2020 Global Outlook

The future is running at us

We are changing our fixed income views ahead of the consequential U.S. election as the outcome could reinforce our expectations for rising inflation risks.
See our investment views See our investment views

October update

Polls are pointing to an increasing likelihood of a Democratic sweep in the U.S. election, with big implications for markets; the economic restart has reached a difficult juncture; and virus infections are flaring up.

Epidemiological estimates of the true number of cases suggest that the first wave was multiple times bigger than what confirmed cases showed. Rising Covid-19 cases have not dented mobility since July. The absence of a stringent lockdown has helped, but precautionary measures have allowed activity to continue even as cases rise. Now, visibility on a vaccine is helping to explain the strong market performance. The evidence of permanent damage to overall economies is limited so far, but the adjustment to a post-Covid world could be painful for some contact- sensitive sectors if mobility is curtailed for an extended period of time.

Our 2020 investment themes

Activity restart
The activity restart is moving into a more difficult phase just as a flare-up of coronavirus infections prompts tighter restrictions.
Policy revolution
The policy response has helped provide a bridge for disrupted income streams, but fiscal policy fatigue is a risk, especially in the U.S.
Real resilience
We believe countries, sectors and companies will make a comeback as diversifiers in a more fragmented world, offering resilience to real economy trends.

Yet we believe the cumulative GDP shortfall – the key for asset prices – from the Covid-19 shock is likely to be significantly smaller than in the aftermath of the global financial crisis (GFC).

An unprecedented monetary-fiscal policy response is providing a bridge for disrupted income streams, though fiscal support fatigue is a risk. The Federal Reserve is leading major central banks in evolving policy frameworks to explicitly aim for inflation overshoot targets – a desirable move in this environment. But we are concerned about the lack of proper guardrails amid a blurring of boundaries between fiscal and monetary policy. Combined with outcomes from the U.S. election and structural changes accelerated by Covid-19, such as deglobalization, we see a higher inflation regime in the medium term.

In the past, higher inflation has often lead to higher nominal rates. In recent months, bond markets this year have started to price in higher expected inflation, but central banks have indicated they stand ready to cap any rise in government bond yields. We have raised our inflation expectations over the medium term but not our nominal yield expectations as a result. In other words, we see lower real yields ahead. This is why we now underweight most nominal government debt and overweight inflation-linked debt on both a strategic and tactical horizon. Our risk exposure includes a sizable allocation to private markets.

The public health and economic crises are exacerbating entrenched forms of inequality across income levels, ethnicity and countries. Many emerging markets (EMs) are facing health, policy and deglobalization challenges. The pandemic has exposed vulnerabilities of global supply chains and added impetus to geopolitical fragmentation. It has led to a policy revolution that blurs the boundaries between fiscal and monetary action – which could address some of the rising inequalities. And it has put a premium on sustainability, corporate responsibility and resilience of companies, sectors and countries.

These supercharged structural trends will change the nature of portfolio diversification. At BlackRock, we are focusing on creating real resilience for the whole portfolio. This is about ensuring the portfolio is well positioned at a more granular level to underlying themes, including sustainability. The most important action investors need to take today, in our view, is to review their strategic asset allocation to ensure portfolios are resilient to the supercharged trends.

Meet the authors
Philipp Hildebrand
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
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
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
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
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 ...