2020 Global Outlook
SEP 2020 GLOBAL OUTLOOK

The future is running at us

The improving macro backdrop, a strong stock market rally and rising volatility leave us moderately pro-risk.

Investment themes

01

Activity restart

Evidence of permanent damage is limited so far for economies as a whole. Yet the adjustment to a post-Covid world could be painful for some contact-sensitive sectors.

02

Policy revolution

Historic policy actions, the Federal Reserve’s new inflation-targeting framework, and accelerated structural changes are set to heighten inflation risks in the medium term.

03

Real resilience

Supercharged structural trends will change the nature of portfolio diversification. Countries and companies will return as diversifiers in a more fragmented world.

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Markets rallied

Markets have rallied sharply from their virus lows, driven by the policy revolution and economic restart. Tighter valuations increase the risk of further market volatility, particularly ahead of the divisive U.S. elections. Against this backdrop we stay moderately pro-risk on a tactical basis, with a preference for credit.

The activity restart has broadened. Yet it is moving at different speeds between countries, driven by differences in dealing with virus dynamics. The lower incidence of new deaths partly explains the relatively muted market response to a renewed rise in infections. The timeline for a vaccine has surprised to the upside following accelerated efforts worldwide. Yet immunization is not a panacea for the economy and a recovery to pre-Covid levels will take time.

Historic policy action

An unprecedented joint monetary-fiscal policy response is providing a bridge for disrupted income streams. Fiscal stimulus fatigue is becoming a risk – especially in the U.S. – even as Europe has stepped up its fiscal support. The Fed’s new monetary policy framework is set to have significant implications for inflation outcomes as it allows for inflation overshoots and doesn’t worry about labor markets overheating. Combined with structural changes accelerated by Covid-19, such as deglobalization, we see a higher inflation regime in the medium term.

The Global Outlook in a snapshot

The coronavirus shock has caused us to reshape our 3 investment themes for 2020. On the latest episode of the BlackRock Bottom Line, Chief Investment Strategist Mike Pyle discusses why.

  • We had for a long time been following trends like deglobalization, the policy revolution between monetary and fiscal coordination, inequality, sustainability. These were all tectonic structural changes that we expected to play out for investors over years and even the next decade or more.

    The coronavirus shock has brought it forward in time to today.

    Title: 2020 midyear outlook: The future is running at us

    Mike Pyle

    Global Chief Investment Strategist

    We’ve updated our three investment themes for 2020.

    Activity restart goes to the coronavirus shock itself. First, we think that the cumulative output losses as result of this shock over a period of years are going to end up being less than what we saw in the global financial crisis 12 years ago. Secondly, economies now are in the phase of restarting economic activity and that’s going to happen in different ways.

    The unprecedented policy response has been an important part of why markets have rebounded so quickly from their March lows. The next steps in the policy revolution are to avoid exiting from policy support too quickly before the shock has passed. And to ensure that a set of guardrails are in place to manage that coordination over the long term.

    Traditionally we think of resilience in portfolios as a financial concept. We think that importantly, getting that resilience is going to be about capturing and balancing the transformations at work in the real economy. Climate risk is shaping our environment, it’s also going to shape portfolios. Think about things like deglobalization, building portfolios that are geographically-balanced or resilient in the face of a more delinked world is going to be vital as well.

    The bottom line is the future is running at us. We think there are an important set of investment implications over both the longer strategic horizon as well as the shorter tactical horizon. Why we’ve maintained a pro-risk orientation, in particular, preferring credit over equities as a place to take that risk. We continue to have a strong preference to be up in quality, whether that’s the quality factor or places like investment grade credit.

Coronavirus shock

The public health and economic crises are exacerbating entrenched forms of inequality across income levels, ethnicity and countries. Many emerging markets (EMs) are facing health, policy and deglobalization challenges. The pandemic has exposed vulnerabilities of global supply chains and added impetus to geopolitical fragmentation. It has led to a policy revolution that blurs the boundaries between fiscal and monetary action – which could address some of the rising inequalities. And it has put a premium on sustainability, corporate responsibility and resilience of companies, sectors and countries.

Market sentiment has been driven by the pandemic’s near-term evolution and the policy response, but these structural limits are transforming the investment landscape and will be significant to investment outcomes. In other words, the future is now.

