2021 Global Outlook

A new investment order

We have changed our asset class views in light of the prospect of additional U.S. fiscal support, climbing inflation expectations and rising U.S. Treasury yields.
Investment themes

The new nominal

We see a more muted response of government bond yields to stronger growth and higher inflation than in the past, as central banks lean against any sharp yield rises. This should support risk assets. Strategic implication: We favor inflation- linked bonds amid inflationary pressures in the medium term.


Globalization rewired

Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-China world order and a remaking of global supply chains, placing greater weight on resilience – even at the expense of efficiency. Strategic implication: We favor deliberate country diversification and above- benchmark China exposures.


Turbocharged transformations

The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality within and across nations, and the dominance of e-commerce at the expense of traditional retail. Strategic implication: We see developed market equities as best positioned to take advantage of a climate transition.

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Vaccine-led restart

Our new nominal theme – which flags a more muted response in nominal government bond yields to rising inflation than in the past – has played out since last year. Inflation-adjusted yields, or real yields, have fallen further into negative territory as a result. Additional fiscal spending could turbocharge a vaccine-led economic restart later this year – one that we believe may exceed market expectations.

Activity in many services sectors is already compressed with less room to decline further. Businesses have also adapted to an environment of social distancing, allowing operations to continue. Consensus expectations of the size of the shock have been revised down materially, particularly for the euro area. Vaccine rollouts are likely to stoke a sharper-than-anticipated rebound.

A different shock

We see pent-up demand in contact-intense services rebounding sharply once restrictions lift in the U.S. and euro area – as seen in China, and supported by the accumulation in personal savings.

U.S. consumers have built up a savings buffer equivalent to more than 12% of annual consumer spending over the past year, as the chart shows.

Not only is the policy response this time far more overwhelming, but a large part of economic activity will restart on its own once the pandemic is under control, in our view. This is a key difference with the Global financial crisis (GFC). The objective of the current policy response has been different: it is not to stimulate growth, but to provide a bridge to the post-Covid world.

U.S. disposable income vs consumer spending

U.S. disposable income vs consumer spending

Source: BlackRock Investment Institute, Bureau of Economic Analysis, U.S. Treasury Department, Opportunity Insights, Bureau of Labor Statistics, Eurostat, with data from Haver Analytics, February 2021. Notes: The chart shows U.S. nominal household disposable income (orange line) and nominal personal consumer spending (yellow line). Data for January 2021 are forecasts based on data from the Daily Treasury Statement, U.S. Employment Situation Report and weekly card spending data.

Shifting expectations

Policymakers, academics, taxpayers and markets have been surprisingly relaxed about the large increase in debt – also a stark contrast to the aftermath of the GFC, when the focus shifted to austerity.

Record-low debt servicing costs help explain more sanguine attitudes to high public debt levels. Public debt in the U.S. is set to reach a record 135% of GDP, according to IMF forecasts. This is twice as high as in the 1990s, but financing costs are only half what they were then. How long will the tolerance of high debt – and the low-yield regime – last? For now we see the new nominal theme at play: a more muted response in nominal government bond yields to rising inflation.

Central banks have committed to look through above-target inflation for a while. They may find it politically fraught to raise rates, even if inflation starts to look more concerning. The scars from 2013’s “taper tantrum,” against a backdrop of even higher indebtedness, also create inertia. And if a tantrum were to occur, central banks would quickly be forced to lean against it, in our view. This is why we have conviction the new nominal regime will last for some time – and are tactically pro-risk.

Stable and negative real yields support our pro-risk stance

Rising U.S. 10-year yields reflect the repricing higher of inflation expectations. We believe central banks have strong incentives to lean against any rapid rise in nominal yields. Yet we still see gradual increases in yields as markets price in a rapid economic restart supported by fiscal stimulus. We underweight U.S. Treasuries as a result.

