GLOBAL WEEKLY COMMENTARY

Three investing lessons of 2021

Key points

Key 2021 lessons
Our key lessons of 2021: Stay anchored to your framework in the unique restart; appreciate the net-zero journey has started; and have courage of conviction.
Omicron market impact
Markets switched to risk-off mode last week as the Omicron virus strain spread globally and the Fed warned of inflation risks and ending asset purchases early.
Week ahead
U.S. CPI data will give investors a read on the strength and drivers of the inflation surge that has prompted the Fed to gradually start normalizing policy.

A new, highly contagious, virus strain could trigger growth downgrades, worsen risk sentiment and have significant sectoral impact. We are concerned about the human toll and expect renewed restrictions on activity. We still favor equities for now, but would change our stance if vaccines or were to prove futile. If they are effective, the strain only delays the restart oftreatments economic activity, and we would lean against any stock market pullbacks. Less growth now means more later.

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It’s a restart, not a recovery

MSCI AC World equity earnings growth estimates, 2014-2021

The chart shows a 52 percent jump in earnings growth estimates for 2021.

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, December 2021. Notes: chart shows the path of aggregate analyst earnings growth estimates for each year since 2015.

2021 has been marked by a confluence of events that have no historical parallel: a unique growth surge, a supply-driven spike in inflation and new central bank frameworks that are stress-tested in real time. Our anchor to interpret this macro environment has been that normal business cycle logic does not apply. The COVID-19 shock was more akin to a natural disaster, followed by a powerful restart of economic activity. This restart is nothing like the long, grinding recovery following the 2008-2009 financial crisis. It’s more like the world turned the lights back on. Economic activity surged, corporate profits rebounded at an astonishing pace in the restart, and developed market (DM) equities ripped. The chart shows how analysts have scrambled to upgrade their earnings forecasts to a 52% jump in 2021 (the red line). We had long warned of higher inflation after decades of disinflation. Inflation is here now. It’s being driven by supply bottlenecks coupled with unusually strong household spending on goods, rather than services. We expect it to settle at higher levels than pre-COVID even as pressures from supply bottlenecks ease. In the past, central banks would already have started to raise policy rates, and bond yields would have spiraled upward. Not this time.

Many central banks were content to let inflation run higher, and bond yields moved up only modestly relative to the inflation picture. The New nominal theme helped foretell this unusually muted response to rising inflation, and was the compass that has guided us throughout the year. The Fed last week belatedly acknowledged inflation risks, and we expect it to start raising rates next year. That’s a big change, but what matters are the rate trajectory and destination. We don’t see rates going as high as they would have historically in the next phase of the New nominal.

The second investing lesson of 2021: the transition to a more sustainable world is happening now, not at some distant point in the future. First, surging fossil fuel prices in 2021 have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way leading to growth and inflation volatility. But we think inflation pressures would be even more acute and growth lower in case of a disorderly transition or no-climate-action scenario. Second, the tectonic shift toward sustainable investing is already playing out, and we believe this will give sustainable assets a return advantage for years to come. Climate-driven repricing has already started, we believe, with carbon-efficient sectors able to lower their cost of capital. Lastly, carbon-heavy companies are not waiting for new climate policies but are changing their business models now, opening up selected investment opportunities.

Our third lesson of 2021 is having courage of conviction. Our macro framework – the New nominal playing out in the restart – kept us positive on equities and underweight government bonds throughout the year. But we did not put enough risk behind our view in hindsight, even considering this has been a tricky environment where things can change quickly. Having courage of conviction is not about adding risk per se, it is also needed when your framework tells you it’s time to pull back on risk-taking. The speed and magnitude of some market moves also surprised us. An example: the swings in 10-year U.S. Treasury yields as different market narratives on growth, inflation and the virus took hold in quick succession.

Where does all of this leave us heading into 2022? We are still overweight equities even as the Omicron virus strain and the Fed’s catching up to inflation reality have hurt risk sentiment. We expect new virus variants to delay, but not derail, the restart and see policy rates rising only modestly in the New nominal’s next phase. Our 2022 Global outlook will lay out the full picture next week, including refreshed granular views for tactical and strategic asset allocation.

A strong U.S. consumer
U.S. consumer spending strengthened in October and stands above its pre-Covid peak. Will the emergence of Omicron knock back spending? Read our macro insights.
BlackRock Investment Institute Macro insights

Assets in review

Selected asset performance, 2021 year-to-date and range

The chart shows that Brent crude oil is the best performing asset so far this year among a selected group of assets, while Gold is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of Dec. 3, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI USA Index, MSCI Europe Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, spot gold, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark government bond

Market backdrop

Markets suffered a risk-off bout as the Omicron virus strain spread, and Fed chair Jerome Powell warned of inflation risks in the restart and indicated the Fed may wrap up its asset purchases earlier than planned. We expect the Fed’s interpretation of its employment objective to set the timing of the kick-off on rates and their pace. We see inflation settling at a level higher than pre-COVID even as pressures from supply bottlenecks ease, as we expect a muted policy response to inflation.

