2020 MIDYEAR GLOBAL OUTLOOK

Real resilience

Supercharged structural trends will change the nature of portfolio diversification. Countries and sectors will make a comeback as diversifiers in a more fragmented world, in our view, offering resilience to real economy trends.

 

Going private
Growth in private markets, 2000-2019

Growth in private markets, 2000-2019

Source: BlackRock Investment Institute, with data from Preqin, June 2020. Notes: The bars represent the sum of net asset value of closed-end funds as well as dry powder of funds in these asset classes: private equity and venture capital, real estate, private debt, infrastructure and natural resources. The line shows the size of private markets relative to that of public markets.

View our Midyear Outlook in charts

 

  • Structural shifts are challenging the resilience of portfolios. With the policy revolution pushing yield curves close to their lower bounds, we see government bonds providing less diversification benefits in strategic allocations.
  • Many assets are vulnerable to the physical and regulatory implications of climate change and other sustainability-related risks. The pandemic has sparked concerns about fragile supply chains and companies’ social license to operate, accelerating a trend toward sustainable investing.
  • China and the U.S. are intensifying their strategic rivalry across multiple dimensions, resulting in an increasingly bipolar world. Investors need to balance the investment case for gaining exposure to both poles with possible investment restrictions on each side. Greater geopolitical fragmentation means that portfolio resilience will have to be driven by deliberate diversification across countries and regions.
  • Investors need to embrace uncertainty in this environment. Our methodology for constructing portfolios explicitly takes into account fundamental uncertainty around long-term mean returns. The coronavirus shock only underscores the importance of uncertainty for building portfolio resilience.
  • Private markets, which are not suitable for all investors, offer this potential. Managers have a say in structuring the investments – and can add custom-made resilience as a result. Private markets can give investors exposure to emerging technologies and other real-economy trends that is not available in public markets, in our view. And they are bigger and deeper than ever. See the chart above.

Bottom line: Structural portfolio resilience is much more than just relying on broad asset class correlations in public markets. It’s making sure the portfolio is well positioned for underlying themes.

Strategic implication: We favor sustainable assets, private markets and deliberate country diversification.

Tactical implication: We have increased our overweight in the quality factor and favor assets with policy backstops. 

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 ...