U.S. 10-year Treasury yield, breakeven inflation and real yields vs. BlackRock estimate, Feb. 2021

U.S. 10-year Treasury yield, breakeven inflation and real yield vs. BlackRock estimate, Feb. 2021

Source: BlackRock Investment Institute and Refinitiv Datastream, data as of 15 February 2021. Notes: The chart shows the U.S. 10-year Treasury yield and the pricing of Treasury inflation protected securities – the 10-year TIPS yield, or real yield, and the breakeven inflation rate, or the future rate of inflation being priced by markets in TIPS. The chart also shows our 5-year ahead expected values for U.S. 10-year nominal yields using the Bloomberg Barclays U.S. Government bond index as a proxy and our estimates for 10-year average inflation from Dec 2026-2036. Forward looking estimates may not come to pass. 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.

The bottom line

We broaden our tactical pro-risk stance in light of major developments since the publication of our 2021 outlook in December: the vaccine rollout and up to $2.8 trillion of additional U.S. fiscal spending this year. Inflation expectations have risen sharply while real rates are steady in negative territory. We prefer equity over credit and turn underweight government bonds – in line with our strategic views.

Our refreshed asset class views
We update our strategic views on government bonds, credit and equities. Check out our latest insights in our February 2021 Global Outlook in charts.
Our refreshed asset class views

Directional views

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

Asset Strategic view Tactical view
Equities Strategic equities - neutral Tactical view - neutral
We turn overweight equities on a strategic horizon. We see a better outlook for earnings amid moderate valuations. Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indexes. Tactically, we stay overweight equities as we expect the restart to re-accelerate and interest rates to stay low. We tilt toward cyclicality and maintain a bias for quality.
Credit Strategic equities - neutral Tactical view - neutral
We are underweight credit on a strategic basis as valuations are rich and we prefer to take risk in equities. On a tactical horizon, we downgrade credit to neutral following the tightening in spreads, particularly investment grade. We still like high yield for income.
Govt Bonds Strategic equities - neutral Tactical view - neutral
We are strategically underweight nominal government bonds as their ability to act as portfolio ballasts are diminished with yields near lower bounds and rising debt levels may eventually pose risks to the low-rate regime. This is part of why we underweight government debt strategically. We prefer inflation-linked bonds as we see risks of higher inflation in the medium term. We turn underweight duration on a tactical basis as we anticipate gradual increases in nominal yields supported by the economic restart.
Cash Tactical view - neutral                             Tactical view - neutral
We use cash to fund overweight in equities. Holding some cash makes sense, in our view, as a buffer against supply shocks driving both stocks and bonds lower.
Private markets Strategic equities - neutral Tactical view - neutral
We believe 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. Many institutional investors remain underinvested in private markets as they overestimate liquidity risks, in our view. Private markets are a complex asset class not suitable for all investors.

Note: Views are from a U.S. dollar perspective, February 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, February 2021

Legend Granular

Asset Tactical view
United States United States
We are overweight U.S. equities. We see the tech and healthcare sectors offering exposure to structural growth trends, and U.S. small caps geared to an expected cyclical upswing in 2021.
Euro Area Europe
We turn neutral European equities. We believe that there is room for the market to close the valuation gap vs. the rest of the world as the economic restart becomes more entrenched.
We are underweight Japanese equities. Other Asian economies may be greater beneficiaries of more predictable U.S. trade policy under a Biden administration. A stronger yen amid potential U.S. dollar weakness may weigh on Japanese exporters.
Emerging markets Emerging markets
We are overweight EM equities. We see them as principal beneficiaries of a vaccine-led global economic upswing in 2021. Other positives: our expectation of a flat to weaker U.S. dollar and more stable trade policy under a Biden administration.
Asia ex-Japan Asia ex-Japan
We are overweight Asia ex-Japan equities. Many Asian countries have effectively contained the virus – and are further ahead in the economic restart. We see the region’s tech orientation allowing it to benefit from structural growth trends.
We are overweight UK equities. The removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome erode. We also see UK large-caps as a relatively attractive play on the global cyclical recovery as it has lagged peers.
Momentum Momentum
We keep momentum at neutral. The factor has become more exposed to cyclicality, could face challenges in the near term as a resurgence in Covid-19 cases and a slow start to the vaccination efforts create potential for choppy markets.
We are neutral on value despite recent underperformance. The factor could benefit from an accelerated restart, but we believe that many of the cheapest companies – across a range of sectors – face structural challenges.
Minimum volatility Minimum volatility
We are underweight min vol. We expect a cyclical upswing over the next six to 12 months, and min vol has historically lagged in such an environment..
We are overweight quality. We like tech companies with structural tailwinds and see companies with strong balance sheets and cash flows as resilient against a range of outcomes in the pandemic and economy.
We are overweight the U.S. size factor. We see small- and mid-cap U.S. companies as a key place where exposure to cyclicality may be rewarded amid a vaccine-led recovery.

