holding its annual general meeting today, while Gimv and Ackermans & van Haaren publish their full-year results and updates. On Wall Street, Ralph Lauren reports earnings.

Alphabet is rebuilding Google

The parent company of the Google search engine was one of the few US stocks to gain ground yesterday, rising 2.8%—at one point up as much as 4%. During a developer event, Alphabet introduced “AI Mode,” a new way to search using more detailed words and phrases than what we’re used to in today’s Google. Observers were enthusiastic about the product, raising hopes that Alphabet may maintain its dominant position. Others believe AI could allow rival tech giants to carve away market share. Many governments and regulators believe Google is too dominant, and want to ban the company from paying Apple to remain the default search engine. Alphabet earns 56% of its revenue from advertising related to search. In the first quarter, those revenues still grew by 10%. At 16 times expected earnings, Alphabet remains the cheapest of the Magnificent Seven.

Profitable leases to supermarkets

Ascencio is a small but solid REIT active in a defensive real estate niche. The company leases large retail parks in prime locations to major supermarket chains. In its recent half-year report, Ascencio announced that rental income rose 2.8%, and recurring profit increased by 5.7%. The group pays an average interest rate of 2.18% on its debt, which is expected to remain stable over the next few years. The debt ratio stands at 43.5%. Ascencio’s key markets are Belgium and France, with expansion also underway in Spain. Earnings per share in the first half amounted to 2.88 euro, up from 2.72 euro a year ago. The REIT is targeting a dividend similar to last year’s 4.3 euro. At today’s low share price, that would offer a gross yield of 8.9%, or 6.2% net.

Did you know…

that Europe’s richest man, Bernard Arnault, is critical of how the EU is handling Donald Trump’s trade tariffs? According to the LVMH chairman, the EU should follow the UK’s example. The United States is the largest market in the world, and it is therefore crucial to reach a swift and constructive agreement.

This article was translated from Dutch and was originally published on Spaarvarkens.be.