For qualified investors

Our midyear outlook

BlackRock |29-Jun-2020

The COVID-19 shock is accelerating structural trends in inequality, globalisation, macro policy and sustainability. This is fundamentally reshaping the investment landscape and will be key to investor outcomes. Our Midyear outlook explains why the most important action investors need to take today is to review their strategic asset allocation to ensure portfolios are resilient to these trends.

Key points

Updated themes and views
The virus shock is accelerating key structural trends. We update our three investment themes and investment views against this backdrop.
Containment and mobility
We are tracking the interplay of containment measures and mobility changes on activity as economies have started to reopen.
US employment data
Markets this week will focus on the latest US employment data as well as on the virus case count and its implication on the economic restart.
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Chart of the week
Assets under management at ESG-mandated funds, 2014-2020 YTD

Assets under management at ESG-mandated funds, 2014-2020 YTD

 

Sources: BlackRock Investment Institute with data from EPFR, as of June 2020. Notes: The chart shows the global total assets under management at ESG-mandated funds. The “other “category includes money-market and alternatives funds. Data for 2020 through May 31, 2020.

The pandemic has supercharged a shift toward sustainability. Assets under management at environmental, social and governance (ESG)-mandated funds in the US. exceeded last year’s record levels at the end of May, even as markets had sold off. See the chart above. Sustainable flows are in their early stages, in our view, and the sustainability wave will likely unfold over years and decades. We also believe markets still underappreciate the potential economic damage caused by climate change, as well as related opportunities such as the long-term rise in renewable energy. The pandemic has brought some setbacks in sustainability-related trends. For example, some governments have paused efforts to curb plastic use. Yet we believe these setbacks are temporary, and the pandemic has thrown spotlight on the “S” in ESG, as issues such as employee safety and social purpose of companies come to the fore. We see sustainability rising above the mere labels of environment, social and governance. A focus on sustainability can help portfolios achieve greater resilience to shocks, in our view.

The focus of the BlackRock Investment Institute’s virtual – but no-less real – Midyear Outlook Forum in early June was decisively on longer-term trends. The COVID-19 shock has pushed the world harder against four key limits we identified at our November forum: inequality, globalization, macro policy and sustainability. We have revamped our three investment themes to reflect the changes. Our new macro view is captured by the “Activity restart” theme as economies reopen at different speeds. A “Policy revolution” is taking place to cushion the pandemic’s shock, making this our second theme. Our third theme is “Real resilience,” as countries and sectors look set to make a comeback as diversifiers in a more fragmented world, offering resilience to real economy trends.

We highlight the importance of the “Real resilience” theme in particular. The structural shifts accelerated by the pandemic shock are already challenging the resilience of portfolios here and now. The chart on the previous page illustrated one such trend – a shift toward sustainable investing. Others include the intensifying US-China strategic rivalry across multiple dimensions. In this increasingly bipolar world, investors need to balance the investment case for gaining exposure to both these engines of global growth, with possible investment restrictions on each side. We see structural portfolio resilience as much more than just relying on broad asset class correlations in public markets. It’s making sure portfolios are well positioned at regional, country and company level to underlying themes.

We believe what is needed today is a reassessment of the whole portfolio, not just a tweaking at the edges. On a strategic horizon, we highlight the fading role of nominal government bonds as their expected long-term returns fall into negative territory in developed markets. We instead prefer inflation-protected bonds as inflation risk builds up in coming years. We also view portfolio diversification as key, as return dispersion grows across regions, and within asset classes. On a tactical basis we maintain a modest pro-risk stance overall, and prefer credit to equities, favoring up-in-quality assets that have policy backstops and are higher up the corporate capital structure. We upgrade European equities to overweight, as we see the region as offering the most attractive exposure to any cyclical uptick due to its public health measures and ramped-up policy response. See our full Midyear outlook for the granular changes to our asset views.