Fixed income

Asset Tactical view
U.S. Treasuries     U.S. Treasuries
We are underweight U.S. Treasuries. We see nominal U.S. yields rising but largely due to a repricing higher of inflation expectations. This leads us to prefer inflation-linked over nominal government bonds.
Treasury Inflation-Protected Securities Treasury Inflation-Protected Securities
We are overweight TIPS. We see potential for higher inflation expectations to get increasingly priced in on the back of structurally accommodative monetary policy and increasing production costs.
German bunds 
We are neutral on bunds. We see the balance of risks shifting back in favor of more monetary policy easing from the European Central Bank as the regional economic rebound shows signs of flagging.
Euro area peripherals Japan
We are closing our overweight to euro peripheral bond markets that we have held since April 2020. Yields have rallied to near record lows and spreads have narrowed. The ECB supports the market but it is not price-agnostic - its purchases have eased as spreads have narrowed.
Global investment grade Global investment grade
We are underweight investment grade credit. We see little room for further yield spread compression and favor more cyclical exposures such as high yield and Asia fixed income.
Global high yield 
Global high yield
We are moderately overweight global high yield. Spreads have narrowed significantly, but we believe the asset class remains an attractive source of income in a yield-starved world.
Emerging market - hard currency Emerging market - hard currency
We are neutral hard-currency EM debt. We expect it to gain support from the vaccine-led global restart and more predictable U.S. trade policies.
Emerging market - local currency Value
We are neutral local-currency EM debt. We see catch-up potential as the asset class has lagged the risk asset recovery. Easy global monetary policy and a stable-to-weaker U.S. dollar should also underpin EM.
Asia fixed income 
Asia fixed income
We are overweight Asia fixed income. We see the asset class as attractively valued. Asian countries have done better in containing the virus and are further ahead in the economic restart.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. 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.


An unprecedented policy response

The fiscal response to the Covid shock is now a multiple of the response after the global financial crisis. Our hypothesis holds: the ultimate cumulative impact on growth is likely to be a fraction of the 2008 crisis. We believe this matters most for financial markets.

An unprecedented policy response

Sources: BlackRock Investment Institute, with data from Haver Analytics, February 2021. Notes: The charts show our estimate of the cumulative GDP loss from the GFC (2008-2009) and our expectation for the Covid-19 (2020-2021) and the discretionary fiscal support for the US and euro area during each period.

Fiscal boost not a market risk - yet

Debt levels have risen to new highs as fiscal support has helped economies bridge the virus shock. Markets do not appear overly concerned, but perceptions and sentiment may shift. The equilibrium is fragile. Debt-to-GDP ratios could still decline over time if real interest rates stay below the trend growth rate – even if deficits increase further.

Fiscal boost not a market risk - yet

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, IMF and OECD using data from Haver Analytics. Note: the left chart shows U.S. government debt and net interest costs. Net interest cost is calculated as the difference between U.S. general government net borrowing and U.S. general government primary deficit, and expressed as a share of nominal GDP. For the period 1990-2000 data are from the OECD, and for 2001 data are from the IMF. For the period 2021-2025 projections are provided by the IMF October 2020 World Economic Outlook. The right chart shows Interest payments are calculated as the difference between U.S. general government net borrowing and U.S. general government primary deficit, and expressed as a share of nominal GDP. The first scenario in red shows hypothetical interest costs assuming that the effective interest rate on the existing debt stock rises quickly to 2.5% and holds there over the next four years. The second scenario shows the hypothetical impact of a more gradual rise to 2.5% by 2025. The green line shows the IMF’s October 2020 projections.

Meet the authors
Philipp Hildebrand
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
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 ...
Elga Bartsch
Elga Bartsch
Head of Macro Research
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 ...
Scott Thiel
Scott Thiel
Chief Fixed Income Strategist
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...