Mike Pyle, Global Chief Investment Strategist, together with Elsa Bartsch, Head of Macro Research, Ben Powell, Chief Investment Strategist for APAC and Vivek paul, Senior Portfolio Strategist, all part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
China’s economy – the first to enter lockdowns and the first to emerge from them – is restarting. We see the economy likely returning to near-trend growth by late 2020, supported by policy stimulus, especially on the monetary front. China’s economic restart – along with that in East Asia more broadly – underpins our modest tactical overweight in equities and credit in Asia outside Japan.
This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: The coronavirus shock is reinforcing structural trends and introducing new ones, such as the policy revolution, surging sustainability wave and accelerating deglobalization. In many ways, the future is arriving fast. This has led us to change our long-term return expectations – and shift our strategic asset class preferences away from nominal government bonds and toward credit.
The unprecedented nature of the coronavirus shock makes alternative data sources more important than ever to sniff out emerging economic trends that official data may be slow to capture. BlackRock’s Systematic Active Equity (SAE) team has been using big data analysis to track the economic recovery as well as policy signals. One such example is the daily usage of Chinese mobile apps that help facilitate activities such as ride sharing, job hunting and travel bookings. These metrics have rebounded after a sharp dip in late January when lockdown measures were imposed, yet mostly remain below pre-virus levels. See the chart above. Job and housing related app usage is the exception, reflecting a spike in unemployment and pent-up demand. Such trends may preview how the recovery could play out across sectors elsewhere, although China’s experience is no clear roadmap for developed economies that were hit by the virus later and have undertaken different public health approaches.
We see the Chinese government’s recent economic policy actions as lending further support for the restart. The Chinese government unveiled some notable policy moves at the recent annual session of the National People’s Congress, the country’s top legislature. A shift in tone on monetary policy – potentially opening the spigot for increased credit growth– is particularly significant. It adds to fiscal stimulus that so far hasn’t been overwhelming, in our view. The government has moved away from setting an explicit 2020 growth target for gross domestic product (GDP), and is focusing on social issues including job creation as part of an ongoing effort to balance economic growth with financial and social stability. Already, industrial profits and revenues for April recovered sharply on an annual and sequential basis. Together with other positive survey data, this points to a potential strong upturn in economic growth in the second quarter.
One risk to China’s restart – and the world’s – is further deterioration in U.S.-China relations, after the pandemic has brought them to their lowest point in decades. Whatever goodwill came from the Phase 1 trade agreement has now been lost amid mutual recriminations, China’s steps to enhance its global position and a bipartisan re-assessment of the China relationship, made more pointed by the U.S. election year. Potential flashpoints include trade commitments, technology and investment restrictions and policies toward Hong Kong. A decoupling between the two countries in sensitive industries such as technology is accelerating.
The global economy is likely to have two engines of growth in the years ahead: The U.S. and Asia, centered in China. Strategic portfolios will want allocations to both regions. The U.S.-China decoupling likely only adds to this investment case — with exposures across the two regions adding diversification. For example, government bonds from the region offer higher expected returns just as developed market government bond yields have hit record lows. This is true over the tactical horizon as well, and we are overweight Asia ex-Japan equities and credit. Many Asian countries have demonstrated their ability to curb the virus spread so far, and look poised for a strong economic restart. We are watching U.S.-China tensions closely as a key risk to this view.
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, May 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent 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: 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.
Measures to contain the virus are gradually being eased in many developed economies. May’s data suggested the worst of the contraction may be behind us, but we see a bumpy restart in coming months. The big question remains: how successful policy execution will be in bridging cash flow constraints and preventing permanent damages to the economy – and what the risk is of policy fatigue in coming months. Markets became wary of rising U.S. China tensions.
- Monday: Manufacturing PMI for Japan, euro area, the U.S. and China (Caixin)
- Wednesday: Services PMI for Japan, China (Caixin) and the U.S; U.S. factory orders; euro area unemployment
- Thursday: European Central Bank (ECB) monetary policy meeting
- Friday: U.S. non-farm payrolls; German industrial orders
This week’s ECB meeting and U.S. payrolls data will be the focus. Markets will focus on whether the ECB will increase the size of its pandemic emergency purchase program. How the ECB intends to deal with the German constitutional court ruling and the potential scenario where the Bundesbank has to pull out of the purchase program will be closely watched. The U.S. jobs data may show a further rise in the unemployment rate, after it hit the highest level since the Great Depression in April.
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