The future is running at us

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.

Our investment themes

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

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.

Inflation risks ahead

Deglobalization and fragmentation
Deglobalization and fragmentation

Rising production costs due to capacity cuts and deglobalization and fragmentation are set to rise globally.

The Fed’s framework

Central banks are fundamentally changing their policy framework with the intent of running inflation above their targets.

Political pressures

The monetary-fiscal policy revolution - a necessary response to the Covid-19 shock - risks greater political constraints on the ability of central banks to lean against inflation.

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.

Our investment views

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.

View details on our asset class views

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.

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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