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BlackRock Commentary: A restart relay

Jean Boivin, Head of BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Wei Li, Global Chief Investment Strategist and Nicholas Fawcett, Member of the Economic and Markets Research Team all forming 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.

The restart of economic activity is real and broadening. This supports our pro-risk stance and our underweight in government bonds as we believe their low yields don’t reflect the restart’s momentum. We see the U.S. passing the baton to Europe and other DMs in leading the restart, whereas the delta variant may challenge some EMs lagging in vaccinations. This supports our tactical overweight in European equities and our recent downgrade of EM equities and debt to neutral.

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Sources: BlackRock Investment Institute, with data from Haver Analytics, August 2021. Notes: The chart shows the monthly Markit composite purchasing managers’ index (PMI) for the U.S., euro area and emerging markets. Emerging markets include Brazil, China, Czech Republic, Egypt, India, Indonesia, Kenya, Lebanon, Malaysia, Mexico, Nigeria, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, United Arab Emirates and Vietnam, as defined by IHS Markit. 


Global economies will be going through two distinct phases. Right now, the restart of economic activity causes a spurt in growth. Eventually, we see this settling into an expansion around trend growth. Beyond that point we see an unusually wide range of potential outcomes. The U.S. is still in the first phase. Growth likely peaked in the second quarter, but last week’s strong jobs report showed the restart is still in full swing. Growth momentum in the euro area appears to be catching up now, as indicated by purchasing managers’ index (PMI) data on the chart. In contrast, the EM PMI this year has trended lower toward 50 – a reading below which suggests stagnation – reflecting challenges in many EMs where renewed outbreaks threaten lockdowns and more dire public health outcomes. China’s potential slowdown, exacerbated by renewed outbreaks, may also spill over to EMs, in our view. Over the long term, we see a greater risk of permanent damages in some EMs due to slow vaccinations and more limited policy space.

China is the only major economy that has surpassed the pre-Covid projections of its growth trend. Consensus expectations see the U.S. returning to trend in the fourth quarter of 2021, and point to a return to pre-Covid trend by the end of 2022 for Europe – with growth rates similar to those over the last decade. Even though the pace toward a complete restart differs, we see some common drivers across DMs, such as pent-up consumer demand, especially in the hardest-hit services sectors.

The uneven pace of the restart is reflected in regional corporate earnings. Nearly 90% of S&P 500 companies have reported second-quarter results by August 6, and 87% of them had beat forecasts on both profit and sales – the highest since 2011. Yet stocks that have beaten expectations have on average not been rewarded, while those that undershot have been punished. We see this as consistent with the restart dynamics: very strong earnings – but just for the duration of the restart. About 90% of MSCI Europe companies have reported earnings, with just over half of them beating estimates. The earnings revision ratio – the share of earnings estimate upgrades vs. downgrades – has been rising in Europe and catching up with that in the U.S. This supports our overweight on European equities and neutral position in U.S. equities on a tactical basis.

The unprecedented restart has also led to unusual supply and demand dynamics – and volatility in growth and inflation data. This has manifested in recent market behavior, notably rising stocks and falling bond yields in the U.S. Record-high stocks may have priced in much of the powerful restart, and we believe the current yield levels are too low given the strength of the restart. The mixed market signals highlight a key question among investors: What lies beyond the restart? We see an unusually wide range of potential outcomes – and believe it’s all the more important to have an anchor. We stick to our new nominal investment theme: Major central banks are slower to respond to rising inflation than in the past, keeping nominal bond yields lower and real rates negative – a positive for risk assets.

The bottom line: The leadership of global restart looks set to pass on from the U.S. to Europe and other DMs, and we see a risk that the restart could stall in some EMs due to worsening virus dynamics and more limited policy room. This supports our tactical overweight on European equities and recent downgrade of EM assets to neutral. We also believe current government bond yield levels do not reflect the powerful momentum of the economic restart, and this supports our underweight in government bonds.

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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 August 5, 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 Europe Index, ICE U.S. Dollar Index (DXY), MSCI USA Index, Bank of America Merrill Lynch Global High Yield Index, MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, J.P. Morgan EMBI Index, Refinitiv Datastream Germany 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 and spot gold.


Market backdrop

U.S. stocks hit record highs, and U.S. 10-year government bond yields climbed to the highest level in two weeks after better-than-expected nonfarm payrolls data. Treasury yields have been driven by a mix of factors, and the rise in yields and real yields after the strong jobs data reinforces our tactical underweight. Even if real yields rise, they remain well in negative territory, supporting equities and our pro-risk tactical stance. Among the nearly 90% of S&P 500 companies that had reported second-quarter earnings by August 6, 87% of them have exceeded expectations on both profits and revenues.

Week Ahead

  • August 9 – China inflation
  • August 10-17 – China total social financing and new yuan loans
  • August 11 – U.S. consumer price index
  • August 13 – University of Michigan Surveys of Consumers

Investors will try to gauge the fiscal pulse from China’s lending data. Chinese authorities have signaled a near-term dovish shift as growth momentum slows, yet over the longer term we expect them to maintain a hawkish stance, key to their focus on the quality of growth. The University of Michigan consumer sentiment survey could shed light on the state of the restart amid rising concerns over the spread of the delta variant.

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 August 11th, 2021 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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