Portfolio insights

At BlackRock, we are focusing on creating real resilience for the whole portfolio. This goes beyond using financial resilience to build a better blend of returns - it’s about ensuring the portfolio is well positioned at a more granular level to underlying themes, including sustainability. The most important action investors need to take today, in our view, is to review their strategic asset allocation to ensure portfolios are resilient to the supercharged trends. We emphasize three strategic calls. First, the policy revolution combined with the risk of supply shocks, raises the potential for higher inflation in the medium term and challenges the role of nominal government bonds as ballast over a strategic horizon. Second, the pandemic has accelerated a tectonic shift toward sustainability. Third, deglobalization and fragmentation call for a focus on real resilience: diversifying across companies, sectors and countries that are positioned well for these trends. Historic policy action

Read our Midyear report (PDF)

Preparing for higher inflation

Inflation is still missing in action after more than a decade of monetary policy stimulus and ever-expanding central bank balance sheets. Why, then, would inflation become an important investment theme over the next five years, or indeed, ever again? Because three new forces are at play.

An unprecedented policy response

The fiscal response to the Covid shock is now a multiple of the response after the global financial crisis. Our hypothesis holds: the cumulative impact on growth is likely to be a fraction of the 2008 crisis. We believe this matters most for financial markets.

Estimate of Covid-19 shock and discretionary fiscal support compared vs the GFC, Feb 2021

Forward-looking estimates may not come to pass. Sources: BlackRock Investment Institute and the Federal Reserve with data from Refinitiv Datastream, November 2020. Notes: The chart shows market pricing of expected average inflation over the coming five-year period. We show it using the five-year/five-year inflation swap which is a measure of market expectation of inflation over five years, starting in five years' time. In the chart, the line is shifted forward five years. The orange and green dots show our current estimate of average U.S. CPI and euro area inflation for the same five-year period of 2025-2030.

 

Strategic implication: We are underweight normal government bonds and like inflation-linked bonds.

Tactical implication: We like high yield and see scope for spreads to tighten further as the economic recovery gathers pace. We believe U.S. stocks are vulnerable to fading fiscal stimulus and unwinds of crowded positions.

Vivek Paul
Vivek Paul
Senior Portfolio Strategist, BlackRock Investment Institute
Vivek Paul, FIA, Managing Director, is Senior Portfolio Strategist for the Portfolio Research Group within the Blackrock Investment Institute (BII). The BII leverages ...

Developed market government bonds in portfolios are challenged; with yields near effective lower bounds and central banks limiting yield rises even as growth picks up, we believe they will be less effective as portfolio diversifiers. Real yields look to be headed lower – one reason why we favor inflation-linked securities on a strategic basis.

Importantly, we believe this new nominal of constrained nominal bond yields will support risk assets. As a result, we are tactically more pro-risk and maintain a higher strategic allocation to equities than if higher inflation were to have its typical impact on nominal yields.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, September 2020

Asset Strategic view Tactical view
Equities Strategic equities - neutral Tactical view - neutral
We are neutral on equities on a strategic horizon given increased valuations and a challenging backdrop for earnings and dividend payouts. We move to a modest underweight in DM equities and tilt toward EM equities. Tactically, we are also neutral on equities overall. We like the quality factor for its resilience and favor Europe among cyclical exposures.
Credit Strategic equities - neutral       Tactical view - neutral
We are neutral on credit on a strategic basis because we see investment grade (IG) spreads offering less compensation for any increase in default risks. We still like high yield for income. On a tactical horizon, we strongly prefer high yield for its income and more room for spread tightening. We are neutral on IG and underweight emerging market debt.
Govt Bonds Strategic equities - neutral Tactical view - neutral
The strategic case for holding nominal government bonds has materially diminished with yields closer to perceived lower bounds. Such low rates reduce the asset class’s ability to act as ballast against equity market selloffs. We prefer inflation-linked bonds as we see risks of higher inflation in the medium term. On a tactical basis, we keep duration at neutral as unprecedented policy accommodation suppresses yields.
Cash Tactical view - neutral                             Tactical view - neutral
We are neutral on cash. Holding some cash makes sense, in our view, as a buffer against supply shocks that could drive both stocks and bonds lower.
Private markets Strategic equities - neutral Tactical view - neutral
Non-traditional return streams, including private credit, have the potential to add value and diversification. Many institutional investors remain underinvested in private markets as they overestimate liquidity risks, in our view. Private assets reflect a diverse array of exposures but valuations and inherent uncertainties of some private assets keep us neutral overall.

