April 2021 Global Outlook | BlackRock Investment Institute

APRIL 2021 GLOBAL OUTLOOK

A powerful economic restart is underway and our new nominal theme has been playing out, with a hefty jump in inflation expectations but a more muted rise in nominal yields. Against this backdrop, we reiterate our pro-risk stance and refine our tactical asset views.

Investment themes

01

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. Strategic implication: We underweight government bonds amid inflationary pressures in the medium term.

02

Globalization rewired

Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-China world order and a rewiring of global supply chains. Strategic implication: We favor deliberate country diversification and above-benchmark China exposures.

03

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. Strategic implication: We prefer sustainable assets amid a growing societal preference for sustainability.

Global Outlook Asset class views Shifting market drivers

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Pent-up demand powers restart

We are at an uncertain juncture in markets. Investors are grappling with how to interpret unusual growth dynamics and new central bank frameworks. On the first, U.S. activity looks set to restart strongly this year, powered by pent-up demand across income cohorts and sky-high excess savings. Growth forecasts have been catching up, as the chart below shows, but the magnitude of the restart may still be underappreciated.

U.S. Annual GDP forecasts during GFC and Covid-19 shock: This chart shows that U.S. annual GDP growth and forecasts during the Covid-19 shock have been revised higher compared to downward revisions seen during the global financial crisis.

Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute and Federal Reserve, with data from Haver Analytics, April 2021. The charts show the level of U.S. GDP and estimates of GDP over time for the global financial crisis and the Covid-19 shock. Both series are rebased to 100 for the year just prior to the shock – 2007 and 2019 respectively. Estimates are taken from the Fed’s Federal Open Markets Committee (FOMC)’s Summary of Economic Projections published through 2008 on the left and 2020-21 on the right, as indicated by the legends. The level of GDP is derived from the FOMC’s forecasts of GDP growth from the fourth quarter of the preceding year to the fourth quarter of the current year.

This is in stark contrast to the repeat growth disappointments seen after the global financial crisis – and reflects the different nature of this shock. We see it as more akin to a natural disaster followed by a rapid “restart” – rather than a traditional business cycle recession followed by a “recovery.”

This is why a year ago we warned against extrapolating too much from the steep decline in activity. Now the same is true – but in reverse. U.S. growth will likely peak over the summer but the eye-popping data will be transient: the more activity is restarted now, the less there will be to restart later. We see the rest of the world following the U.S. and reopening as vaccine rollouts pick up pace.

New nominal plays out

The second dynamic investors are grappling with is new central bank frameworks. Our new nominal theme helps us navigate this environment. The Federal Reserve is building credibility in its new framework and has set a high bar to change its easy policy stance, even in face of higher realized inflation.

This has yet to be fully digested by markets, in our view. We see markets still underestimating the potential for the Fed to achieve above-target inflation in the medium term as it looks to make up for persistent undershoots in the past. This is why we think the direction of travel for yields is higher. But the overall adjustment will be much more muted than one would have expected in the past based on growth dynamics – and much adjustment has already taken place.

We expect inflation to build steadily over the medium-term as easy monetary policy allows the U.S. economy to run hot. Nominal long-term yields have risen but less than inflation expectations as reflected in breakeven inflation rates. That has kept real yields negative – a positive for risk assets.

Staying moderately pro-risk

The broadening restart – coupled with our belief that this will not translate into significantly higher rates – underpins our pro-risk stance. We remain overweight equities, neutral credit and underweight government bonds on a tactical basis. Yet we have tweaked some of our tactical views given significant moves in market pricing. See the "Asset views" tab above for more.

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Directional views

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

Asset	Strategic view	Tactical view	Commentary
Equities			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			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.
Government bonds			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	-		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		-	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.

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.

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, May 2021

Asset	Tactical view	Commentary
Equities
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.
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		We are underweight Japanese equities. Other Asian economies may be greater beneficiaries of a 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		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		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.
UK		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		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		We are neutral on value despite recent outperformance. 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		We are 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		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		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
U.S. Treasuries		We are underweight U.S. 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		We turn neutral TIPS following 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		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		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		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		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		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		We are overweight EM local debt as its year-to-date underperformance has left valuations more appealing, particularly if U.S. Treasury yields and the U.S. dollar stabilize. We see limited contagion to broader EM from selected country-specific volatility.
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.

Testing the Fed’s new policy framework

Markets are trying to get a handle on the Fed’s post-pandemic reaction function. The disconnect between market pricing and the Fed’s own projections has important implications for asset returns.

Market pricing of U.S. policy rates: This chart shows that the current market pricing of U.S. policy interest rates is at a little over a half percent, below our 2022-2024 estimate of roughly two percent.

Source: BlackRock Investment Institute, Federal Reserve, with data from Refinitiv Datastream, April 2021. Note: The chart shows the U.S. two-year overnight index swap in one years’ time, a pricing of Fed policy rates in the next few years.

Not a taper tantrum redux

The driver’s of this year’s yield rise are very different from 2013’s taper tantrum. Then it was a sharp repricing of the Fed rate path via expected real rates. Now it is more about a higher term premium.

Breakdown of U.S. 10-year Treasury yield drivers: This chart shows that between 2020-2021, term premium has been the main driver of U.S. 10-year Treasury yields. This is in stark contrast to the 2013 taper tantrum, when the breakdown of yields was attributed mostly to the expected real rate.

Source: BlackRock Investment Institute, with data from Haver Analytics, April 2021. Notes: The chart shows breakdowns in the driver of rising 10-year U.S. Treasury yields based on historical market pricing of expected real rates, expected inflation and the term premium, or the premium investors typically demand to hold riskier long-term government bonds. The 2013 taper tantrum period shows the changes in the months after then Fed Chair Ben Bernanke floated the idea of the central bank curbing bond purchases. The 2020-2021 period shows the drivers after the initial Covid-19 shock drove yields to record lows. The term premium is based on a model similar to Andreasen et. al. https://www.frbsf.org/economic-research/files/wp2017-11.pdf (2017).

Market leadership has changed quickly

The sharp reversal of value’s underperformance relative to growth as the cyclical rally accelerated has been a stand-out feature of year-to-date market moves.

Global growth equities relative to value and the U.S. Treasury yield: This chart shows the sharp reversal in global growth equities relative to value and U.S. Treasuries. Total return at the end-April 2021 was just above 16% and the U.S. 10-year Treasury yield came down to roughly 1.5%.

BlackRock Investment Institute, with data from Refinitiv Datastream, April 2021. Note: The orange line shows cumulative MSCI World Growth total return minus MSCI World value. The yellow line shows the yield on the U.S. 10-year Treasury.

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

Global Chief Investment Strategist – BlackRock Investment Institute

Wei Li, Managing Director, is Global Chief Investment Strategist at the BlackRock Investment Institute (BII).

Elga Bartsch

Head of Macro Research, BlackRock Investment Institute

Elga Bartsch, PhD, Managing Director, heads up economic and markets research at the Blackrock Investment Institute (BII). BII provides connectivity between BlackRock's ...

Vivek Paul

Senior Portfolio Strategist

Vivek Paul, FIA, Director, is Senior Portfolio Strategist for the Portfolio Research Group within the Blackrock Investment Institute (BII). The BII leverages BlackRock’s ...

Scott Thiel

Chief Fixed Income Strategist, BlackRock Investment Institute

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 ...

Powerful restart