2021 Global Outlook
SEPTEMBER 2021 GLOBAL OUTLOOK

Why we stay pro-risk

The path for further gains in risk assets looks to have narrowed after a long run higher, but we reaffirm our tactical pro-risk stance – supported by a broadening global restart and ongoing negative real interest rates – even as the path for further gains in risk assets looks to have narrowed after a long run higher.

Investment themes

01

The new nominal

The powerful economic restart is broadening, with Europe and other major economies catching up with the U.S. We expect a higher inflation regime in the medium term – with a more muted monetary response than in the past. Tactical implication: We are overweight European equities and inflation-linked bonds, and upgrade EM local debt to overweight.

02

China stands out

China is on a path toward greater state control, with social objectives at times taking primacy over growth. Yet the growth slowdown has hit levels policymakers can no longer ignore and in the near term we expect incremental policy loosening. Tactical implication: We turn moderately positive on Chinese equities, and stay overweight on its debt.

03

Journey to net zero

Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today. Tactical implication: We are overweight the tech sector as we believe it is better positioned for the green transition.

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Narrowing path

Markets have been jittery amid focus on China’s regulatory clampdown and the prospect of the Federal Reserve tapering its asset purchases. We believe the path for further gains in risk assets has narrowed after an extended run higher, warranting a selective approach, but we reaffirm our tactical pro-risk stance. In the context of very small client allocations to Chinese assets, we are dipping our toes in the asset class by shifting our view to a modest overweight. 

Reinforcing the new nominal

The new nominal stands
U.S. policy rate path vs. past cycles

The chart shows how we expect the path of this rate cycle to be slower than previous cycles

Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, Federal Reserve, with data from Refinitiv Datastream , September 2021. Notes: The red dot show the median federal funds rate expectation published by the Federal Open Market Committee, a committee within the Fed that sets the federal funds rate. The lines show past rate hiking cycles since 1994 and our estimates for the path of U.S. interest rates. The paths are shown relative to the point at which the first hike took place, which is indicated by quarter 0. The Fed median dot plot comes from the September 2021 Summary of Economic Projections (SEP). Since the SEP projections show only the end of year forecast for the federal funds rate we reflect the uncertainty by showing end of year dots rather than a continuous line. We believe the Fed will start its next hiking cycle in the first half of 2023.

The Fed has signalled it is gearing to start tapering around the year end. It appears reluctant to admit its inflation mandate has been met, and this reinforces our new nominal theme –or a more muted response to higher inflation from central banks than in the past, a positive for risk assets. See the chart for past rate hike cycles and our estimate. Despite ongoing risk around the fallout from the regulatory clampdown, we are dipping a toe in Chinese equities by moving our tactical view from neutral at midyear to a modest overweight. This call is partly rooted in our expectation for incremental near-term easing via three policy levers –monetary, fiscal and regulatory –with growth slowdown likely having reached a level that policy makers cannot ignore. We see Q4 growth likely dropping to 3% range from Q1’s 18%. We believe the significant repricing –Chinese equities underperforming U.S. peers by more than 30 percentage points so far this year -and a rise in equity risk premia in Chinese equities are overdone, especially with a 6-12 month horizon. Investors are compensated for risk at current valuations in our view, but we favor a quality bias.

Selectively pro-risk

Our strategic view on China already takes into account that the country is unmistakably on a path toward greater state involvement with social and political objectives taking primacy over economic ones –leading to greater risks and the need for a new investment lens. But context is everything: Our allocations to Chinese assets remain orders of magnitude lower than those to developed market assets. To justify currently very small client allocations to China would imply a view that the market will become essentially un-investable despite its growing importance. 

We are also upgrading emerging market (EM) local-currency debt to modestly overweight. We do not see the Fed’s tapering leading to an EM tantrum given the higher real yields and improved external balances. EM local-currency debt also offers attractive valuations and coupon income in a world starved for yield. We prefer EM local-currency debt because of its lower duration than EM dollar debt, in line with the significant underweight to U.S. Treasuries, and the steep local yield curves that bring attractive term premium.

In addition, we believe much of the early tightening cycle in many EM economies is behind us, and this lends support to EM local-currency debt. 

These two modest upgrades don’t mean that we have become more pro-risk tactically. In fact we see a narrowing path for risk assets to push higher, and there could be bouts of volatility along the way as markets are prone to over-reaction after an extended bull run in risk assets. Yet over a 6-12 months horizon we still see broadening restart and the new nominal supporting risk assets. 

We stay overweight on European equities as we see the region continuing to benefit from the broadening restart. We are still underweight U.S. Treasuries, as we see only a gradual rise in yields even with the Fed poised to make a taper announcement in November, and we prefer Treasury Inflation-Protected Securities over nominal bonds for portfolio duration exposure, especially after the recent pullback. We are also underweight global investment grade credit as we see little room for further yield compression. Implementation of asset views will differ across investor types and geographies, depending on objectives, constraints and regulation. 

Directional views

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

Note: Views are from a U.S. dollar perspective, November 2021. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, 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, November 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.

Wide range of potential outcomes

How does the current environment compare with the post-GFC recovery? We are on a very different path now, in our view. Historic fiscal stimulus and innovative monetary policy – the policy revolution – make a repeat of the 10-year bull market in stocks and bonds unlikely. Our base case: the New nominal.

This schematic shows a wide range of potential economic and financial outcomes as a result of the Covid-19 shock. For example, we could see financial instability, the new nominal, the roaring 1920s, or policy tightened too late.

Sources: BlackRock Investment Institute, July 2021. Notes: The schematic shows hypothetical macro and policy outcomes now compared with the sluggish outcome following the GFC. These are our views on the implications for equities and government bonds as of July 2021. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Journey to net-zero

The path to net-zero carbon emissions has a starting point and potential destination – but there is no clear roadmap yet for getting there. Some of the coming changes may be abrupt – and add to supply and demand disruptions among commodities. We see opportunities along the way, with private market financing playing a key role.

The chart shows a gap opening between copper and crude oil spot prices, unlike the near lockstep rise in the 2000s – which is why a commodity “supercycle” is not how we’d view now.

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, July2021. Note: chart shows the spot price of London Metal Exchange (LME) copper and Brent crude oil rebased to 100 at the start of 2000.

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee.
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).
Vivek Paul
Vivek Paul
Senior Portfolio Strategist, BlackRock Investment Institute
Vivek Paul, FIA, Managing Director, is Senior Portfolio Strategist for the Portfolio Research Group within the Blackrock Investment Institute (BII). The BII leverages ...
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 ...
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 ...