BlackRock Commentary: Vaccines shape 2021 outlook

Jean Boivin, Head of BlackRock Investment Institute together with Mike Pyle, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research and Scott Thiel, Chief Fixed Income 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.

Positive news on Covid vaccines gives us greater confidence that the economic restart can re-accelerate in 2021 – and that the cumulative activity loss from the virus shock will ultimately be a fraction of that seen after the  global financial crisis (GFC). We prefer to look through any market volatility generated by the virus resurgence and renewed restrictions over the challenging months ahead.

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Sources: BlackRock Investment Institute, with data from Reuters News, November 2020. Notes: The green line shows the cumulative sum of the difference between actual U.S. GDP and where it would have been had it grown at its pre-GFC trend level (3.4% a year in nominal terms) from 2007onwards. The solid yellow line shows the total shortfall of U.S. GDP over two years from the last quarter of 2019, based on the median expectation from a Reuters poll of economists published on Sept. 25, 2020. The solid orange line shows our estimate for a hypothetical scenario of renewed tightening/lockdown measures. We assume trend growth after the two years, shown as the dotted lines. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. The hypothetical scenario is subject to significant limitations as the pandemic is evolving and we are still trying to understand the potential for more extensive activity shutdowns.

 

Traditional business cycle analysis doesn’t apply to the Covid shock, in our view. We see the latter as more akin to the shock of a natural disaster: With the vaccine news, we have even greater visibility on how the cumulative activity loss will likely be limited – just a fraction of that seen after the GFC in our estimate – even as we expect a renewed surge in infections and resulting restrictions to disrupt the restart in the near term. See the chart above. We are still months away from any vaccine being widely available. But the game changer is that we now know we are building a bridge to somewhere, providing more clarity for governments and companies about getting to the post-Covid stage. That will make it easier to absorb any near-term disappointments and have greater confidence in the restart plan. It should also help limit any economic scarring and justify deploying further policy support. Yet risks of retrenching fiscal policy too soon, especially in the U.S., look to be significant. Still, we see the vaccine development providing a constructive backdrop for risk assets as we approach 2021.

BlackRock’s portfolio managers and senior executives gathered virtually last week at our 2021 Outlook Forum to discuss  what we see as a new investment order. The pandemic has accelerated transformations in our economies and societies across four dimensions – sustainability, inequality, geopolitics and the policy revolution. A tectonic shift toward sustainability was already under way, and the pandemic shone a spotlight on some underappreciated environmental, social and governance (ESG) factors such as employee safety and supply chain integrity.

The pandemic is also accelerating geopolitical trends that were already in motion – such as the shift toward a bipolar U.S.-China world order and a remapping of global supply chains. A simple way to think about it: The global economy is recalibrating from a single-minded focus on cost efficiency and short-term profitability to a system that puts greater weight on long-term resilience. Reduced global specialization could result in higher production costs, in our view.

The inflation outlook was at the center of our debates. The pandemic has spurred new structural trends such as a policy revolution that sees greater coordination between fiscal and monetary policy. Central banks are showing an increased tolerance for inflation overshoots after persistent inflation undershoots, and the fiscal-monetary coordination is leading to political pressure to keep interest rates low even amid rising price pressure. Together with rising production costs stemming from the remapping of global supply chains and more focus on sustainability, this points to a higher inflation regime over the medium term. This is a shift that markets are not prepared for, even though in the near term corporates’ cost-cutting effort may help mitigate some price pressure.

Investors need to adapt their portfolios to these accelerated trends, including higher inflation in the medium term. These views reinforce our strategic underweight in nominal bonds and preference for inflation-linked debt, as well as our belief that allocations to Asia’s growth engine and private markets will be crucial for delivering real diversification in the post-Covid world. We also favor sustainable assets as we see sustainability becoming the fundamental source of portfolio resilience. Even with a vaccine on the way there are major sectoral implications as the Covid shock creates structural winners and losers. We see big tech companies likely maintaining their high margins under a divided U.S. government and airlines among the potential losers as business travel recovers only slowly. Stay tuned for our 2021 Global outlook.

