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BlackRock Commentary: Leaning further into cyclicality

Wei Li, Global Chief Investment Strategist of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist 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.

The UK has led the developed world in the pace of its vaccine rollout, with the euro area set to catch up after a slower start. Vaccine rollouts and fiscal spending are paving the way for an accelerated global restart, reflected in a recent rise in real rates. This supports a broadening of the cyclical tilt in our tactical views, with our recent debut of a UK equities overweight and upgrading euro equities to neutral.

Article Image 1

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. You cannot invest directly in an index. Sources: BlackRock Investment Institute and Refinitiv Datastream, data as of Feb. 26, 2021. Notes: The chart shows the estimated equity risk premia and historical ranges since December 1997 for selected equity markets, represented by MSCI USA, MSCI UK, MSCI Europe (euro), and MSCI Emerging Markets Indexes. We calculate the equity risk premium based on our expectations for nominal interest rates and the implied cost of capital for respective equity markets.


UK and euro area stocks lagged the global market in 2020. UK stocks, skewed toward sectors that typically fare poorly during cyclical downturns and weighed down by Brexit uncertainties, were the worst performer among developed market (DM) peers. With the risk of a no-deal Brexit lifted and the UK leading the vaccine rollout among DMs, we see a broad activity restart in the summer. Unprecedented UK fiscal support – which the government plans to keep in place – has helped to minimize long-term economic scarring, reinforcing our positive view on this market. We see the euro area restart lagging that of the UK or U.S. by a few months, given its slower-than-expected vaccine rollout, but this leaves room for a catch-up. In addition to the positive macro backdrop, we see valuations in these two markets as supportive, based on our estimates of the equity risk premium, our preferred valuation gauge that accounts for changes in the risk-free rate. See the chart above.

We expect a vaccine-led reopening to enable activity to return to pre-Covid levels by late 2021 or early 2022 in the euro area and the UK, with a well of pent-up demand fueling spending, especially in services. Activity data last week were stronger than expected, suggesting services have not been as severely hit as by the initial lockdowns as in 2020. We see ongoing fiscal support for the most affected households and sectors, and expect central banks to keep financial conditions easy. We expect the ECB to likely reiterate such a commitment at this week’s policy meeting, pushing back against higher bond yields.

Recent earnings suggest an improving outlook for European and UK companies. More European companies have beat earnings expectations in the fourth quarter of 2020 than ever – albeit versus moderate expectations – accompanied by an improving margin picture. Cyclical exposures such as materials and energy have posted the strongest upward earnings revisions, lending additional support.

Rising government bond yields recently have put pressure on equities. Yet we see UK and European equities relatively well placed in this environment, as our research shows equity prices are typically less sensitive to rising rates when valuations are low, or the ERP is high. More broadly, we don’t see rising nominal yields as a source of worry as long as our new nominal theme holds, with a more muted central bank response against inflation than in the past – and monetary authorities leaning against any excessively rapid increases in real yields. The recent increase in real yields, in our view, reflects expectations for a stronger economic restart and underpins the recent broadening of our pro-cyclical stance.

The bottom line: We have broadened our pro-cyclical stance over the tactical horizon as we expect a rapid activity restart later this year and into 2022. As a result we are overweight UK equities and have upgraded euro area equities to neutral. We also recently downgraded euro area peripheral bonds to neutral, as yield spreads have narrowed. Overall, we prefer equities over credit over the tactical horizon given the relatively more attractive valuations in equities. European companies have also made strides in the shift towards sustainability, positioning them well for the transition to a zero-carbon economy that we see as a key driver of asset returns over the strategic horizon.

Market Updates

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

Market backdrop

U.S. 10-year Treasury yields hit the highest level since last February, putting pressure on the stock market. Nominal yields have been climbing since September, but the magnitude has lagged that of the rise in inflation expectations during the period. Inflation-adjusted yields remain deep in negative territory – in line with our new nominal theme. We still believe the new nominal will support equities and risk assets over the next six to 12 months.

Week Ahead

  • March 11 – ECB policy meeting
  • March 12 – University of Michigan Surveys of Consumers
  • March 8-15 –  China total social financing and new yuan loans

The ECB policy meeting will be in focus after the spike in U.S. government bond yields have driven up global yields. We expect the central bank to reaffirm its intention to keep policy easy until the effects of the pandemic are past and inflation is sustainably back at target. University of Michigan consumer sentiment survey could shed light on the status of the restart as some states have started to ease restrictions.

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 March 8th, 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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BlackRock Commentary: Staying dynamic in our strategic views

BlackRock anticipates that the new macroeconomic environment, characterized by increased volatility, will lead to more frequent valuation changes across asset classes. While short-term outcomes may not always be influenced by valuations, they remain significant in the long run.

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