2021 Global Outlook

Powerful restart

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

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.


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.


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.

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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.

Download outlook in chart (PDF)

Directional views

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

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

Legend Granular

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.

Meet the authors
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).
Elga Bartsch
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
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
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 ...