 

Market Updates

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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, November 2020. 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: spot gold, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI USA Index, Bank of America Merrill Lynch Global Broad Corporate Index, MSCI Emerging Markets Index, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index and spot Brent crude.

Market backdrop

The positive vaccine news triggered a sharp rotation into value and small-cap equities that fizzled later in the week when near-term virus concerns returned to the fore. Effective vaccines would allow a broader opening-up of activity sooner and reduce the risk of long-term scarring, in our view. Yet we do see potential for near-term disruption to the economic restart caused by the ongoing virus resurgence and government restrictions.

Week Ahead

  • November 16: China industrial output, retail sales
  • November 17: U.S. industrial production
  • November 19: Federal Reserve Bank of Philadelphia November Manufacturing Business Outlook Survey
  • November 20: Japan Jibun Bank Flash composite purchasing managers’ index (PMI)

Manufacturing data this week will be in focus. China’s industrial output likely grew for the seventh consecutive month in October, according to a Reuters poll, as the country’s economic recovery is well underway. U.S. manufacturing data may not reflect the impact from the virus resurgence yet, but we see downside risks to the activity restart in coming months if lockdown measures tighten.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 16th, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


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Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Last week was remarkable for global equity markets, as the potential for a successful COVID-19 vaccine to be available by spring 2021 drove stocks broadly higher. The Stoxx Europe 600 Index closed last week up 5.1%, the S&P 500 Index was up 2.2% and the MSCI Asia Pacific Index was up 1.4%. US pharmaceutical company Pfizer and German biotechnology company BioNTech announced positive trial data for their vaccine, raising hopes of its success and triggering a sizeable equity rotation. Confirmation of Joe Biden’s US presidential election victory was almost a side story for equity markets through the early part of last week. Notably, last week saw the largest-ever week of inflows into global equities of US$44.5 billion, with US$32.5 billion of that into the United States.

Rotation, Rotation, Rotation

Last Monday saw the largest value over growth outperformance on record—going back to 1991—and the highest weekly outperformance since 2000. Value over growth factor volatility hit its highest level in 20 years last week—higher than during the 2008-2009 global financial crisis and only surpassed by the tech bubble a decade earlier. As such, the year-to-date (YTD) winners were sold in favour of what had been YTD losers. Moves were extreme, which really is no surprise given how extreme positioning has been in the lead-up to last week’s vaccine news.

This rotation drove broad sector moves last week. In Europe, the bank stocks were up 16.5%, energy stocks were up 14.0% and insurance stocks were up 11.8%. These sectors are still far from pre-pandemic levels, but value investors certainly should welcome the respite. The travel and leisure sector was also strong, up 6.9% on the week (airlines were up 23% last Monday alone). Meanwhile, health care, technology, and chemicals stocks underperformed, although these sectors all still remained slightly positive on the week.

It was a similar story in the United States. Energy stocks, notable laggards this year, were up 16.5% but remained down 44% YTD, so there is still a long road to go in terms of a recovery to pre-pandemic levels. Financials were also strong, but weak spots included consumer discretionary and technology. Interestingly, the Nasdaq 100 Equal Weighted Index closed last Friday at new all-time highs.

The same rotation was witnessed in Asia Pacific region. Again, energy and financials stocks were solid performers. The laggards in Asia last week included those sectors that had been strong YTD, including communication services and consumer discretionary stocks.

While the markets cheered the COVID-19 vaccine news, positive vaccine trial data will not do much to help the management of the virus in the immediate term. As we head into the colder months, high rates of infection remain widespread. France, Belgium, the Czech Republic and Austria are among the worst-affected in Europe. German Economy Minister Peter Altmaier also noted that Germany must live with “considerable restrictions” for at least the next four to five months. In the United States, the death toll is close to 250,000, with daily cases hitting new highs. Several states are imposing renewed restrictions on schools, restaurants, gyms, cinemas, etc.