Note: Views are from a U.S. dollar perspective, September 2020. 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, September 2020

Legend Granular
Equities

Asset Tactical view
United States United States
We are neutral on U.S. equities. Risks of fading fiscal stimulus and an extended epidemic are threatening to derail the market’s strong run. Renewed U.S.-China tensions and a divisive election also weigh.
Europe
Europe
We are overweight European equities. The region is exposed to a cyclical upside as the economy restarts, against a backdrop of solid public health measures and a galvanizing policy response.
Japan
Japan
We keep Japanese equities at neutral. We see strong fiscal policy and public health measures allowing for rapid normalization.
Emerging markets Emerging markets
We are underweight emerging market equities. We are concerned about the pandemic’s spread and see less room or willingness for policy measures to cushion the impact in many – but not all – countries.
Asia ex-Japan Asia ex-Japan
We hold Asia ex-Japan equities at neutral. Renewed U.S.-China tension is a risk. China’s goal to balance growth with financial stability has led to relatively muted policy measures to cushion the virus fallout.
Momentum Momentum
We keep momentum at neutral. The sectoral composition of the factor provides exposure to both growth (tech) and defensive stocks (pharma). Yet momentum’s high concentration poses risks as recovery takes hold.
Value
Value
We are neutral on value. We see the ongoing restart of economies likely benefiting cyclical assets and potentially helping value stage a rebound after a long stretch of underperformance.
Minimum volatility Minimum volatility
We hold min vol at neutral. The restart of economies may benefit cyclical assets and reduce the need for defensive exposures.
Quality
Quality
We keep our strong overweight on quality. We see it as the most resilient exposure against a range of outcomes in terms of developments in the pandemic and economy.

Fixed income

Asset Tactical view
U.S. Treasuries      U.S. Treasuries
We downgrade U.S. Treasuries to underweight. The potential for fiscal spending – particularly in a Democratic sweep election outcome – could spur higher yields and a steeper yield curve.
Treasury Inflation-Protected Securities Treasury Inflation-Protected Securities
We upgrade TIPS to overweight. We see potential for higher inflation expectations to get increasingly priced in on the back of loose monetary policy, greater fiscal stimulus and increasing production costs.
German bunds 
    Europe
We upgrade bunds to neutral. We see the balance of risks shifting back in favor of more monetary policy easing from the European Central Bank as the regional economic rebound shows signs of flagging.
Euro area peripherals Japan
We are overweight euro area peripheral government bonds despite recent outperformance.  We see further rate compression due to stepped-up quantitative easing by the European Central Bank and other policy actions.
Global investment grade Global investment grade
We hold investment grade credit at neutral. We see little room for further yield spread compression, as we see deeper rate cuts and more asset purchases as unlikely as policy response. Central bank asset purchases and a broadly stable rates backdrop still are supportive.
Global high yield 
Global high yield
We keep our strong overweight on high yield. We see the very high implied default rates as overly pessimistic, and high yield remains an attractive source of income in a yield-starved world.
Emerging market - hard currency Emerging market - hard currency
We are underweight hard-currency EM debt due to the pandemic’s spread, heavy exposure to energy exporters and limited policy space in some emerging economies. Default risks may be underpriced.
Emerging market - local currency Value
We are still underweight local-currency EM debt. We see many EM countries as having insufficient capacity to rein in the virus spread and limited policy space to cushion the shock from the pandemic.
Asia fixed income  
Asia fixed income
We are neutral on Asia fixed income. The pandemic’s containment in many countries and low energy exposure are positives. Renewed U.S.-China tensions and China’s relatively muted policy fallout are risks.

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.

Meet the authors
Philipp Hildebrand
Philipp Hildebrand
Vice Chairman of BlackRock
Jean Boivin
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Alex Brazier
Deputy Head of BlackRock Investment Institute
Vivek Paul
Vivek Paul
Senior Portfolio Strategist, BlackRock Investment Institute

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