Jobless jump
The labor market is one of the key channels through which the coronavirus shock could lead to long-term scarring.
Learn more Learn more

Assets in review
Selected asset performance, 2020 year-to-date and range

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

 

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, June 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 US. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE US. 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 (US , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Measures to contain the virus are gradually being eased in many developed economies. May’s data suggested the worst of the contraction may be behind us, but we see a bumpy restart in coming months. We are tracking the interplay of containment measures and mobility changes on activity as economies have started to reopen. The unprecedented policy response has boosted markets, leaving a potential resurgence of infections and policy implementation as key risks. US Congress is headed for a fiscal cliff as jobless benefits, state support and payroll protection measures are expiring soon.

Week ahead

June 30 - US consumer confidence; China official manufacturing purchasing managers’ index
July 1 - Manufacturing PMI for Japan, China (Caixin), the euro zone and US
July 2 - US nonfarm payrolls
July 3 - Caixin China services PMI

The US job market data will be in focus. Consensus estimates point toward modest pickup in US employment, yet there is a risk of a sizable decline. Markets will closely watch the US COVID-19 case count trend this week and next, to gauge the development of the outbreak and its implication on the restart process of the economy.

Directional views

Six to 12-month tactical views on major global assets from a US dollar perspective, June 2020

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.

Granular views

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

Granular views

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 US 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 details about our investment themes and more in our 2020 Global outlook.

Growth edges up

 

Economies are slowly restarting, but at different paces. We are tracking the evolution of the virus and mobility. The longer it takes for activity to restart, the more cracks might appear in the financial system and productive capacity.

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    • Stringent shutdown measures are gradually being lifted even though the rate of growth in virus cases has picked up in some regions.
    • The nature of the activity rebound will depend on the path of the outbreak, delivery of policy response and potential changes to consumer and corporate behaviors. Success will not just be about restarting the economy and containing the virus – but balancing both objectives.
    • Market implication: We are moderately pro-risk, and express it in an overweight to credit in strategic, long-term portfolios. We prefer Europe among cyclical exposures on a tactical horizon.
Policy Pause

 

The policy revolution was needed to cushion the devastating and deflationary impact of the virus shock. In the medium term, however, the blurring of monetary and fiscal policy could bring about upside inflation risks.

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    • The Federal Reserve built on its “whatever it takes“ approach to helping the economy through the shock and ensuring markets function properly. We could see its balance sheet more than double to just over $10 trillion by year end to support the fiscal response. The US Treasury smashed records by setting out a $3 trillion borrowing plan in its quarterly refunding to fund the response – showing the blurring of lines between monetary and fiscal policy.
    • The Fed has so far steered clear of committing to explicit yield curve control.
    • We are gaining confidence in Europe’s policy response. The European Central Bank’s latest targeted long-term refinancing operation (TLTRO-III) was met with a record €1.3 trillion of demand. The Bank of England boosted its monetary easing by £100 billion, although weekly asset purchases may slow.
    • A German constitutional court ruling threatens the ECB’s independence and could lead to euro area fragmentation in the long run. It’s crucial to have proper guard rails around policy coordination, as we discuss in Policy Revolution.
    • China moved away from setting a GDP growth target for 2020, emphasizing quality of growth over quantity, and announced fiscal stimulus of around 4% of GDP.
    • Central banks have moved from alleviating dysfunctional market pricing and tightening financial conditions to ensuring credit flows to businesses and local governments.
    • We see risks of implementation and policy exhaustion. Next rounds of US fiscal stimulus look harder to achieve because of a return of political polarization after a short window of bipartisanship.
    • Market implication: Coupon income is crucial in an even more yield-starved world, including corporate credit.
Raising resilience

 

Supercharged structural trends are changing the nature of portfolio diversification. Countries and sectors will make a comeback as diversifiers in a more fragmented world, in our view, offering resilience to real economy trends.

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    • 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 – and the coronavirus shock seems to be accelerating this shift.
    • Market implication: We prefer sustainable assets, private markets and deliberate country diversification for strategic portfolios. We have raised our overweight in the quality factor on a tactical horizon, and favor assets with policy backstops.
Jean Boivin
Head – BlackRock Investment Institute
Elga Bartsch
Head of Macro Research – BlackRock Investment Institute
Mike Pyle
Global Chief Investment Strategist – BlackRock Investment Institute
Scott Thiel
Chief Fixed Income Strategist — BlackRock Investment Institute

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