The vaccine, produced by Pfizer and BioNTech, is going through emergency approval. Attention is turning now to who would (and should) be the first to receive it, and what the likely timescale would be. Pfizer reported that the United States ordered 100 million doses, the European Union (EU) 200 million doses and the United Kingdom 40 million doses. It is fully expected that, once approved, key health care workers would be first in line to receive the vaccine in order to limit transmission to vulnerable groups.

Notably, it was reported last Tuesday that a member of the UK government taskforce and professor of medicine at Oxford University, Sir John Bell, believes there is a 70% to 80% chance that the country’s most vulnerable would all be vaccinated by Easter 2021.

Brexit Talks Continue

With the focus squarely on vaccine hopes and US politics, it was easy to forget we are running out of time for the United Kingdom and EU to agree a Brexit deal. It is important to keep an eye on this as we could see extreme volatility in UK assets (and to a lesser extent EU assets) around any news flow.

Talks continued last week, with little evidence of progress on the key outstanding issues: fisheries access, “level playing field” for business, and how any accord would be enforced. However, there was some drama on Downing Street as it was announced two of UK Prime Minister Boris Johnson’s once most-trusted advisors, Dominic Cummings and Lee Cain, were to leave government. They were key architects of the “Leave” campaign; however, the UK’s Chief Negotiator, David Frost, said there would be no fresh concessions and the United Kingdom’s red lines had not changed. UK sterling, a proxy for Brexit risk, was little changed last week, up 0.25%.

In terms of timing, there was talk last week that the “new” deadline would be this Thursday (19 November), when a video conference of EU leaders is scheduled. This would also allow enough time for ratification on both sides. However, over the weekend, there were reports from the UK side that “quite big gaps” still remain, and they doubt that a deal could be struck in the coming days.

Here are the key upcoming events:

  • Week commencing November 16: Talks set to continue
  • November 19: EU leaders hold video conference
  • November 23-26: European Parliament meets
  • December 10-11: Another EU summit
  • December 14-17: European Parliament meets for last time this year
  • December 31: End of Brexit transition period

Much has been made in the financial press of how cheap UK assets are. We are also seeing a number of UK acquisitions recently. No doubt, we shall see more of these if we get confirmation of a Brexit deal and more certainty.

Week in Review

Europe

Last week was another strong one for European equities, with the Stoxx Europe 600 up 5.1%. Reflation rotation was the key theme, clearly driven by the COVID-19 vaccine news (alongside Biden’s US presidential win). Spain’s IBEX 35 Index outperformed quite dramatically, up 13.3% on the week. The outsized move was down to its sizeable skew towards banks as well as travel and leisure. Meanwhile, the UK FTSE 100 Index and the composite Stoxx Europe 600 Index were up 6.9% and 5.1% respectively, clearly lagging due to their large health care weightings.

European equities outperformed the United States last week as YTD as sentiment around the transatlantic trade relationship improved and given Joe Biden’s US presidential victory. It looks like there could be further for European equities to run, especially given the size and duration of its long underperformance vs. the United States.

The European credit market was also in focus after the European Central Bank (ECB) hinted at further support during its scheduled forum. In a speech last Wednesday, ECB President Christine Lagarde said that it was the responsibility of monetary policy to “ensure favourable financing for the whole economy”. Lagarde suggested that we could see a longer quantitative easing (QE) programme at the December meeting.

The spread between Italian and German sovereign bond yields is a key indicator of risk sentiment in the euro area as a whole, as well as Italy itself. Last week, this gap closed to its tightest level in over two years as markets anticipate further bond buying from the central bank.

United States

As in other regions, the positive vaccine news pushed equities sharply higher and triggered some extreme rotation out of momentum names into value. A good example of that rotation theme was in the performance of the small-capitalisation Russell 2000 Index, up 6.1% on the week, whilst the NYSE FANG Index was down 4% on the week.

