2020 Global Outlook: Testing limits

Investment views

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The broad view

We quickly concluded Covid-19 would cause an unprecedented near-term economic contraction – but that an overwhelming policy response would help mitigate the damage and make the cumulative GDP shortfall much smaller than that of the GFC.

As a result, we advocated taking advantage of historic opportunities in sustainability in late February and risk assets in strategic portfolios in late March. We have since turned neutral on equities in our strategic framework after the significant rally but keep our overweight in credit. Higher spread levels make up for increased default risk, in our view.

On a tactical basis, reflecting a shorter investment horizon, we turned cautious on Feb. 28, taking both equities and credit to neutral. We returned to a mild pro-risk stance on April 6, overweighting credit and favoring up-in-quality assets with strong policy backstops. This was reflected in a preference for U.S. stocks, investment grade credit and the quality factor.

We have now downgraded U.S. equities to neutral amid risks of fading fiscal stimulus and election uncertainty, and have turned cautious on emerging markets. We have upgraded European equities as we see them offering the most attractive exposure to a cyclical upswing. We are keeping our credit overweight because of a global hunt for yield and central bank purchases.

Tactical calls

We maintain a modest pro-risk stance overall, given our macro assessment of the virus shock and the strong policy response. This is balanced by a preference for up-in-quality assets that have policy backstops and are high up the corporate capital structure.

We prefer credit over equities as a result. This includes overweights in investment grade credit (our quality bias), high yield and euro area peripheral debt. The common thread: renewed asset purchases by central banks, a stable interest rate backdrop and attractive income in a world where decently yielding assets are hard to find.

We have downgraded EM equities and USD-denominated debt. Many EM economies are still battling to contain the virus outbreak and lack policy space to cushion the blow.

We have upgraded European equities to overweight. The region offers more attractive cyclical exposure than EMs due to its public health measures and ramped-up policy response. We are raising Japanese equities to neutral for similar reasons.

We have downgraded U.S. stocks to neutral after a strong run of outperformance. Risks include policy fatigue, a re-emergence of the virus, intensifying U.S.-China tensions, and a turbulent election season. We also cut Asia-ex Japan equities to neutral as renewed U.S.-China tensions may hurt investor sentiment as China balances its growth and stability objectives.

From a factor perspective, we increase our overweight in quality, for what we see as its likely resilience against a range of future outcomes. The possibility of a cyclical uptick has caused us to upgrade the value factor to neutral and downgrade minimum volatility to neutral. We also remain neutral on momentum.

Download our Midyear Outlook PDF

Our directional views show our relative preferences across broad, global asset classes and where we think they are headed over the next six to 12-months. The bars show our level of conviction.

Directional views
Tactical views on major global assets from a U.S. dollar perspective, December 2019

Directional View

 

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.

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

Granular views
Tactical views on selected assets vs. broad asset classes by level of conviction, December 2019

Granular View

 

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.

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
Jean Boivin
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute (BII). The institute leverages BlackRock’s expertise and produces proprietary ...
Elga Bartsch
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Elga Bartsch, Managing Director, is Head of Macro Research of the BlackRock Investment Institute. Elga heads up economic and markets research of the Blackrock Investment ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Scott Thiel
Scott Thiel
Chief Fixed Income Strategist
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...