GLOBAL WEEKLY COMMENTARY

What lies beyond the restart?

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
U.S. 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.

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.

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Chart of the week

U.S. GDP growth trend after the global financial crisis and Covid shock

Chart of the week: The chart shows that consensus expectation for U.S. growth is above the range of growth trend assumptions.

 

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 U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S.-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 U.S.-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.

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Japan's restart gathers pace
The economic restart is gaining traction in Japan. Read more in our macro insights.
BlackRock Investment Institute Macro insights

Assets in review

Selected asset performance, 2021 year-to-date and range

Chart: The chart shows that Brent crude oil is the best performing asset so far this year among a selected group of assets, while U.S. 10-year Treasury is the worst.

 

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 U.S. 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 U.S. 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 U.S. 10-year benchmark government bond index.

Market backdrop

U.S. 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 – U.S. retail sales and industrial production
June 16 – Federal Open Market Committee policy meeting; China retail sales
June 17 – U.S. 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.

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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.

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

The new normal

 

We see the U.S. 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.
Globalization

 

Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-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 U.S. 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 U.S.-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.
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 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.

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