2021 Global Outlook
2021 MIDYEAR GLOBAL OUTLOOK

Looking beyond the restart

We remain pro-risk as the powerful economic restart plays out. What lies beyond? The post-2008 crisis playbook won’t work, in our view, and how a higher inflation regime will play out is key.
Investment themes
01

The new nominal

The powerful economic restart is broadening, with Europe and other major economies catching up with the U.S. We expect a higher inflation regime in the medium term – with a more muted monetary response than in the past. Tactical implication: We go overweight European equities and inflation-linked bonds. We cut U.S. equities to neutral.

02

China stands out

Growth in China is starting to slow at the same time the policy stance is relatively tight. The regulatory crackdown on dominant companies is ongoing. We see these as important aspects of China’s efforts to improve the quality of growth. Tactical implication: We introduce a neutral stance on Chinese equities and an overweight to Chinese debt.

03

Journey to net zero

There is no roadmap for getting to net zero, and we believe markets underappreciate the profound changes coming. The path is unlikely to be a smooth one – and we see this creating opportunities across investment horizons. Tactical implication: We are overweight the tech sector as we believe it is better positioned for the green transition.

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A consequential juncture

The powerful economic restart after the Covid-19 shock is playing out. We remain pro-risk as the restart broadens. The more consequential question: What lies beyond? This juncture could be as critical as the shift to the neoliberal consensus in the 1980s. The post-global financial crisis (GFC) playbook won’t work, in our view, as the historic monetary-fiscal collaboration to bridge the pandemic should lead to a higher inflation regime. This means we don’t expect another decade-long bull market in stocks and bonds.

A restart is not a traditional business cycle recovery – you can only turn the lights back on once, so to speak. Fiscal stimulus and easy monetary policy have provided a bridge through the pandemic. We have estimated the U.S. has seen more than four times the stimulus compared with the GFC for less than one-quarter the shock. We see a wide range of macro outcomes as a result.

The economic restart is real and it is broadening out globally, but what comes next?

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Title: 2021 midyear outlook: Looking beyond the restart

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Wei Li

Global Chief Investment Strategist for BlackRock

Our first theme for the rest of 2021 is what we call the new nominal, where we expect higher inflation in the medium term as a result of a more muted monetary policy response to inflation than in the past.

We’re turning even more positive on European equities and upgrading Japanese equities to neutral. We are moderating our view on the U.S. equities to neutral.

Our second theme is China stands out. Chinese assets play a key role in an increasingly bifurcated U.S.-China world and they need to be considered as a stand-alone asset allocations. The quality revolution in China, putting the quality of growth over the quantity of growth makes us tactically neutral on Chinese equities, but strategically overweight.

Our third theme is the net-zero journey. Our journey to net zero, in terms of carbon emission, has a clear starting point and a destination, but there’s no road map and we see many zig-zags along the way. We’ve overweight, the tech sector, as better positioned for the green transition.

The bottom line is as the economic restart broadens out, we remain pro-risk, even though the path for risk assets for push higher is getting narrower.

The economic restart is real and it is broadening out globally, but what comes next?

BBL open
Title: 2021 midyear outlook: Looking beyond the restart

Hero Shot/ID
Wei Li

Global Chief Investment Strategist for BlackRock

Our first theme for the rest of 2021 is what we call the new nominal, where we expect higher inflation in the medium term as a result of a more muted monetary policy response to inflation than in the past.

We’re turning even more positive on European equities and upgrading Japanese equities to neutral. We are moderating our view on the U.S. equities to neutral.

Our second theme is China stands out. Chinese assets play a key role in an increasingly bifurcated U.S.-China world and they need to be considered as a stand-alone asset allocations. The quality revolution in China, putting the quality of growth over the quantity of growth makes us tactically neutral on Chinese equities, but strategically overweight.

Our third theme is the net-zero journey. Our journey to net zero, in terms of carbon emission, has a clear starting point and a destination, but there’s no road map and we see many zig-zags along the way. We’ve overweight, the tech sector, as better positioned for the green transition.

The bottom line is as the economic restart broadens out, we remain pro-risk, even though the path for risk assets for push higher is getting narrower.

