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BlackRock Commentary: Our midyear outlook

Jean Boivin, Head of the BlackkRock investment institute, together with Mike Pyle, Global Chief Investment Strategist, Elsa Bartsch, Head of Macro Research, and Scott Thiel, Chief Fixed Income Strategist, also 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 COVID-19 shock is accelerating structural trends in inequality, globalization, macro policy and sustainability. This is fundamentally reshaping the investment landscape and will be key to investor outcomes. Our Midyear outlook explains why the most important action investors need to take today is to review their strategic asset allocation to ensure portfolios are resilient to these trends.

BlackRock 30.06 Article Image 1

Sources: BlackRock Investment Institute with data from EPFR, as of June 2020. Notes: The chart shows the global total assets under management at ESG-mandated funds. The “other “category includes money-market and alternatives funds. Data for 2020 through May 31, 2020.

The pandemic has supercharged a shift toward sustainability. Assets under management at environmental, social and governance (ESG)-mandated funds in the U.S. exceeded last year’s record levels at the end of May, even as markets had sold off. See the chart above. Sustainable flows are in their early stages, in our view, and the sustainability wave will likely unfold over years and decades. We also believe markets still under-appreciate the potential economic damage caused by climate change, as well as related opportunities such as the long-term rise in renewable energy. The pandemic has brought some setbacks in sustainability-related trends. For example, some governments have paused efforts to curb plastic use. Yet we believe these setbacks are temporary, and the pandemic has thrown spotlight on the “S” in ESG, as issues such as employee safety and social purpose of companies come to the fore. We see sustainability rising above the mere labels of environment, social and governance. A focus on sustainability can help portfolios achieve greater resilience to shocks, in our view.

The focus of the BlackRock Investment Institute’s virtual – but no-less real – Midyear Outlook Forum in early June was decisively on longer-term trends. The COVID-19 shock has pushed the world harder against four key limits we identified at our November forum: inequality, globalization, macro policy and sustainability. We have revamped our three investment themes to reflect the changes. Our new macro view is captured by the “Activity restart” theme as economies reopen at different speeds. A “Policy revolution” is taking place to cushion the pandemic’s shock, making this our second theme. Our third theme is “Real resilience,” as countries and sectors look set to make a comeback as diversifiers in a more fragmented world, offering resilience to real economy trends.

We highlight the importance of the “Real resilience” theme in particular. The structural shifts accelerated by the pandemic shock are already challenging the resilience of portfolios here and now. The chart on the previous page illustrated one such trend – a shift toward sustainable investing. Others include the intensifying U.S.-China strategic rivalry across multiple dimensions. In this increasingly bipolar world, investors need to balance the investment case for gaining exposure to both these engines of global growth, with possible investment restrictions on each side. We see structural portfolio resilience as much more than just relying on broad asset class correlations in public markets. It’s making sure portfolios are well positioned at regional, country and company level to underlying themes.

We believe what is needed today is a reassessment of the whole portfolio, not just a tweaking at the edges. On a strategic horizon, we highlight the fading role of nominal government bonds as their expected long-term returns fall into negative territory in developed markets. We instead prefer inflation-protected bonds as inflation risk builds up in coming years. We also view portfolio diversification as key, as return dispersion grows across regions, and within asset classes. On a tactical basis we maintain a modest pro-risk stance overall, and prefer credit to equities, favoring up-in-quality assets that have policy backstops and are higher up the corporate capital structure. We upgrade European equities to overweight, as we see the region as offering the most attractive exposure to any cyclical uptick due to its public health measures and ramped-up policy response.


Market Updates

BlackRock 30.06 Article Image 2

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, June 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.


Market backdrop

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. We are tracking the interplay of containment measures and mobility changes on activity as economies have started to reopen. The unprecedented policy response has boosted markets, leaving a potential resurgence of infections and policy implementation as key risks. U.S. Congress is headed for a fiscal cliff as jobless benefits, state support and payroll protection measures are expiring soon.

Week Ahead

  • Tuesday:  U.S. consumer confidence; China official manufacturing purchasing managers’ index
  • Wednesday: Manufacturing PMI for Japan, China (Caixin), the euro zone and U.S.
  • Thursday: U.S., UK and euro area flash PMIs
  • Friday: Caixin China services PMI

The U.S. job market data will be in focus. Consensus estimates point toward modest pickup in U.S. employment, yet there is a risk of a sizable decline. Markets will closely watch the U.S. COVID-19 case count trend this week and next, to gauge the development of the outbreak and its implication on the restart process of the economy.

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 June 29th, 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.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. 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.

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