From a technical perspective, it will be interesting to see if the S&P 500 Index can push on from here, as it is very much at the top of its recent trading range.

US politics remain a talking point as current President Donald Trump still refuses to concede he lost the election, despite a lack of any evidence of systemic election fraud. Some observers point to Trump’s tweet over the weekend mentioning Biden had “won” as a sign he may accept defeat. However, it was followed by a continued stream of accusations against a variety of targets before he concludes, “I WON THE ELECTION”.

Despite this rhetoric, there a small but growing number of Republican politicians are now stating it’s time to accept Biden’s election win. In the meantime, Biden’s team stated it’s time for Trump to begin transition and work with an incoming administration to ensure the challenge of soaring COVID-19 cases can be managed in an optimal fashion.

We would note that the race for the US Senate will not ultimately be decided until 5 January 2021, when two seats in the state of Georgia will have a run-off election. The Republicans currently hold a small Senate majority of 50 seats versus 48 for the Democrats, so this Senate race will be a key market focus early in 2021.

COVID-19 cases in the United States are still rising at an alarming rate, and we are seeing signs of some states bringing in stricter measures to slow the spread of the virus. The economic impact of any new measures taken will clearly be crucial for markets, particularly with the US Thanksgiving holiday coming up next week. In addition, the worsening picture creates a greater sense of urgency around a stimulus package being agreed upon; however, bi-partisan talks on this remain stalled.

Asia Pacific

Equities in the Asia Pacific (APAC) region were also broadly higher. Japan’s market was the outperformer, although gains were more muted than European counterparts. Trump continued to apply pressure to China despite his election loss, signing an executive order banning US investors from 31 companies linked to China’s military, including state-owned China Telecom and China Mobile, which both sold off following the action.

The political situation in Hong Kong remains fraught after the government ousted four opposition lawmakers last week. This, in turn, prompted most of the pro-democracy members of the region’s de facto parliament to resign. New powers granted by Beijing last Wednesday allow the removal of lawmakers on the ground of national security. The US government condemned the move.

Equities in the APAC region made gains today after leaders from 15 Asia Pacific nations agreed to one of the biggest trade deals in history. The Regional Comprehensive Economic Partnership (RCEP) aims to reduce barriers and is the first trade agreement to bring together China, Japan and South Korea.

Week Ahead

Monday 16 November

  • Economic/Political:
    • Brexit crunch time: talks look set to continue in Brussels as the UK and EU approach the latest deadline
    • Key speakers: ECB’s Luis de Guindos, Christine Lagarde, Yves Mersch
  • Data: Norway trade balance, Italy consumer price index (CPI) EU harmonised, Italy general government debt

Tuesday 17 November    

  • Economic/Political:
    • OPEC+ joint ministerial monitoring committee meets
  • Data: Norway Consumer Confidence, Norway gross domestic product, Italy trade balance, Eurozone Construction Output, US Industrial and Manufacturing Production

Wednesday 18 November  

  • Economic/Political:
    • ECB’s Andrea Enria
  • Data: UK CPI & retail prices index (RPI), Eurozone EU27 new car registrations, Eurozone CPI

Thursday 19 November 

  • Economic/Political:
    • EU leaders hold a summit to discuss the bloc’s latest efforts to contain the coronavirus. The summit is also seen as deadline for draft Brexit deal
    • Key speakers: ECB’s François Villeroy, Christine Lagarde, Isabel Schnabel
  • Data: Netherlands unemployment rate, Sweden unemployment rate, Italy current account balance, Spain trade balance, US weekly jobless claims

Friday 20 November

  • Economic/Political:
    • Key speakers: ECB’s Christine Lagarde
  • Data: UK Public Sector Net Cash Requirement (PSNCR), Germany producer price index, Italy industrial orders, US state employment

 


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This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 17th November 2020, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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