GLOBAL WEEKLY COMMENTARY

Why we stay pro-risk

Key points

Tactically pro-risk
We stay tactically pro-risk amid the broadening economic restart, with negative real rates supporting risk assets – as per our new nominal theme.
Market backdrop
The Fed signaled it will start to taper around the year-end. Its reluctance to confirm inflation is meeting its new objective supports our new nominal theme.
Week ahead
U.S. personal income and consumption data will be in focus, while purchasing managers’ index data could shed light on the restart amid the delta spread.

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.

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The new nominal stands

U.S. policy rate path vs. past cycles

The chart shows the median federal funds rate expectations published by the Federal Open Market Committee are lower than rates in previous rate hiking cycles. Our estimates of rates were even lower than the Fed expectations.


Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, Federal Reserve, with data from Refinitiv Datastream , September 2021. Notes: The red dots show the median federal funds rate expectations 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 1999 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 up to start tapering around the end of the year. 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 risks 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.

We believe that the very small index weights and client allocations effectively represent a large structural underweight to the world’s second-largest economy and that this could increase significantly before it became a bullish bet on China. Our strategic view already takes into account that China 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. Currently very small client allocations to Chinese assets would imply a view that China will become essentially un-investable despite its growing importance

We are also shifting our tactical stance on emerging market (EM) local-currency debt to a modest overweight. We do not see the Fed’s tapering leading to an EM tantrum given the higher real yields and improved external balances in EM. 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 nominal yields even with the Fed poised to gear up to start tapering by the end of the year. We prefer Treasury Inflation-Protected Securities over nominal bonds for portfolio duration exposure, especially after the recent pullback. We are underweight global investment grade credit as we see little room for further yield compression. Read our detailed views in our Q4 Global outlook update. Implementation of asset views will differ across investor types and geographies, depending on objectives, constraints and regulation

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The Fed and its inflation mandate
The Fed's reluctance to confirm inflation is meeting its new objective. Read about what this means in our Macro insights.
BlackRock Investment Institute Macro insights

Assets in review

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

The chart shows that Brent crude oil is the best performing asset so far this year among a selected group of assets, while spot gold 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 Sept. 23, 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 USA Index, MSCI Europe Index, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, MSCI Emerging Markets Index, J.P. Morgan EMBI Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index and spot gold.

Market backdrop

The Fed has signaled it will start to taper around the year end. Its reluctance to confirm inflation is meeting its new objective reinforces our new nominal theme. Worries about a default by China Evergrande, a debt-laden property developer, triggered a short-lived risk selloff. We see little contagion risk as we believe Chinese authorities will not allow a disorderly property sector deleveraging that would undermine economic and social stability.

Week ahead

Sept 28  –U.S. consumer confidence
Sept 30 China official manufacturing purchasing managers’ index
Oct 1 –Euro area flash inflation; U.S. ISM manufacturing PMI manufacturing PMI; U.S. personal income and consumer spending, PCE inflation

Market attention this week will be on U.S. consumption and income data, which includes the August PCE inflation rate. Early survey data for September could shed light on the ongoing restart in activity and in particular how much the spread of the delta variant in the U.S. is weighing on activity in the near term.

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Directional views

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

Note: Views are from a U.S. dollar perspective, August 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, September 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

 

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.

    • The powerful restart of economic activity has broadened, with Europe and other major economies catching up with the U.S. We expect a higher inflation regime in the medium term. We see the Fed normalizing policy rates only in 2023 and the European Central Bank staying pat for much longer.
    • The new nominal has largely unfolded in 2021: the rise in long-term yields has been mainly driven by higher market pricing of inflation, with real yields remaining pinned well in negative territory.
    • The Fed has signalled that it is gearing up to start tapering around the end of the year. It appears reluctant to confirm its inflation mandate has been met, and this reinforces our new nominal theme.
    • The ECB has made a significant change to its monetary policy framework by adopting a symmetric inflation target of 2%. We believe this is part of a global trend to relax the constraints in earlier frameworks preventing looser policy.
    • Tactical implication: We are overweight European equities and inflation-linked bonds. We are neutral on U.S. equities. We upgrade EM local-currency debt to modest overweight.​
    • Strategic implication: We remain underweight DM government bonds and prefer equities over credit.
Globalization

 

China is already a distinct pole of global growth. We believe it is time to also treat it as an investment destination separate from EM and DM.

    • Chinese authorities have started loosening policies as growth slows, yet we believe they will maintain the broadly hawkish policy stance over the medium term to stay focused on the quality of the growth. The pace and intensity of the regulatory crackdown on some private industries could moderate.
    • We believe investors should be mindful of ongoing geopolitical tensions, which was underscored by the uncertainty around China’s clampdown on certain industries.
    • Tactical implication: We turn modestly positive on Chinese equities, and maintain an overweight on its debt.​
    • Strategic implication: Given the small benchmark weights and typical client allocation to Chinese assets, allocation would have to increase by multiples before they represent a bullish bet on China, and even more for government bonds.
Turbocharged transformations

 

There is no roadmap for getting to net zero, and we believe markets underappreciate the profound changes coming. The path is unlikely to be a smooth one – and we see this creating opportunities across investment horizons.

    • There is no roadmap for getting to net zero, and we believe markets underappreciate the profound changes coming. The path is unlikely to be a smooth one – and we see this creating opportunities across investment horizons. ​
    • Certain commodities, such as copper and lithium, will likely see increased demand from the drive to net zero. Yet we think it’s important to distinguish between near-term price drivers of some commodities – notably the economic restart – and the long-term transition that will matter to prices.
    • Climate risk is investment risk, and we also see it as a historic investment opportunity. Our long-run return assumptions now reflect the impact of climate change and use sectors as the relevant unit of investment analysis.
    • Tactical implication: We are overweight the tech sector as we believe it is better positioned for the green transition.​
    • Strategic implication: We like DM equities and the tech sector as a way to play the climate transition.​

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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), where she leads its team of investment strategists
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, Managing Director, is Senior Portfolio Strategist for the Portfolio Research Group within the Blackrock Investment Institute (BII). The BII leverages ...