Mike Pyle, Global Chief Investment Strategist at the BlackRock Investment Institute, together with Elsa Bartsch, Head of Macro Research, and Vivek Paul, Senior Portfolio Strategist both also part of the BlackRock Investment Institute and Mark Everitt, Head of Research and Strategy with the BlackRock Alternative Investors, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Public markets were at the center of market action as risk assets sold off amid the spreading pandemic and then rebounded amid an overwhelming policy response. We now see opportunities in slower-moving, less liquid private markets and expect them to offer exposure to accelerating structural trends. Diversification with – and within – private markets will be crucial to building resilient portfolios, in our view.
Sources: BlackRock Investment Institute, with data from Preqin, June 2020. Notes: The bars represent the sum of net asset value of closed-end funds as well as dry powder of funds in these asset classes: private equity and venture capital, real estate, private debt, infrastructure and natural resources. The line shows the size of private markets relative to that of public markets.
Private markets are bigger, deeper and a larger component of institutional portfolios than ever before. The private market universe has tripled since the financial crisis to $7.7 trillion today, from $2.5 trillion in December 2007, as the bars in the chart above show. They now make up 6.3% of public market size, from 3.8% then (the yellow line). Allocations to private assets such as private equity (PE), private debt, real estate and infrastructure now make up around 26% of global pension fund assets, up from 19% in 2008, according to consultancy Willis Towers Watson. These markets can be illiquid and are not suitable for all investors. Yet we believe they can help investors build diversified portfolios that are more representative of the global economy than public markets alone. Our work also suggests many institutional investors are more worried than they need to be about liquidity constraints, and that owning more private assets could help them meet return and diversification goals.
Why consider private markets now? Risk assets in public markets have rapidly rebounded after hitting lows in late March as uncertainty about the virus impact peaked, removing some of the value there on a tactical basis. Even after last week’s selloff, the S&P 500 index is up almost 40% from lows. The policy revolution has cushioned the pandemic’s fallout, and economies are slowly reopening, making this a time to unlock value in slower-moving private markets. Moreover, we expect wide variations in activity normalization, by region and sector and company. This calls for a greater focus on real resilience at a granular level. We believe private markets offer this potential. Investors have a say in structuring the investments and can add custom-made resilience—via contractual provisions, avoidance of excess leverage and choice of counterparty.
Private managers at first primarily played defense in the virus shock —a rapid reassessment of the operating and liquidity needs of the assets they already owned. This is morphing into offense: seizing opportunities in the market dislocations. What is tomorrow’s opportunity set? The first is providing liquidity, rescue and turnaround finance. Quality companies that have lost bank financing may need liquidity bridges while their operations recover. The shock is likely to produce a large market in distressed debt. There are at least $600 billion of distressed assets trading today, and we expect this to increase.
The second is seizing opportunities in sectors benefiting from accelerating structural trends. The pandemic is irrevocably reshaping the economy and investment landscape, and investors focused on public markets alone may miss out on opportunities in sustainability, digitalization and public health. Examples are renewable power (the most active infrastructure sector in 2019, according to IJGlobal); and technology and health care (which accounted for 19% and 13%, respectively, of private equity (PE) deals in 2019, according to Preqin).
The virus shock is unlike anything else, but the global financial crisis does hold some lessons for private market investors. First, vintages (when a private market fund deploys its capital) after a crisis tend to be good ones. Second, opportunities in different sectors come and go on different timelines—credit more quickly, for example, and real estate more slowly. Third, the difficulty of timing markets (and especially private markets) makes diversification of vintage years crucial. Bottom line: We believe private markets will play an increasingly important role in fortifying strategic portfolios.
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.
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 second wave 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.
- Monday: U.S. Empire State survey
- Tuesday: Bank of Japan interest rate decision; U.S. industrial and retail sales for May; German ZEW economic sentiment
- Thursday: Bank of England interest rate decision; Philadelphia Fed Manufacturing Survey
The Bank of England is expected to keep interest rates unchanged at its policy meeting this week. Analysts expect it to expand the gilt purchase program while keeping its corporate debt buying unchanged, according to a Reuters poll. The BoE may also mention the negative interest rate debate – but only to the extent of discussing further options should the need arise.
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