QUESTION OF THE WEEK - SPECIAL EDITION

Which investment theme will play out most?

In this special edition, we explore three debates from the BlackRock Investment Institute’s 2021 Midyear Outlook Forum. Some 100 BlackRock investment professionals gathered at the event, which anchored our 2021 midyear outlook. 

    The economic restart is real and it is broadening out globally, but what comes next?

    BBL open
    Title: 2021 midyear outlook: Looking beyond the restart

    Hero Shot/ID
    Wei Li

    Global Chief Investment Strategist for BlackRock

    Our first theme for the rest of 2021 is what we call the new nominal, where we expect higher inflation in the medium term as a result of a more muted monetary policy response to inflation than in the past.

    We’re turning even more positive on European equities and upgrading Japanese equities to neutral. We are moderating our view on the U.S. equities to neutral.

    Our second theme is China stands out. Chinese assets play a key role in an increasingly bifurcated U.S.-China world and they need to be considered as a stand-alone asset allocations. The quality revolution in China, putting the quality of growth over the quantity of growth makes us tactically neutral on Chinese equities, but strategically overweight.

    Our third theme is the net-zero journey. Our journey to net zero, in terms of carbon emission, has a clear starting point and a destination, but there’s no road map and we see many zig-zags along the way. We’ve overweight, the tech sector, as better positioned for the green transition.

    The bottom line is as the economic restart broadens out, we remain pro-risk, even though the path for risk assets for push higher is getting narrower.

    The economic restart is real and it is broadening out globally, but what comes next?

    BBL open
    Title: 2021 midyear outlook: Looking beyond the restart

    Hero Shot/ID
    Wei Li

    Global Chief Investment Strategist for BlackRock

    Our first theme for the rest of 2021 is what we call the new nominal, where we expect higher inflation in the medium term as a result of a more muted monetary policy response to inflation than in the past.

    We’re turning even more positive on European equities and upgrading Japanese equities to neutral. We are moderating our view on the U.S. equities to neutral.

    Our second theme is China stands out. Chinese assets play a key role in an increasingly bifurcated U.S.-China world and they need to be considered as a stand-alone asset allocations. The quality revolution in China, putting the quality of growth over the quantity of growth makes us tactically neutral on Chinese equities, but strategically overweight.

    Our third theme is the net-zero journey. Our journey to net zero, in terms of carbon emission, has a clear starting point and a destination, but there’s no road map and we see many zig-zags along the way. We’ve overweight, the tech sector, as better positioned for the green transition.

    The bottom line is as the economic restart broadens out, we remain pro-risk, even though the path for risk assets for push higher is getting narrower.

    Poll results

    Markets are at a consequential juncture. There are many potential outcomes as the vaccine rollout and economic restart play out. Which theme do you think will be the strongest driving force post-Covid?


    1. The new nominal  [45.2%]

    2. China stands out  [20.7%]

    3. Journey to net zero  [34.1%]

    Source: Blackrock Investment Institute, with data from SurveyMonkey. Note: Data does not include results from BlackRock social media polls.

    Responses to our public poll showed that nearly half (45%) see the new nominal playing out most over the coming years. This was followed by the journey to net zero at 34%. 

    Besides these three themes, the BlackRock investment community debated three further key market drivers that will help shape the post-Covid world – corporate margins, geopolitics and infrastructure. See below for key points on each one and read our 2021 midyear outlook.

    Corporate margins

    The chart shows that net profit margins are expected to rise across the U.S., Asia ex-Japan, and in Europe.

    Past performance is no guarantee of future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv, June 2021. Notes: The chart shows the trailing net profit margins for Datastream Global U.S., Europe and Asia ex-Japan equity indexes. Dotted lines show 12-month forward aggregate analyst estimates.. Forward looking estimates may not come to pass.