Week ahead

Dec. 7 – U.S. and China trade data
Dec. 9 China PPI and CPI
Dec. 10U.S. CPI and University of Michigan sentiment; UK GDP estimates; China money and credit data

U.S. inflation data are the key focus this week, especially after the Fed has caught up to inflation reality and warned of inflation risks last week. The Fed’s inflation target has been met, so now the key is how the central bank will interpret the other side of its mandate – full employment. The timing and trajectory of rate rises will depend on this. We see the rate path as historically shallow. U.S. and China trade data may give a read on how fast supply-demand imbalances are dissolving.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, December 2021

Note: Views are from a U.S. dollar perspective, December 2021. 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 funds, strategy or security.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2021

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Source: BlackRock Investment Institute Notes: Views are from a U.S. dollar perspective as of December 2021. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

 

Read details about our investment themes and more in our 2021 Global outlook.

The new normal

 

Inflation is being driven by the unusual restart dynamics of extraordinary demand bumping up against supply bottlenecks. We expect many supply-demand imbalances to resolve next year. We see inflation as persistent into 2022, moderating from today’s elevated levels to settle at higher levels than before COVID.

    • The policy response to rising inflation isn’t uniform. The Fed and the ECB are more tolerant of inflation, even as the Fed has started to warn of inflation risks. Other developed market central banks have signaled policy rate paths with steeper initial increases.
    • The Fed has started tapering bond purchases by $15 billion a month and indicated it may speed up this timeline. The central bank has achieved its new inflation goal to make up for past misses; the key now is how it interprets its more ambitious full employment mandate.
    • We expect the Fed to start raising interest rates next year – if not as soon as the market pricing. But what matters is the policy rate trajectory, not just the first hike. We expect the most muted policy response to inflation in decades.
    • Tactical implication: We prefer equities and inflation-linked bonds, and are underweight U.S. Treasury bonds.​
    • Strategic implication: We are underweight DM government bonds and prefer equities over credit.
Globalization

 

China has emphasized social objectives and quality growth over the quantity of growth in a series of regulatory crackdowns that have spooked some investors. Yet a growth slowdown has hit levels policymakers can no longer ignore, and we expect to see incremental loosening across three pillars - monetary, fiscal and regulatory.

    • We believe investors should be mindful of the ongoing U.S.-China strategic competition, which was underscored by the uncertainty around China’s clampdown on certain industries.
    • Tactical implication: We are modestly positive on Chinese equities and are overweight government bonds.​
    • Strategic implication: We are underweight DM government bonds and prefer equities over credit.
Turbocharged transformations

 

Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today. The net-zero journey is not just a 2050 story, it's a now story.

    • Sustainability cuts across multiple dimensions: the outlook for inflation, geopolitics and policy. The green transition comes with costs, yet the economic outlook is unambiguously brighter than a scenario of no climate action.
    • Risks around a disorderly transition are high – particularly if execution fails to match governments’ ambitions to cut emissions. Policy remains the main tool. Some carbon-heavy companies already are changing their business models, independent of regulatory and political outcomes, creating potential investment opportunities.
    • Risks around a disorderly transition are high – particularly if execution fails to match governments’ ambitions to cut emissions. Policy remains the main tool. Some carbon-heavy companies already are changing their business models, independent of regulatory and political outcomes, creating potential investment opportunities.
    • Commodities such as copper and lithium will likely see increased demand from the drive to net zero. It’s important to distinguish between near-term drivers of commodities prices – the economic restart – and the long-term transition.
    • Tactical implication: We see opportunities in companies rapidly adapting their business models for net zero.​
    • Strategic implication: We like DM equities and the tech sector as beneficiaries of the climate transition.​

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Jean Boivin
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute (BII). The institute leverages BlackRock’s expertise and produces proprietary ...
Wei Li
Wei Li
Global Chief Investment Strategist - BlackRock Investment Institute
Wei Li, Managing Director, is Global Chief Investment Strategist at the BlackRock Investment Institute (BII), where she leads its team of investment strategists
Elga Bartsch
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Elga Bartsch, Managing Director, is Head of Macro Research of the BlackRock Investment Institute. Elga heads up economic and markets research of the Blackrock Investment ...
Beata Harasim
Beata Harasim
Senior Investment Strategist, BlackRock Investment Institute
Beata Harasim, Director, is a Senior Investment Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). She is responsible for developing ...

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