QUESTION OF THE WEEK

Are risk assets flashing red?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and insights.

    There is broad consensus around a pro-risk stance for 2021 and yet news media are full of references to “stretched valuations". Markets are looking through near-term bad news and are climbing ever higher.

    A key question: To what extent is the economic restart already reflected in the price of risk assets?

      Poll results: Are risk assets flashing red?

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

      Poll results

      The responses to our external poll were nearly split evenly into thirds. Two-thirds of respondents saw the economic restart either fully – or more than fully – priced in.

      Views inside BlackRock, however, were not so equally divided. The bulk of portfolio managers (53%) did not see the economic restart and policy outlook being fully priced in. A third saw it fully reflected in prices and roughly 14% saw valuations running ahead of the economic restart.

      Tech craze 

      Some of our portfolio managers saw investors having rewarded tech and tech-enabled companies by paying a premium for them, partly because their business models have proved resilient. Our Active Equity team noted that it was worth reflecting on the massive structural shifts in consumer preferences that have taken place in a matter of months, such as the rapid take up of e-commerce that saw 10 years of growth compressed into just six months last year.

      Quotation start

      If all you knew about the past 12 months was the strong rally in risk assets – Nasdaq up about 45% over that time – you wouldn’t think the global pandemic is still raging.

      Quotation end
      Jean Boivin Head of BlackRock Investment Institute

      A cautionary tale

      You can’t think about valuations in a vacuum - a note of caution from our Risk & Quantitative Analysis team. They note that equity valuations have only scaled the current heights twice in the past century – both times before major market tops – according to a gauge that measures prices relative to inflation-adjusted 10-year historical earnings. 

      But the key question is whether the compensation investors are getting to take on additional equity risk, after factoring in current low interest rates, is fair. This is why the BlackRock Investment Institute (BII) prefers to gauge valuation by looking at the expected return of equities over the risk-free rate.

      While questions on “stretched valuations” are rife in financial media, BII does not see risk asset valuations as obviously stretched overall, and expects low interest rates and a vaccine led restart to support risk assets over the next six to 12 months.

      For more insights on valuations, read our Global weekly commentary that digs into this topic.

      Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

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