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A cyclical rotation

Key points

A cautious tilt
We favor a cautious tilt into cyclical assets, with expectations for a rebound in global trade and manufacturing activity.
Growth outlook
We see growth stabilizing and gradually picking up over the next six to 12 months thanks in part to easy financial conditions.
Davos forum
This week’s Davos forum will likely shine a light on big structural themes such as the intensifying focus on sustainability.

Markets have greeted the new year with optimism. The signing of a limited “Phase 1” deal between the U.S. and China reinforces our expectation for global trade tensions to take a pause in 2020. Generally positive economic data and an encouraging start to the latest quarterly earnings season also back our call for a potential bounce in risk assets. In equities, we are overweight emerging market (EM) and Japanese equities, and have upgraded the value style factor to neutral.

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Chart of the week
Earnings and return sensitivity to global industrial output, 2000-2019

Earnings and return sensitivity to global industrial output, 2000-2019


Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Refinitiv, MSCI, the Netherlands Bureau for Economic Policy Analysis, and the National Bureau of Economic Research, January 2020. Notes: Each region’s equity market is represented by the respective MSCI index. Sensitivity to global industrial production is calculated by comparing the changes in 12-month forward earnings estimates and equity market total return to the changes in global industrial production on a rolling three-month basis. We used the world industrial production data from the Netherlands Bureau for Economic Policy Analysis and forward earnings based on I/B/E/S estimates in this study, from the start of 2000 to October 2019 excluding recessions.

Cyclical assets have severely underperformed in recent years, including amid a global growth slowdown. We believe a rebound in global trade and capex should pave the way for stronger performance of cyclical assets over a six-to-12 month horizon, even as we see some long-term trends weighing on these assets, such as the structural downshift in China’s growth. We studied the sensitivity of corporate earnings and equity returns to fluctuations in global manufacturing activity over the past two decades in different regions. See the chart above. The conclusion? Earnings estimates – as well as equity returns – in EM and Japan have historically been the most sensitive. This suggests these equity markets may have room for outperformance during a global growth pickup.

Recent data support our expectation for a pickup in growth this year. World trade volumes appear to have stabilized after sharp declines since 2018. China has reported better-than-expected trade data – alongside rebounding industrial profits and improving manufacturing activity. Financial conditions have eased significantly in developed economies since early 2019, and look poised to filter through to support the real economy in the next six to 12 months. Our BlackRock GPS, which gauges where consensus gross domestic product (GDP) forecasts may stand in three months’ time, indicates global growth should be accelerating slightly through the year. We see this environment as positive for cyclical EM assets.

Japanese equities may benefit from the same dynamics – as well as a pause in U.S.-China trade tensions – due to the export-oriented nature of the Japanese economy. A few other factors work in its favor. A weakened Japanese yen – currently at the lowest level against the dollar since mid-2019 – has historically tended to help lift Japanese stocks. We expect the Bank of Japan to stand pat on its ultra-loose monetary policy and the government to launch sizable fiscal stimulus this year, providing further support for the market. An ongoing improvement in corporate governance is another positive. Share buybacks have surged – up 40% in 2019 to a record high of 7 trillion yen (about $64 billion), according to Morgan Stanley. This should help boost return on equity and share performance. Yet most foreign investors are still underweight the market.

We have also upgraded the value style factor to neutral on a tactical basis amid expectations for a modest cyclical upswing in this late-cycle period. We expect a firming in industrial and trade activity – as well as a steepening yield curve – to underpin the factor. The underperformance in recent years – with the drawdown in value now the third worst and the longest in almost 100 years based on the Fama-French data set – also supports our tactical call. Among other factors, we are moderately overweight quality, which includes many global firms that stand to benefit from easing trade tensions.

Bottom line: We favor a cautious tilt into cyclical assets, including Japanese and EM equities. In bonds, we prefer EM and high yield debt. The risks to our view include profit margin erosion and an unexpected slowdown. For now we expect revenue growth to boost corporate earnings even as profit margins decline, but higher costs – from wage increases or supply chain disruptions - may eat into profits.

