A new investment order

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

New playbook needed

We believe the lessons learned from previous business cycles do not apply to the pandemic. We see the shock as more akin to that of a large-scale natural disaster followed by swift economic restart. Early in the crisis, we assessed that the ultimate cumulative economic losses– what matters most for financial markets –  would likely prove to be a fraction of those seen in the wake of the global financial crisis.

This view was conditional on robust policy support to tide households and businesses through the income shock. The early results of Covid-19 vaccine trials give us greater confidence in this framework. They suggest the economic restart can re-accelerate significantly in 2021 as pent-up demand may be unleashed. Markets may be quick to price in a full economic restart given the better visibility on the outlook.

Restart challenges

The U.S. and Europe face challenges in the very near term: A resurgence of virus cases may result in outright economic contraction. Risks of policy fatigue are rising, especially in the U.S., and ongoing policy support is vital to limit any permanent economic scarring. Yet positive vaccine news changes the outlook in that we now know we are building a bridge to somewhere, providing clarity for policymakers, companies and markets about getting to a post-Covid stage.

Portfolio implications

As a result, we favour looking through any near-term market volatility.  We believe equities will do well over the next 6-12 months, and expect increased nuance between sectors, with tech and healthcare poised to benefit from the pandemic’s transformative shifts. The more cyclically geared parts of the market may gain support from the recovery, such as emerging market equities and U.S. small caps. Markets in Asia (Asia ex-Japan equities and Asia fixed income) may benefit from the region’s effective virus response, as will those exposed to Chinese growth.

Central banks appear committed to limit any rises in interest rates even as inflation picks up. Investors won’t be able to rely on lessons from the past to navigate this, with real yields on government bonds being limited while equities may enjoy a stronger tailwind than is typical in periods of rising inflation.

Sustainability is a key component of our views as we see a tectonic shift to sustainable assets playing out over decades. Contrary to past consensus, we expect this shift to help enhance returns.

Directional views

Risk: BlackRock has not considered the suitability of any investment against your individual needs and risk tolerance

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, December 2020

Asset	Strategic view	Tactical view
Equities
We are neutral on equities over the longer-term given increased valuations and a challenging backdrop for earnings and dividend payouts. Tactically, we have upgraded equities as we expect the restart to re-accelerate and rates to stay low. We like quality stocks balanced with selected cyclical exposures.

Credit
We are neutral on credit on a strategic basis because we see investment grade yields offering less compensation for any increase in default risks. We still like high yield for income. On a tactical horizon, we see the economic restart and ongoing policy support helping credit perform, even with yields trading closer to equivalent government bonds and the wind-down of some emergency credit support.

Govt Bonds
The strategic case for holding government bonds has materially diminished with yields closer to perceived lower bounds. Such low rates reduce the asset class’s ability to act as ballast against equity market selloffs. We prefer bonds with a yield linked to inflation (i.e. “real return”) as we see risks of higher inflation in the medium term.

Cash
We are neutral on cash, preferring to fund equities and credit. Holding some cash makes sense, in our view, as a buffer against the risk of supply shocks that could drive both stocks and bonds lower.

Private markets
Non-traditional return streams, including private credit, have the potential to add value and diversification. Our neutral view is based on a starting allocation that is much larger than what most qualified investors hold. Private markets are a complex asset class not suitable for all investors.

Note: Views are from a U.S. dollar perspective, December 2020. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security.

General Disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an of fer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of November 2020 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks.

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