Higher inflation regime

New policy paradigms mean central banks are now attempting to overshoot inflation targets to make up for past misses. See the chart below. The shaded region shows how high the Fed would likely need to let inflation run to make up for previous shortfalls. This is a major shift from the neoliberal consensus adopted in the early 1980s that helped contain inflation and usher in a four-decade period of falling inflation and interest rates. Yet markets have not yet bought the narrative, and are pricing in a more rapid lift-off in policy rates than what the Federal Reserve’s new policy framework and projections indicate. This mismatch and resulting uncertainty could stoke volatility.

We expect a higher inflation regime in the medium term – as a result of a more muted monetary response than in the past. We see recent bond yield rises primarily driven by inflation, rather changes in the expected path of policy rates, making the unique environment that we have called the new nominal constructive for equities.

Only getting into the inflation zone
Average Fed inflation projections vs. average make-up, 2015-2023

The chart shows how much work the central bank has to do to achieve its new goal of letting inflation run above target to make up for past shortfalls.

Sources: BlackRock Investment Institute, with data from the U.S. Bureau of Economic Analysis and Federal Reserve, June 2021.  Notes: The chart shows the range of  future PCE inflation levels over the Fed’s policy horizon, which we set at two years, that would be needed on average to make up for past inflation undershoots of the Fed’s 2% target. The undershoot is calculated as the average actual core PCE inflation over the previous two to five years. The red and yellow lines show the average of Fed forecasts of annual core personal consumption expenditure inflation in Q4 2021, Q4 2022 and Q4 2023 from its quarterly Summary of Economic Projections.

Staying moderately pro-risk

We are moderately pro-risk and look for opportunities from any turbulence to increase risk: Negative real, or inflation-adjusted, bond yields should support equities. We see potential for cyclical shares and regions to benefit form a broadening restart. We are turning positive on European equities and upgrading Japanese equities to neutral – and cut U.S. equities to neutral. Even if yields remain low, the direction of travel is up – and we remain underweight developed market government bonds.

For the first time, we break out Chinese assets from emerging markets as distinct tactical allocations. We believe Beijing’s focus on quality growth should bear fruit, keeping us tactically neutral on Chinese equities but heavily overweight strategically.

The path to net-zero carbon emissions has a starting point and potential destination – but there is no clear roadmap yet for getting there. Some of the coming changes may be abrupt – and add to supply and demand disruptions among commodities. We see opportunities along the way, with private market financing playing a key role.

Staying pro-risk

The broadening economic restart, coupled with global central banks’ resolve to maintain easy financial conditions, keeps us pro-risk. We favor equities over credit and government bonds on both a strategic and tactical investment horizon.

Directional 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, July 2021. 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.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

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

Legend Granular

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.

Wide range of potential outcomes

How does the current environment compare with the post-GFC recovery? We are on a very different path now, in our view. Historic fiscal stimulus and innovative monetary policy – the policy revolution – make a repeat of the 10-year bull market in stocks and bonds unlikely. Our base case: the New nominal.

This schematic shows a wide range of potential economic and financial outcomes as a result of the Covid-19 shock. For example, we could see financial instability, the new nominal, the roaring 1920s, or policy tightened too late.

Sources: BlackRock Investment Institute, July 2021. Notes: The schematic shows hypothetical macro and policy outcomes now compared with the sluggish outcome following the GFC. These are our views on the implications for equities and government bonds as of July 2021. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Journey to net-zero

The path to net-zero carbon emissions has a starting point and potential destination – but there is no clear roadmap yet for getting there. Some of the coming changes may be abrupt – and add to supply and demand disruptions among commodities. We see opportunities along the way, with private market financing playing a key role.

The chart shows a gap opening between copper and crude oil spot prices, unlike the near lockstep rise in the 2000s – which is why a commodity “supercycle” is not how we’d view now.

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, July2021. Note: chart shows the spot price of London Metal Exchange (LME) copper and Brent crude oil rebased to 100 at the start of 2000.

Meet the authors
Philipp Hildebrand
Vice Chairman
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Vivek Paul
Senior Portfolio Strategist
Scott Thiel
Chief Fixed Income Strategist