2021 Midyear outlook

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


Our first theme for the rest of 2021 is what we call the new nominal, whereby we expect higher inflation in the medium term as a result of 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 US equities to neutral.

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

Our third theme is the net zero journey. Our journey to net zero in terms of carbon emissions has a clear starting point and a destination. But there's no roadmap, and we see many zigzags along the way. While overweight, the tech sector is 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 risky assets to push higher is getting narrower.


What comes after the economic restart? We see three themes for markets shaping the remainder of the year. Watch Wei Li, Chief Investment Strategist, explain on BlackRock Bottom Line and read the BlackRock Investment Institute’s Midyear Outlook.

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Akina Fong: Welcome to the China Bond Weather Centre. With ongoing low interests rates in developed markets, we are seeing a drought in the search for yields. Let’s turn to Freddie to see what he thinks.

Thank you, Freddie. Interest rates are expected to remain low for awhile. Alex, where do you think we can seek higher income in this drought environment?

Alex Lee: Let’s look at the satellite image. China’s bond market looks like a potential safe haven from the drought. For investors seeking higher yield at lower volatility, China’s bond market is one of the attractive options as Chinese bonds make up more than 60% of the global fixed income universe yielding more than 2.5%. In addition to higher yield, Chinese bonds are less volatile than other fixed income asset classes. It is worth noting that the China onshore credit market has one of the lowest 5-year annualized volatility. 

Akina: Investors often don’t realize Chinese bond’s resilience to extreme global market conditions. China’s is the world’s second largest bond market with a market size of over US$16 trillion, but its foreign ownership stands at only 3%, leading to low correlation between the onshore China bond market and other global assets. 

Alex: That’s right. Even during thunderstorms or periods of market uncertainty, the China onshore bond market remains resilient. For example, China onshore bonds generated positive returns despite a deep market sell-off during the 2018 US-China trade tensions and the pandemic-induced global market rout in the first quarter of 2020, Chinese bonds can provide investors with an opportunity to diversify risks at a time of market uncertainty, and offering resilience to your portfolio. Although investors often hear about individual credit events in the China credit market, we believe China onshore default risks remain manageable. Having an in-depth understanding of an issuer's creditworthiness is paramount in managing default risk. The default rate in China is expected to stay low at about 2%, lower than emerging markets and the US. We believe the PBoC is committed to stabilizing the market, injecting sizable liquidity when needed to mitigate any systematic credit risks.

Akina: Looks like investing in China bond market will become a major theme. How should we choose among China bonds?

Alex: BlackRock China Bond Fund has the ability to invest tactically across all China bond markets, including the onshore and offshore RMB bond markets, as well as the offshore hard currency China credit market. The Fund was launched in 2011 and has generated positive return every year since then. The Fund also pays an attractive annual dividend yield of 5-6%.

Akina: Thank you Alex. Investors can consider China bonds to deliver potential diversification benefits and added resilience to a global portfolio to help you get through this income drought. 

Unleash the potential of China bonds

In this low for longer interest rate environment across developed markets, income-seeking investors can look outside of core markets and consider China bonds to deliver potential yield opportunities and diversification benefits, and add resilience to a global portfolio.

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