A new investment order
In the BlackRock Investment Institute’s 2021 Global Outlook, “A new investment order,” the BlackRock Investment Institute discusses the structural trends that are shaping their strategic calls and unveils three new investment themes – The new nominal, Globalization rewired and Turbocharged transformations.
The traditional business cycle playbook does not apply to the pandemic. We see the shock as more akin to that of a large-scale natural disaster followed by swift economic restart. Early in the crisis, we assessed that the ultimate cumulative economic losses – what matters most for financial markets – would likely prove to be a fraction of those seen in the wake of the global financial crisis (GFC).
This view was conditional on robust policy support to tide households and businesses through the income shock. The early results of Covid-19 vaccine trials give us greater confidence in this framework. They suggest the economic restart can re-accelerate significantly in 2021 as pent-up demand is unleashed. We believe markets will likely be quick to price in a full economic restart given the improved visibility on the outlook.
The U.S. and Europe face challenges in the very near term: A resurgence of virus cases may result in outright economic contraction. Risks of policy fatigue are rising, especially in the U.S., and ongoing policy support is vital to limit any permanent economic scarring. Yet positive vaccine news is a game changer in that we now know we are building a bridge to somewhere, providing clarity for policymakers, companies and markets about getting to a post-Covid stage.
As a result, we favor looking through any near-term market volatility. We increase our overall pro-risk stance by upgrading equities on a tactical basis, and take a sectoral approach. We like tech and healthcare due to the pandemic’s transformative shifts. We balance this with a preference for prime potential beneficiaries of the economic restart, such as emerging market (EM) equities and U.S. small caps. We overweight Asia ex-Japan equities and Asia fixed income on the region’s effective virus response, and favor assets exposed to Chinese growth.
The policy revolution has big implications for our strategic views as we see a more muted response of nominal yields to a higher inflation regime. Central banks appear committed to limit any rises in nominal yields even as inflation picks up. Investors will need a new playbook to navigate this. We underweight government bonds and maintain a higher strategic allocation to equities than in typical periods of rising inflation. Sustainability is a key component of our views as we see a tectonic shift to sustainable assets playing out over decades. Contrary to past consensus, we expect this shift to help enhance returns. Private market exposures are one way to pursue portfolio resilience with a sustainable lens.
2021 investment themes
The new nominal
We see stronger growth and lower real yields ahead as the vaccine-led restart accelerates and central banks limit the rise of nominal yields – even as inflation expectations climb. Inflation will have different implications to the past.
Strategic implication: We underweight government bonds and see equities supported by falling real rates.
Tactical implication: Our low rate outlook keeps us pro-risk. We like U.S. equities and prefer high yield for income.
Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-China world order and a remaking of global supply chains – placing greater weight on resilience and less on efficiency.
Strategic implication: We favor deliberate country diversification and above-benchmark China exposures.
Tactical implication: We like EM equities, especially Asia ex-Japan, and are underweight Europe and Japan.
The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality within and across nations, and the dominance of e-commerce at the expense of traditional retail.
Strategic implication: We prefer sustainable assets amid a growing societal preference for sustainability.
Tactical implication: We take a barbell approach, favoring tech and healthcare as well as selected cyclical exposures.
Asset class views
Strategic (long-term) and tactical (6-12 month) views on broad asset classes, December 2020
Note: Views are from a U.S. dollar perspective, December 2020. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2020
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Read the full BlackRock Investment Institute’s 2021 Global Outlook.