VOOR PROFESSIONELE BELEGGERS

What lies beyond the restart?

14/jun/2021
  • BlackRock

BlackRock’s senior executives and portfolio managers gathered virtually at our midyear outlook forum at a critical juncture in markets – with a pro-risk consensus over the tactical horizon. Beyond the near-term restart, they expressed a wide range of views on topics including growth and inflation, and identified a few key long-term investment themes including the climate transition, China and policy.

Key points

Midyear outlook forum
BlackRock’s senior executives and portfolio managers discussed what lies beyond the restart – and investment implications - at our semi-annual forum.
Market backdrop
US consumer price index (CPI) jumped in May and key drivers appear related to activity restart. Stocks rallied to record highs and bond yields fell.
Fed in focus
The Federal Reserve’s policy meeting will be in focus this week. We expect the Fed to stress the transitory nature of the inflation surge.
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Chart of the week
US GDP growth trend after the global financial crisis and Covid shock

US GDP growth trend after the global financial crisis and Covid shock

Sources: BlackRock Investment Institute, Reuters with data from Haver Analytics, June 2021. Notes: The pink line represents the extrapolation of the five-year growth trend preceding the global financial crisis (GFC). The yellow area represents a range of assumptions for trend growth following the Covid shock. The orange line represents actual US GDP up to the first quarter of 2021 and the median forecast from the second quarter of 2021 to the last quarter of 2022, based on the latest Reuters poll as of May 13, 2021. We plot the log of GDP so that the slope of the line indicates the trend growth rate.

The global economy and markets are at the most consequential moment since our outlook forums started a decade ago. The bounce back from the Covid shock has been remarkably swift, reflecting our view that this is a restart, not a usual business cycle recovery. This is in stark contrast to the global financial crisis (GFC) and the “lost decade” that followed. Median forecasts now point to a period of above-trend growth of the US economy, according to the latest Reuters poll. See the chart above. This is unusual, as typically growth takes time to pick up to trend again after a downturn. The bigger question: What lies beyond? Views among forum participants differed on whether the restart is the start of a broader pickup in animal spirits, the acceleration of trends that boost potential growth, or a return to something more like a typical mid- or late-cycle. Many saw US inflation exceeding the Fed’s target in the medium term – a big turnaround from the tepid inflation expectations of a year earlier. The BlackRock Investment Institute (BII) sees US CPI inflation averaging just under 3% between 2025-2030, and believes this is still underpriced by markets.

Strong consensus emerged among forum participants on some long-term investment themes. These include the transition to a net-zero economy, an enduring policy revolution, opportunities in Chinese assets despite structural US-China tensions, and the key role of technological innovation. Tech will be critical for solving structural problems such as ageing societies and the resulting decline of labor participation; it is also key to our sectoral views on incorporating the effect of climate change – and that of the “green” transition – in our long-term return assumptions. The net-zero transition requires huge investments, changes in business models and innovation. There is no roadmap for such a tectonic shift – one that we believe markets are underappreciating. The transition could create sustained demand for commodities such as copper and lithium that are critical for electrification, but may also exacerbate a near-term supply/demand imbalance in oil, spurring price volatility.

China is key to the net-zero transition. China, the world’s largest greenhouse gas emitter, has pledged to achieve carbon neutrality before 2060 and peak carbon emission by 2030. More broadly, we view China-related assets as core strategic holdings as we believe investors need exposures to China in an increasingly bi-polar US-China world order.

We see our new nominal investment theme – that calls for a more muted response in interest rates to higher inflation than in the past – not only playing out but just getting started. We see central banks, notably the Fed, as likely leaning against sharp long-term yield rises. The upshot: We see a lower path of short-term interest rates compared with our previous expectation and current market pricing – and this has significant implications for our strategic views.

Our strong conviction on these long-term investment themes has helped inform our strategic views. These include a preference for assets that are likely to benefit from the climate transition, Chinese assets as core holdings, and a preference for inflation-linked bonds over nominal bonds. The direction of travel is clear, yet it is crucial to identify nearer-term opportunities along the path between now and then. Over the tactical horizon, we are pro-risk amid the broadening restart. The easy monetary policy and massive fiscal spending have triggered some concerns about asset price bubbles, but we see little evidence to date of systemic financial imbalances arising. We will reflect on the implications of the economic restart on asset classes and update our views in the upcoming midyear global outlook to be released on July 6.

Japan's restart gathers pac
The economic restart is gaining traction in Japan. Read more in our macro insights.
Eyes on inflation

Assets in review
Selected asset performance, 2021 year-to-date and range

Selected asset performance in the past 12 months

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 June 10, 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 US dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI Europe Index, MSCI USA Index, MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, ICE US Dollar Index (DXY), spot gold, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream US 10-year benchmark government bond index.

US consumer prices jumped in May and key drivers appear related to the activity restart. Stocks rallied to record highs and bond yields fell. Economic data have been erratic, and we expect more of the same as economies restart amid pent-up consumer demand and supply shortages. We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Fed faces a very high bar to change its easy monetary policy stance.

Week ahead

June. 15- US retail sales and industrial production
June. 16- Federal Open Market Committee policy meeting; China retail sales
June. 17- US Philly Fed business sentiment
June. 18- Bank of Japan policy decision

Markets will focus on the Fed’s policy meeting this week as investors watch for the central bank’s reaction to strong inflation prints in recent months. We see the volatility in near-term inflation data as a result of the unusual supply and demand dynamics triggered by the economic restart, and expect the Fed to reiterate the transitory nature of the inflation spike and to stand by its new policy framework.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, May2021

Legend Granular

Asset Strategic view Tactical view
Equities Strategic equities - neutral Tactical view - neutral
We are 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, credit, especially investment grade, has come under pressure from tightening spreads, but 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 are 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.

