<strong>By:</strong> <b>BlackRock Investment Institute (BII)</b>

Global economic activity is being frozen to stem the coronavirus pandemic. Yet implications for asset prices will depend on the cumulative impact of the growth shortfall over time. We believe that policy actions to cushion the impact of virus shock are nothing short of a revolution. Execution is a risk, but if successful, the cumulative impact of the virus should be well below that seen in the wake of the 2008 global financial crisis (GFC) — despite the historic scale of the initial shock.

<strong>Chart of the week</strong>

Estimated cumulative GDP shortfalls from virus shock vs. financial crisis

<img class="aligncenter wp-image-142169 size-full" src="https://www.cover.co.za/wp-content/uploads/2020/04/image001-19.jpg" alt="" width="487" height="291" />

A banking crisis and overextended household balance sheets led to a “lost decade” of deleveraging after the GFC. This time, the immediate shock is much deeper, but the financial system is not in crisis for the moment. The propagation of the shock is directly linked to the evolution of the virus and the duration of containment measures, in our view. Long-run economic forecasts, including the most pessimistic, imply economic consequences that are much less severe than the post-GFC impact in both the U.S. and euro area, as the chart shows. The cumulative GDP shortfall in the years that followed was ultimately equivalent to 50% of 2007 GDP in the U.S. For the current shock to be on a similar scale, it would have to morph into a financial crisis, in our view. For now, we see the much swifter and greater fiscal and monetary response this time stemming this risk.

The pandemic has triggered an abrupt, deliberate stop to economic activity. We believe the concept of “recession” doesn’t’ apply here because this is not resulting from the evolution of a usual business cycle. See details in <a href="https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/global-macro-outlook" data-saferedirecturl="https://www.google.com/url?q=https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/global-macro-outlook&amp;source=gmail&amp;ust=1588270717155000&amp;usg=AFQjCNGDOeahRnMb8B5g9COlmKimcc26iQ">How large is the coronavirus macro shock</a>? The current shock is more akin to a large-scale natural disaster that severely disrupts near-term activity, but eventually results in an economic recovery. The large and immediate loss of income needs to be addressed with a comprehensive policy response, including a new suite of policy measures designed to help bridge cash flow pressures by backstopping household incomes and small businesses – without which the economy could suffer permanent damage. We have seen these measures – both monetary and fiscal – coming together quickly and on unprecedented scale, especially in key developed economies. Policy coordination is critical, as we wrote in <a href="https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response" data-saferedirecturl="https://www.google.com/url?q=https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response&amp;source=gmail&amp;ust=1588270717155000&amp;usg=AFQjCNGhHbprgSw16skpXztuvmSlLuWTuw">Time for policy to go direct</a>.

A key risk to our view is policy execution. A recent example shows the difficulty of delivering the aid to those in need: A $350 billion loan program for distressed small businesses in the U.S. quickly reached its limit, with evidence that the smallest businesses had severe difficulty accessing the program. There is also the risk of permanent damage if the freezing of economic activity lasts for an extended period of time – especially if ongoing policy support loses momentum. An extended interruption could morph into a financial crisis if it were to lead to an unprecedented wave of corporate insolvencies, putting pressure on the banking system. Last week’s oil price collapse – partly caused by the ongoing drop in demand caused by the economic contraction – illustrates the outsized near-term knock-on effects of halting economic activity.

Bottom line: The initial risk asset response in 2020 – with equities down 30-40% across the world – has been on an order of magnitude similar to the financial crisis. We see the lasting impact of the current economic shock as less severe given much greater fiscal and monetary support this time around. Yet effective implementation of such policy support is critical, and we remain cautious over a tactical horizon due to the substantial near-term uncertainty on the evolution of the virus and containment measures. We mostly stick to benchmark holdings on an asset class level, and generally prefer credit over equities given bondholders’ preferential claim on corporate cash flows. We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast. Quality equities and a focus on sustainability also can provide portfolio resilience. Read our latest views on global economy and markets in the <a href="https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/outlook" data-saferedirecturl="https://www.google.com/url?q=https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/outlook&amp;source=gmail&amp;ust=1588270717155000&amp;usg=AFQjCNEO7p2AXuOcZXkcBWvD46FDgAT0qg">Global Outlook</a>.

<strong>Market updates</strong>

<strong>Assets in review</strong>

Selected asset performance, 2020 year-to-date and range

<img class="aligncenter wp-image-142170 size-large" src="https://www.cover.co.za/wp-content/uploads/2020/04/image002-27-600x286.jpg" alt="" width="600" height="286" />

<strong>Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.</strong> Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, April 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

<strong>Market backdrop</strong>

Fiscal and monetary policy action to bridge the economic impact of the coronavirus has taken shape – and now the key is policy execution to ensure households and businesses get the cash being promised. Oil prices crashed last week amid plunging demand and a surging demand for oil storage, dragging down other risk assets such as stocks. The U.S. launched an additional $484 billion relief package, including a $321 billion top-up of its funding for small businesses. That takes the fiscal support passed by Congress to nearly $3 trillion in the past two months.

