QUESTION OF THE WEEK

How will the Covid-19 response affect portfolios?

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.

Woman looking out of window wearing a face mask (Covid-19 related)

Poll results

The response to Covid-19 has turbocharged debt-financed deficit spending and massive central bank balance sheet expansion. 

How do you see the legacy of the Covid-19 response  affecting your portfolios over the next 1-2 years?

  • It won’t, 2%
  • Will stay pro-risk, 53%
  • Will reduce risk, 13%
  • Will seek relative value, 32%

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

Votes are in! The majority of public responses (53%) saw a sustained appetite for risk assets over the next 1-2 years. Another 32% saw a shift in seeking relative value across securities. Some voted to reduce risk (13%), with only a tiny share expecting that the Covid-19 response won’t matter for portfolios (2%).

In a similar poll, some 80% of BlackRock portfolio managers saw the unprecedented pandemic policy response creating long-term costs, but only 11% cited this as a reason to reduce portfolio risk on a one- to two-year time horizon. Maintaining or adding to a risk-on stance was the most popular response, garnering a third of the votes. Seeking relative value opportunities came a close second at 30%.

Views: Tour de table

One BlackRock fixed income portfolio manager saw the unprecedented fiscal policy response keeping the broadly risk-on environment intact over the medium term. The same was true for the Multi-asset Strategies and Solutions team, which favors a risk-on approach, with a preference for equities where relative valuations remain attractive (Japan). 

Some investors saw lower future growth rates and higher taxation as potential fallouts of the ongoing deficit financing. There is an expectation that the debt burden will be partly tackled with a transfer of wealth through higher taxes on the wealthy. BlackRock’s Fundamental Fixed Income group saw more chance of structurally higher – rather than lower – growth as the current demand-supply dynamics and labor shortages may drive productivity higher, for example through greater automation. 

A portfolio manager in the Global Fixed Income team thought that the vast volumes of money being pumped into the system were weakening the U.S. dollar’s purchasing power relative to financial assets, real assets and – even with some recent moderation – cryptocurrencies.

Eyes on China

The BlackRock Investment Institute flags that China’s policy revolution is very different from the one in the West. Why? The country has its eye on longer-term targets, such as doubling GDP by 2035, and the need for productivity to go up to achieve this. Part of that process is to engineer a more efficient allocation of capital by reforming credit markets and allowing for dispersion in corporates’ credit costs. Read more in the inaugural Asia insights.

Risk-on stance

A risk-on stance echoes the BII’s outlook on markets. The equity risk premium (ERP) – our preferred valuation gauge – captures both the prevailing interest rate backdrop and improving corporate earnings outlook. The ERP remains above its historical median for the U.S. and euro area even after the strong gains since the lows of last March, pointing to the appeal of equities. Credit spreads, meanwhile, are close to their tightest levels relative to history.

 

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

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