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2021 GLOBAL OUTLOOK

A new investment order

We have entered a new investment order. The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate across four dimensions: sustainability, inequality, geopolitics and policy support (both government and central bank). We believe this calls for a fundamental rethink of investment portfolios – starting now.

Investment themes

01

The new nominal

We see stronger growth as the restart accelerates and central banks keep interest rates low – even as inflation expectations climb. While this limits the real yield (yield received minus the inflation rate) on government bonds, we believe it will be supportive for equity markets.

02

Globalisation rewired

Covid has accelerated geopolitical transformations such as a bi-polar U.S.-China world order and a remaking of global supply chains. One portfolio implication of this would be to increase diversification across countries, with China taking on more weight than in the past.

03

Turbocharged transformations

The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality, and the dominance of e-commerce at the expense of traditional retail. We prefer sustainable assets amid a growing societal preference for sustainability.

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.

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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.

Meet the authors
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.
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute (BII).
Elga Bartsch
Head of Macro Research
Elga Bartsch, PhD, Managing Director, heads up economic and markets research at the Blackrock Investment Institute (BII).
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Mike Pyle, CFA, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BII
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).

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