    Markets expect a sharp global rebound in corporate profit margins

    Consensus estimates point to net corporate margins hitting their highest level in over two decades in the U.S. and returning to pre-GFC levels in Europe and Asia. See the Margin recovery chart. 

    Outlook looks more challenging beyond the next couple of quarters

    Input, financing and labor costs are rising amid higher inflation and supply shortages across sectors. And U.S. corporate tax hikes and the push for a global minimum tax are on the table.

    Tech companies, pharma and luxury goods makers to benefit, in our view

    We remain strategically overweight as we see realistic valuations accounting for the expected path of interest rates. We see rising costs key to differentiate across regions, sectors and companies. 

    Labor-intensive industries, such as retail and leisure, are likely to face margin pressures on the back of rising wages, in our view. 

    Quotation start

    For margins to keep grinding higher, we’ll need revenue growth to more than offset rising cost pressures.

    Quotation end
    Kate Moore Head of Thematic Strategy, Global Allocation

    Geopolitics

    The chart shows that net profit margins are expected to rise across the U.S., Asia ex-Japan, and in Europe.

    Source: BlackRock Investment Institute, with data from Refinitiv, July 2021, Notes: We identify specific words related to geopolitical risk in general and to our top risks. We then use text analysis to calculate the frequency of their appearance in the Refinitiv Broker Report and Dow Jones Global Newswire databases. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history. A score of one means the BGRI level is one standard deviation above the five-year average. We weigh recent readings more heavily in calculating the average.

    Geopolitical risk concerns subsided with the new U.S. administration

    Yet we believe it’s worth tracking specific geopolitical risks as any flareups could catch investors off guard, particularly when market attention is low. 

    Top risks: Technology decoupling & U.S.-China strategic competition

    The pandemic exacerbated tensions across nearly all dimensions of U.S.-China relations. Among the potential flashpoints: Taiwan. We do not see a military showdown now but see the risk will increase.

    The U.S. and China are both focused on reducing tech interdependence – even as financial integration deepens. This is why we see a need for dedicated exposures to both poles of global growth. 

    Cyber security is another risk markets may underappreciate

    Attacks on critical infrastructure are increasing in scope, scale & sophistication, and the U.S. is facing an epidemic of “ransomware.” Attacks could cause significant damage & sustained disruption.

    Quotation start

    Cyber has reached an inflection point; it’s not just a national security risk now, but a business and economic one.

    Quotation end
    Tom Donilon Chairman of the BlackRock Investment Institute

    Infrastructure

    The chart shows total infrastructure returns rebased to 2005 having overall increased and rebounded since the pandemic.

    Past performance is not a reliable indicator of current or future results. Sources: BlackRock Investment Institute, with data from Bloomberg, December 2020. Notes: The chart shows total returns rebased to 2005. Private infrastructure returns are represented by the Cambridge Private Market Infrastructure Index. Listed infrastructure returns are represented by the FTSE Developed Core Infrastructure 50/50 Index. Indexes are unmanaged. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest in an index.

    A rebuild of global infrastructure is critical to achieving net zero

    The Paris climate accord underscores global efforts – both public and private – to reorient investments and put this new or refitted infrastructure in place.

    The Biden administration has proposed major infrastructure investments

    Proposals are not only to fund the green transition but also to make up for years of underinvestment in traditional infrastructure such as roads, bridges, rail and ports.

    The switch to renewable energy to require huge investments

    The switch to renewable energy will require multiples more of wind turbines and solar panels. Growth in electric vehicles is reliant on investment in the distribution grid and charging stations. 

    Stretched public finances & a roughly $15 trillion global funding gap1

    Despite funding challenges, we see private capital playing a key role. We see significant opportunities, not only in major advanced economies but in China and Asia-Pacific more broadly. 

    Quotation start

    The energy transition is driven by four Ds: decarbonization, decentralization, digitalization and demographics.

    Quotation end
    Anne Valentine Andrews Global Head of Real Assets, BlackRock Alternative Investors

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