QUESTION OF THE WEEK

What will markets focus on in six months?

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.

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    Poll results

    What will the market focus on in six months?

    • Inflation & rates (69%)
    • Risk-on stance lives on (10%)
    • Reopening rally stalls (15%)
    • China growth slows down (6%)

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

     

    Voters to our public poll overwhelmingly (69%) saw inflation and rates dominating market attention by the close of this year. Another 15% saw the reopening rally stalling, 10% of respondents saw appetite for risk assets persisting, and 6% of votes went to “China growth slows down”.

    Almost one third of BlackRock portfolio managers answered rates and inflation (30%) will still be top of mind for markets six months from now. Yet the poll also shows that this group of investors is divided – almost evenly – on how to play this view, underscoring the uncertainty around the inflation debate.

    The great inflation debate

    The BlackRock Systematic Fixed Income team saw the inflation outlook as a big area of uncertainty. Fiscal policy has created an amazing amount of excess demand at the same time as we're experiencing a supply shock. The main question from the team was how persistent will this be? 

    A portfolio manager in the Fundamental Fixed Income team thought the unique nature of both the Covid shock and the unprecedented policy response has made it very hard to get a proper handle on what's going on. For instance, inflation expectations are considerably above where they were even just three months ago. A multi-asset strategy researcher viewed reopening dynamics such as pent-up savings and demand, along with supply chain disruptions, making inflation data noisier. 

    Within our Fundamental Active Equity business, some mulled what they might regret if the world moves into a “roaring 2020s” macro backdrop in six months' time. Not getting more aggressively long emerging market equities now could be one such regret. Emerging markets are going through a particularly weak moment. Six months from now the situation is likely to improve, yet the worry is that EMs will be coming to the party when the party is almost done. 

    Our views on inflation

    The BlackRock Investment Institute (BII) sees inflation outcomes – and not the near-term growth outlook – as key to the Federal Reserve’s rate outlook under its new policy framework. The new nominal regime, which calls for a more muted response of interest rates to higher inflation than in the past, combined with the monetary and fiscal policy response to Covid-19, suggest nominal yields will be less sensitive to inflation expectations.

    BII believes supply constraints and surging demand will likely keep the short-run path more volatile. Inflation pricing has already moved a lot – one reason BII closed its tactical overweight on inflation-linked bonds in its Global Outlook update.

     

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