2020 Global Outlook
Coronavirus reshapes our investment themes
The coronavirus shock is set to bring the economy to a near standstill and a sharp contraction in second-quarter growth, but we expect a recovery if policymakers deliver a decisive response. That is starting to happen.
March update
The coronavirus pandemic is set to deliver a sharp and deep economic shock. Market moves are reminiscent of the darkest days of the financial crisis, but we don’t think this is a repeat of 2008. Stringent containment and social distancing policies will bring economic activity to a near standstill, and lead to a sharp contraction in growth for the second quarter. However, provided bold policy actions are taken to bridge households and businesses through the shock, activity should return rapidly with limited permanent economic damage. This includes drastic public health measures to stem the spread of the infection, as well as coordinated monetary and fiscal policies to prevent disruptions that could cause lasting economic damage.
We see encouraging signs from major central banks and governments that such a monetary and fiscal response is starting to take shape. The pledged policy response has been swift – and we expect total fiscal stimulus to be similar in size to that of the global financial crisis but compressed into a shorter timeframe. Recent policies by Australia, Canada and the UK are the type of coordinated monetary and fiscal action that we have flagged a need for in dealing with the next downturn. While the shock is of unknown depth and duration, what we do know is that the containment measures and social distancing mechanically bring economic activity to a halt. The impact on economic activity will likely be sharp – and deep. And virus fears have led to a sharp tightening of financial conditions – and plunge in growth expectations. See the chart below. We see the shock as akin to a large-scale natural disaster that severely disrupts activity for one or two quarters, but eventually results in a sharp economic recovery.
Virus fears are tightening financial conditions
BlackRock U.S. and euro area financial conditions indicators, 2010-2020
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Source
Sources: BlackRock Investment Institute, March 2020. Data as of 12 March 2020. Notes: The chart shows our financial conditions indicators (FCI) for the U.S. and euro area. Our FCIs give a forward view of where our Growth GPS may head and are expressed in GDP terms, based on its historical relationship with our Growth GPS. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass. Read details of the methodology on the BII Macro dashboard.
Markets, in our view, will ultimately settle down if three conditions are met: 1) visibility on the ultimate scale of the coronavirus outbreak and evidence the infection rate has peaked over the long term; 2) deployment of credible and coordinated policy packages; and 3) confidence that financial markets are functioning properly. Once we better understand the scale and impact of the outbreak, the policy response is setting the stage for an eventual – and strong – recovery. We stay neutral on risk assets and believe investors should take a long-term perspective. For some investors this may include rebalancing back toward benchmark weights, as the scale and rapidity of market moves have likely left many portfolios effectively overweight bonds and underweight equities.
We emphasize portfolio resilience through a benchmark allocation to government bonds, quality equities, cash and sustainable investing. We prefer geographies with the most policy space – such as the U.S. and China in both equities and credit, and favor quality exposures. In equities, we have upgraded the U.S. market both because of its quality bias and expected fiscal stimulus. We move to underweight Japanese equities because the outbreak’s impact adds to the earlier economic damage of a sales tax increase. In fixed income, we have reduced Treasury Inflation-Protected Securities (TIPS) to neutral after a huge decline in rates, though we still see value in the long term.
Over a longer horizon, this pandemic adds to the trade tensions in compelling companies to rethink their global manufacturing footprints. This combination of supply shocks could weigh on growth, increase production costs, pressure profit margins and drive up inflation.
3 updated investment themes for 2020
Market volatility has continued and economic growth is now poised to contract in the second quarter. Our latest episode of the BlackRock Bottom Line shares why we have updated our three investment themes for 2020.
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Transcript
With economic growth poised for contraction in the second quarter, our experts at the BlackRock Investment Institute have updated their 2020 investment themes.
Economic activity is coming to a near standstill because of stringent containment and social distancing policies. But we believe activity should return rapidly with little permanent economic damage – as long as coordinated government and central bank actions help businesses and households through the shock.
The sizable policy response is already setting the stage for an eventual – and strong – recovery. We also believe drastic public health measures are required to stem the outbreak. The key: making sure small businesses and households don’t face cash flow crunches that could tip the economy into a crisis.
Recent 2008-like market moves have affirmed our preference for U.S. Treasuries as buffers against stock selloffs. But the sharp drop in Treasury yields also raises the risk of a yield snapback.
We favor sticking to benchmarks and rebalancing into the equity decline. Coupon income from bonds is crucial in a yield-starved world. We still like U.S. Treasuries over lower-yielding peers for portfolio resilience.
Our investment views
We favor rebalancing back toward benchmark weights, as the scale and rapidity of market moves have left many portfolios effectively overweight bonds.
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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 (FMA
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
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 ...
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 BlackRock Investment Institute ...
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 ...
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