<strong>Week ahead</strong>

<strong>Apr. 28 –</strong> U.S. consumer confidence

<strong>Apr. 29 –</strong> U.S. preliminary Q1 GDP, Federal Reserve rate decision

<strong>Apr. 30 –</strong> China official purchasing managers’ index (PMI); euro area flash GDP, European Central Bank rate decision

<strong>May 1 –</strong> Manufacturing PMI for Japan and the U.S.

This week’s U.S. consumer confidence data will be in focus. Consumers have tended to play a stabilizing role during past economic downturns. Many of the social distancing measures to contain the pandemic specifically target consumers’ activities, such as dining out and shopping. Consensus estimates point to the consumer confidence index plunging to a four-year low.

<strong>2020 Investment themes</strong>

<strong>Activity standstill:</strong>

<ul>

<li>The coronavirus shock is unprecedented and sharper than what we saw in 2008 - but its cumulative hit to growth is likely to be lower as long as authorities deliver an overwhelming fiscal and monetary <a href="<https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response>" data-saferedirecturl="<https://www.google.com/url?q=https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response&amp;source=gmail&amp;ust=1588270717156000&amp;usg=AFQjCNFoz3tXKBxVSxOBfMpWxv6P3ekhdQ>">policy response</a> to bridge businesses and households through the shock. The main risk to our view: The decisive policy response is not delivered in a successful and timely fashion, causing lasting damage to the economy.</li><li>The rate of growth in virus cases looks to be slowing in many regions as stringent shutdown measures take effect. A key question: Can such measures be lifted without a major second wave of cases?</li><li>The nature of the rebound will depend on the path of the outbreak, effective delivery of policy response and potential changes to consumer and corporate behaviors.</li><li>The U.S. will likely prove more resilient than many other developed economies because of a smaller share of manufacturing in its GDP, a relatively high share of healthcare spending and an aggressive policy response.</li><li><strong>Market implication:</strong> We are mostly sticking to benchmark holdings on an asset class level; prefer credit over equities; and favor rebalancing into the risk asset decline.</li>

</ul>

<strong>Bold policy action:</strong>

<ul>

<li>We believe the required policy response includes drastic public health measures to stem the outbreak. A decisive, pre-emptive and coordinated policy response needed to stabilize financial markets is taking shape, particularly in the U.S. The key: policies to forestall any cash flow crunches among small businesses and households that could lead to financial stresses and tip the economy into a crisis.</li><li>The Federal Reserve built on its “whatever it takes“ approach to helping the economy through the coronavirus shock and ensuring markets function properly. We could see its balance sheet more than double to $11 trillion by year end. U.S. lawmakers have passed $3 trillion worth of fiscal stimulus to cushion the blow.</li><li>European Union leaders agreed on the need for an emergency fund of at least 1 trillion euros. They stopped short of agreeing on how it will be financed, and tasked the European Commission to sort out details.</li><li>Some actions are raising questions about whether they may undermine the independence of central banks. The UK Treasury activated a funding facility for spending that will be directly financed by the Bank of England, rather than the gilt market, but called the move temporary.</li><li>It’s crucial to have proper guard rails around policy coordination, as we wrote in <a href="<https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/global-macro-outlook/august-2019>" data-saferedirecturl="<https://www.google.com/url?q=https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/global-macro-outlook/august-2019&amp;source=gmail&amp;ust=1588270717156000&amp;usg=AFQjCNEMm9ZRGniqC2an5PCCR6IcWmpHPA>">Dealing with the next downturn</a>.</li><li>Central bank policy has moved from mostly alleviating the dysfunction of market pricing and tightening of financial conditions to ensuring credit flows to businesses and local governments.</li><li><strong>Market implication:</strong> Coupon income is crucial in an even more yield-starved world, including corporate credit and dividend income in selected equity sectors.</li>

</ul>

<strong>Resilience rules:</strong>

<ul>

<li>The valuations of developed government bonds look stretched in light of our economic outlook, but we still see them providing diversification – albeit less so with some yields near levels we consider to be their lower bounds. The recent bounce in Treasury yields off record lows illustrates the risk of snapbacks.</li><li>A focus on sustainability can help make portfolios more resilient. We believe the adoption of sustainable investing is a tectonic shift that will carry a return advantage for years to come.</li><li><strong>Market implication:</strong> We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and see a strong case for integrating sustainability into investment processes.</li>

</ul>

<strong>Asset class views</strong>

<strong>Directional views</strong>

Six to 12-month tactical views on major global assets from a U.S. dollar perspective, April 2020

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Note: 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.

<strong>Granular views</strong>

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2020

<img class="aligncenter wp-image-142173 size-full" src="https://www.cover.co.za/wp-content/uploads/2020/04/image004-6.jpg" alt="" width="570" height="369" />

<img class="aligncenter wp-image-142172 size-full" src="https://www.cover.co.za/wp-content/uploads/2020/04/image005-2.jpg" alt="" width="571" height="349" />

<b><span lang="EN-US">Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.</span></b><span lang="EN-US"> 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.</span>