Stimulus and reopening spark optimism

June 15, 2020

We’re adding risk incrementally
as the economy reawakens.

Markets continued to recover in May, driven by additional stimulus commitments from central banks and governments. Notably, the eurozone and Japan announced new sizable stimulus measures and China has left the door open for more in the coming months. Adding to positive investor sentiment is the sharp reduction in the spread of the virus in developed economies, allowing the reopening process to begin. In contrast, emerging markets (ex-China) are still experiencing a sharp rise in cases and deaths. News flow regarding treatment and vaccine developments have also boosted the market tone.

Economic activity remains weak, but there is building evidence the worst may be behind us. Modest improvements across consumer, employment and manufacturing data are promising and expected to continue in June. Our base case calls for positive growth later this year, but we expect the recovery process to be gradual with fits and starts along the way. Risks to the recovery include a second wave of infection and rising geopolitical risks, particularly escalating U.S.-China tensions.

In the BlackRock Multi-Asset Income Fund, we have been cautious on adding more equity risk given global stocks have rallied near 35% from their March lows and valuations look stretched – especially in cyclical assets which have led the rally of late. This trend may be difficult to sustain absent a stronger-than-expected economic rebound. Therefore, we favor adding to credit where opportunities exist without needing to dip into the lowest quality sectors or regions. That said, within equities, covered calls remain attractive given elevated stock volatility and the potential for upside should stocks continue to rise.

We expect the wide dispersion we’ve seen within asset classes to persist as the economic recovery is not likely to lift all companies and sectors alike. Additionally, the sizeable amounts of near-zero-yielding cash on the sidelines alongside rock-bottom Treasury yields should be supportive of taking some risk in income asset classes, especially for medium to longer-term investors. At the end of the day, we’ve seen an impressive rally and uncertainty remains, but the backdrop has modestly improved; therefore, we are more comfortable incrementally adding risk.

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