2020 Global Outlook: Testing limits

Forum focus

Some 100 BlackRock investment professionals gathered in New York, on Nov. 12-13 at our 2020 Outlook Forum to debate how powerful structural trends will play out over the next year and may intersect with the tactical market outlook. This event kicks off a series of discussions that we leverage to inform our views. Potential market drivers that were debated included rising inequality, populism, deglobalization, limits to monetary policy, and the pressing need for sustainability considerations. Below we give a flavor of some of the key conclusions.

Geopolitics

We expect market attention to geopolitical risks to remain high in 2020 even as we see U.S.-China trade tensions likely extending their temporary pause. See our Geopolitical risk dashboard. We also see flashpoints in the Middle East and risks from the U.S. election year. Whatever the U.S. election outcome, big tech companies may face a regulatory backlash, as issues around market dominance, data privacy, election meddling and cyber security rise to the fore. This challenges large caps that have led markets higher.

Tom Donilon
Chairman – BlackRock Investment Institute
“The age of self-regulation of the tech sector is coming to an end.”

Supply shocks

This economic cycle — now entering a second decade — has been an unusually long and shallow. The late-cycle, dovish pivot has also been unusual, and there are few signs of the traditional late-cycle limits of economic overheating. As a result, we don’t see a slide into recession as the primary risk — but a stubborn mix of slower growth and rising inflation. The potential for such a regime shift is one reason why we prefer short-maturity U.S. Treasuries, and see inflation-linked debt as attractive.

Sarah Foley
Senior Economist – BlackRock Global Fixed Income Americas
“Upward pressure on U.S. CPI will likely become more broad-based, as tariffs affect more goods.”

China

China’s economy is in the midst of a structural slowdown as the country transitions away from its credit-intensive growth model. Yet China’s economic rebalancing eventually could present investors with a more favorable mix: less capital flowing into lumbering state-owned enterprises (SOEs) with negative margins; and more to higher-quality private sector firms. And China’s economy is set to generate $1.2 trillion of incremental GDP this year, according to IMF estimates, around 1.5 times the amount the U.S. is expected to add to global growth. The combination of the sheer magnitude of China’s growth and its improving quality is why we see opportunities as China opens its markets to foreign investors.

Ben Powell
Chief Investment Strategist, APAC BlackRock Investment Institute
“I call it the “AND” argument. China is slowing AND offers huge opportunities in its domestic markets.”

Strategic implications

Deglobalization and low yields are structural limits challenging strategic asset allocation. Deglobalization raises the risk of supply shocks that reduce productivity and increase inflation. It also may cause splintering of technology standards and trade patterns across regions driven by the U.S.-China rivalry. This argues for greater regional diversification, including to China, in our view. And yields that are approaching lower bounds test the ballast properties of government bonds. This means strategic allocations may need to look very different to meet risk/return goals.

Natalie Gill
Portfolio Strategist - BlackRock Investment Institute
“If government bonds won’t keep a negative correlation with equities, the idea of holding them as ballast could be questioned.”

Profit margins

Profit margins of publicly listed companies have been on a decades-long march higher. This has been driven by two key trends: globalization (integrated supply chains and labor markets that have, along with technological innovation, reduced input costs) and rising market concentration (the advent of superstar firms that dominate their industries). Both now are at risk of reversal amid trade conflicts, rising wages and a regulatory backlash against winner-take-all firms. An increasing focus on sustainability also poses a threat to some sectors, with carbon-intensive companies facing risks such as higher taxes and cost of capital. Margins also tend to contract in late cycle periods, based on our analysis of U.S. corporate profit margins over the stages of the business cycle since 1965. This analysis shows margins have already fallen from peaks.

Jimmy Keenan
Portfolio Manager – BlackRock U.S. Large Cap Core Equity
“Rising wages are the biggest issue in the U.S.; in Asia and Europe it’s the lack of top-line growth.”

  

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
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
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
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 ...