Notes: Views are from a US dollar perspective, April 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, May2021

Legend Granular
Equities

Asset Tactical view
United States United States
We are overweight US equities. We see the tech and healthcare sectors offering exposure to structural growth trends, and US small caps geared to an expected cyclical upswing in 2021.
Europe
Europe
We are neutral European equities. We believe the broad economic restart later in the year will help narrow the performance gap between this market and the rest of the world.
Japan
Japan
We are underweight Japanese equities. Other Asian economies may be greater beneficiaries of a more predictable US trade policy under a Biden administration. A stronger yen amid potential US 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 US 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 been more effective at containing 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.
UK Emerging markets
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.
Value
Value
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 turn neutral min vol. Our regional and sectoral preferences warrant a higher exposure to the factor. Min vol’s underperformance has brought valuations to more reasonable levels in our view.
Quality
Quality
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.
Size
Size
We are overweight the US size factor. We see small- and mid-cap US companies as a key place where exposure to cyclicality may be rewarded amid a vaccine-led recovery.

Fixed income

Asset Tactical view
US Treasuries U.S. Treasuries
We are underweight US Treasuries. The accelerated economic restart has sent yields surging, but we prefer to stay underweight as we expect short-term rates will stay anchored near zero.
Treasury Inflation-Protected Securities Treasury Inflation-Protected Securities
We are neutral TIPS after the sharp rise in inflation expectations since late year. Further increases seem unlikely in the near-term. We still see inflation pressures building over the medium term due to structural reasons.
German bunds
Europe
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 neutral euro peripheral bond markets. 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 US trade policies.
Emerging market - local currency Value
We are overweight EM local debt as its year-to-date underperformance has left valuations more appealing, particularly if US. Treasury yields and the US dollar stabilise. We see limited contagion to broader EM from selected country-specific volatility.
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 US 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.

 


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

Growth edges up

 

We see the US and UK leading the developed world’s economic restart – with the euro area catching up - powered by pent-up demand and sky-high excess savings. The huge growth spurt will be transitory, in our view. This is because a restart is not a recovery: the more activity restarts now, the less there will be to restart later.

    • Our new nominal theme – that nominal yields will be less sensitive to expectations for higher inflation – was confirmed by the Fed’s recent policy meetings. The Fed made it clear that the bar for reassessing its policy rate path was not met and that it was too soon to talk about tapering bond purchases. We believe this clear reaffirmation of its commitment to be well “behind the curve” on inflation has helped the Fed regain control of the narrative – for now.
    • We believe the rise in nominal government bond yields this year is justified and reflects markets awakening to a strong, vaccine-driven activity restart combined with historically large fiscal stimulus.
    • We expect short-term rates will stay anchored near zero, supporting equity valuations. The Fed could be more willing to lean against rising long-term yields than the past, yet the direction of travel over the next few years is clearly towards higher long-term yields. We see important limits on the level of yields the global economy can withstand.
    • Market implication: We favor inflation-linked bonds amid inflationary pressures in the medium term. Tactically we prefer to take risk in equities over credit amid low rates and tight spreads.
Policy Pause

 

Covid-19 has accelerated geopolitical transformations such as a bipolar US-China world order and a rewiring of global supply chains, placing greater weight on resilience.

    • The Biden administration is engaging in strategic competition with China, particularly on technology, and has criticized Beijing on human rights. Pending legislation in the US would direct large-scale investment to meet the China challenge. We see a case for greater exposure to China-related assets for potential returns and diversification – and view them as core strategic holdings that are distinct from EM exposures.
    • We expect persistent inflows to Asian assets as we believe many global investors remain underinvested and China’s weight in global indexes grows. Risks to China-exposed assets include China’s high debt levels and US-China conflicts, but we believe investors are compensated for these risks.
    • Momentum is growing at the G20 for a global minimum tax that would reduce the ability of multinationals to shift profits to low-tax jurisdictions.
    • Market implication: Strategically we favor deliberate country diversification and above-benchmark China exposures. Tactically we like Asia ex-Japan equities, and see UK equities as an inexpensive, cyclical exposure.
Raising resilience

 

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.

    • The pandemic has focused attention on underappreciated sustainability-related factors and supply chain resilience.
    • It has also accelerated “winner takes all” dynamics that have led to the strong performance of a handful of tech giants in recent years. We see tech as having long-term structural tailwinds despite its increased valuations, yet it could face challenges from higher corporate taxes and tighter regulation under a united Democratic government.
    • The pandemic has heightened the focus on inequalities within and across countries due to the varying quality of public health infrastructure – particularly across EMs – and access to healthcare. We see a risk of social unrest.
    • Market implication: Strategically we see returns being driven by climate change impacts, and view developed market equities as an asset class positioned to capture the opportunities from the climate transition. Tactically we favor tech and healthcare as well as selected cyclical exposures.
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Elga Bartsch
Head of Macro Research — BlackRock Investment Institute
Vivek Paul
Senior Portfolio Strategist – BlackRock Investment Institute

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Bronnen: Bloomberg, tenzij anders aangegeven

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