Wages on the rise
What's the implication of U.S. wage growth?
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Assets in review
Selected asset performance in the past 12 months

Selected asset performance in the past 12 months


Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, January 2020. Notes: The two ends of the bars show the lowest and highest returns over the last 12 months, and the dots represent returns compared to 12 months earlier. 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: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Market backdrop

An escalation in Middle East tensions has spurred a cautious start to the year for risky assets. Abating trade tensions, signs of economic stabilization in China and still accommodative financial conditions have spurred a rebound. We are on the watch for more signs that global manufacturing may be bottoming out. We see the dovish pivot by major central banks as having run its course for now. We expect growth to stabilize and gradually pick up over the next six to 12 months as easier financial conditions start filtering through and sideways protectionist pressures give global trade activity some breathing room. See our macro data dashboard.

Week ahead

Jan. 21-24 – Davos World Economic Forum
Jan. 23 – Japan trade data for December 2019
Jan. 24 – Japan December consumer price index; Japan, euro area, UK and U.S. composite Purchasing Managers’ Index

Global business and political leaders gather this week for the annual Davos meeting. Discussions will likely feature powerful structural trends that are testing limits – and intersecting with the near-term outlook. These include rising inequality and social unrest; deglobalization and fragmentation; an intensifying focus on sustainability (as reflected in BlackRock CEO Larry Fink’s annual letter); and the limited toolkit that central banks have to fight the next downturn. Read our Davos brief.

Directional views
Tactical views on major global assets from a U.S. dollar perspective, December 2019

Directional View

Note: 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.

Granular views
Tactical views on selected assets vs. broad global asset classes by level of conviction, December 2019

Granular View

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.

Read details about our investment themes and more in our 2020 Global outlook.

Growth edges up


We see global economic growth edging higher as easier financial conditions start filtering through.

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    • The growth mix is shifting as the modest pickup is likely to be led by manufacturing, business spending and interest rate-sensitive sectors such as housing.
    • We believe the U.S. and China have strong incentives to hit pause on their trade conflict across 2020, though there may be turbulence along the way. A “Phase 1” limited trade deal in principle between the U.S. and China as well as a revised North American trade pact should allow global trading activity some breathing space.
    • We see China’s economy stabilizing but little appetite among its leadership for large-scale stimulus. Europe and emerging markets should see higher average growth rates as they recover from a weak 2019.
    • The UK Conservative Party’s large election win gives Prime Minister Boris Johnson a mandate to deliver Brexit in January, but a difficult end-2020 deadline looms to negotiate a trade deal with the EU. We expect an extension.
    • Market implication: We maintain a moderate pro-risk stance and see potential for cyclical assets such as Japanese and EM assets to outperform tactically.
Policy pause


We see economic fundamentals driving markets in 2020, and less scope for monetary easing and other policy surprises. The lagged effect of policy easing should start to filter through to economic activity.

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    • The Federal Reserve reaffirmed last week that the bar for further policy easing is high — with no policy action barring a significant growth slowdown or an unwanted tightening in financial conditions.
    • The policy debate is set to zoom in on a potential shift from monetary to fiscal stimulus.
    • Any fiscal support in 2020 is likely to come from outside the U.S.: notably Europe and Japan, as well as EM ex-China. We see the U.S. presidential election overshadowing the U.S. fiscal policy debate in 2020.
    • The bottom line: We see little chance of meaningful fiscal stimulus, but believe even modest shifts toward fiscal easing may have outsized market impact.
    • Market implication: Income streams are crucial in a slow-growth, low-rate world. We like EM and high yield debt.
thinking resilience


The dovish pivot in 2019 pushed bond yields in some developed markets near levels we consider to be their lower bounds. This implies less room for yields to fall during risk asset selloffs.

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    • A weakening or breakdown of the negative correlation between stocks and bonds could also undermine the portfolio ballast role of government bonds.
    • A focus on sustainability can also help make portfolios more resilient, in our view, by reducing exposure to environmental, social and governance (ESG) risks.
    • The U.S. killing of a top Iranian military leader in the Middle East marked an escalation in the U.S.-Iran conflict. The U.S. and Iran have stepped back from direct military confrontation. Attacks on energy infrastructure in the region or disruption in shipping would generate greater market impact, in our view. Generally, we believe markets are underestimating cyber risks. See our geopolitical risk dashboard.
    • Market implication: We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and like inflation-protected securities against inflation risks.
Mike Pyle
Global Chief Investment Strategist
Mike Pyle, CFA, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute ...
Kurt Reiman
Managing Director
Kurt Reiman, Managing Director, is BlackRock's Chief Investment Strategist for Canada and is a member of the BlackRock Investment Institute (BII).
Ben Powell
Managing Director
Ben Powell, CFA Managing Director, is Chief Investment Strategist for APAC within the BlackRock Investment Institute.