2020 Global Outlook
2020 Global Outlook

Deep shock underway

We see the coronavirus shock as akin to a large-scale natural disaster that severely disrupts activity in the near term, but eventually results in an economic recovery.
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April update

Economic activity has ground to a near-halt. Recent stimulus has resulted in an easing of financial conditions but given limited monetary space left, fiscal policy needs to be an explicit part of the coordinated response toolkit. Record plunges in economic activity data underscore the unprecedented contraction in growth. And the rate of increases in virus cases looks to be slowing in many regions as stringent shutdown measures take effect. See the chart below. A key question: Can the measures be lifted without a major second wave of cases? The nature of the economic rebound will hinge on the path of the outbreak, effective delivery of the policy response and potential changes to consumer and corporate behaviors.

Measures have helped slow the spread
Stringency measures and trajectory of the virus spread, 2020

Stringency measures and trajectory of the virus spread, 2020
  • Source

    Sources: BlackRock Investment Institute, with data from the University of Oxford’s COVID-19 government response tracker and Johns Hopkins, April 2020. Data as of April 20, 2020. Notes: The chart on the left maps the University of Oxford’s Stringency index that aims at capturing the severity of each respective government’s response. The index is based on publicly available indicators such as school closures, travel bans and public event cancellations as well as financial indicators such as fiscal or monetary measures. Full details are available here. The chart on the right tracks the number of active cases per capita in respective regions and countries. The data is based on Johns Hopkins’ global tracker available here.

The deliberate freezing of economic activity via stringent lockdown measures to combat the coronavirus pandemic has led to a sharp growth shock. It has also triggered market swings reminiscent of the global financial crisis, including an unprecedented crash in oil futures. Yet we don’t think this is a repeat of 2008. We believe investors should remain level-headed, take a long- term perspective and stay invested.

Our latest analysis shows the near-term impact on growth to be far greater than that of the Global Financial Crisis (GFC) – and the largest contraction since the Great Depression. But the cumulative impact over time may only be a fraction of the GFC, provided policy makers are successful in preventing the shock from morphing into more systemic financial pressures. Overall, the financial system is in much better shape than in 2007. The more prolonged the shutdown – the greater the likelihood that cracks appear, exposing hidden financial vulnerabilities that could lead to more permanent damage. For now, we believe that the bold and broad policy response is limiting this risk and implementation of policy support is key.

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 the degree of policy support.

We recently upgraded our overall view on credit, based on extraordinary measures by central banks that should underpin demand for investment grade and global high yield debt. Overall, we prefer credit over equities given bondholders’ preferential claim on corporate cash flows in a highly uncertain economic environment.

The virus shock and the oil price slump pose particular challenges for emerging markets (EM). The outbreak threatens to overburden weak public health systems in many EM economies, leading to the prospect of prolonged economic damage.

We have turned more cautious on emerging market local debt despite depressed valuations after recent selloffs. Some EMs have allowed their currencies to weaken to help absorb the economic shock, and we see a risk of further currency declines in selected EMs that could wipe out coupon income. We are still overweight equities and credit in Asia ex-Japan, with China gradually restarting its economy and readying more policy support.

Over a longer horizon, several sectors may face profound levels of long-term disruption including air travel, fossil energy, healthcare, retail, and government regulations. The 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.

View our April update in charts

Emerging markets in the time of coronavirus

Emerging economies have been hit hard during the coronavirus outbreak. The latest episode of the BlackRock Bottom Line discusses why we've adjusted our views on emerging market local debt.

  • Transcript

    Emerging markets in the time of coronavirus

    Emerging market activity was the first to plummet when the coronavirus hit the global economy. So, how has this changed our view on emerging markets? Emerging economies have different economic fundamentals – like growth, inflation and unemployment. They also have different fiscal conditions and quality of public health systems. Many emerging market currencies have fallen sharply against the U.S. dollar especially South Africa and Brazil. This is similar to past economic crises, with one big difference: Many emerging economies today are not fighting currency declines to help absorb the economic shock. This comes with risks: Investors could move money out of emerging economies which could make currency declines worse and force central banks to raise interest rates. Economists now see growth modestly contracting in emerging markets in 2020.

    The Bottom Line: We have downgraded emerging market local debt to neutral due to currency concerns. We are still overweight equities and credit in Asia ex-Japan as China gradually restarts its economy and prepare for more policy support.

Our 2020 investment themes

The coronavirus shock is sharper than what we saw in 2008 - but we believe its cumulative hit to growth over time is likely to be lower.
We believe the required policy response includes drastic public health measures to stem the outbreak and implementation.
The valuations of developed market government bonds look stretched in light of our economic outlook, but we still see them providing diversification.
Our investment views
We downgrade emerging market local debt to neutral on the risk that EM policy easing could drive sharper currency declines.
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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 ...