Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Scott Thiel, Chief Fixed Income Strategist and Vivek Paul, Senior Portfolio 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.
2020 was an extraordinary year for financial markets. The initial Covid shock triggered a massive selloff, followed by a risk rally that extended to the year end. We drew three key lessons from navigating markets. First and foremost, the nature of the Covid shock and the policy revolution triggered by the pandemic were core to the performance of risk assets and our overall asset views.
Sources: BlackRock Investment Institute, with data from Haver Analytics, December 2020. Notes: The orange bars show estimates of the discretionary fiscal measures in 2020 and 2021 in response to the pandemic, based on proprietary and broker research. The green bars show the estimated impulse of monetary growth in China measured via total social financing. The purple bars show the direct central bank support via programs such as the euro area’s Targeted Longer-Term Refinancing Operations. The yellow bars show central bank purchases of sovereign debt. For the U.S. we assume the Federal Reserve purchases an additional $80 billion of U.S. government debt per month through 2021, in line with its recent policy announcement. For the euro area we include purchases under the Pandemic Emergency Purchase Program, and the additional 120 billion-euro purchases announced under the Asset Purchase Program. Bars of darker shades represent 2020, and those of lighter shades 2021.
The initial Covid shock triggered a market plunge in early March. Early in the crisis we assessed the ultimate cumulative economic losses – what matters most for financial markets – would likely prove to be a fraction of those seen in the wake of the 2008 global financial crisis. We saw the Covid shock as more akin to a large-scale natural disaster that would be followed by a swift economic restart – if policy support could provide a bridge. We then witnessed the extraordinary policy response, and saw it as an opportune time to raise our strategic allocation to equities. On a tactical horizon we upgraded credit and increased our preference for quality assets – and held our moderate pro-risk stance over the rest of 2020. The ongoing fiscal and monetary policy support in 2021 will help prevent economic scarring as Covid vaccines create a bridge to a post-pandemic economy, in our view. See the chart above.
A key consequence of the policy revolution is the potential for a more muted response of nominal yields to higher inflation, as reflected in The new nominal theme in our 2021 outlook. We expect nominal yields to be capped by central banks as they have signaled they will be more willing to let economies run hot with above-target inflation. The result: stronger growth and declining real (inflation-adjusted) yields. We see this combination as under-appreciated by markets, and a potential booster to risk assets even as the prospect of a widespread Covid vaccination campaign has buoyed markets in recent months.
The second lesson from 2020 is the importance of long-term structural trends as drivers of asset performance. For example, the pandemic has reinforced an increased focus on sustainability and the dominance of e-commerce at the expense of traditional retail. Tech exposures with long-term structural tailwinds have continued to outperform. This helps inform our barbell approach to risk assets over the next six to 12 months: quality assets such as tech and healthcare stocks on one end, and selected cyclical exposures on the other. Quality assets with strong balance sheets and cash flows also offer resilience against potential bumps on the road to a full activity restart, in our view. We maintain our overweight in the quality style factor – a view that worked out well throughout 2020. We see traditional “value” sectors facing structural challenges that have been exacerbated by the pandemic, which could limit their upside even with a rapid restart.
The third lesson: It is important to be selective in cyclical exposures. In our midyear 2020 outlook we recognized the importance of tilting back into cyclicality. We closed our overweight in U.S. and Asia ex-Japan equities, and upgraded European equities to overweight. These calls turned out to be less successful than some of our other views, such as overweights in high yield credit and the quality style factor. We’ve since turned neutral on emerging market (EM) debt, and positive on EM equities.
The bottom line: Our directional risk views – driven by the nature of the Covid shock and the policy revolution – were critical in navigating turbulent market conditions last year. A key takeaway is how swiftly macro policies can evolve and the lasting impact this can have on market dynamics. The policy revolution that started in 2020 is still a key driver of our investment views for this year.
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, December 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.
U.S. President Donald Trump has signed the new $900 billion fiscal package into law after months of negotiations among lawmakers, as Covid deaths climbed, restrictions tightened and data showed signs that the restart was losing steam. The UK and European Union have agreed on a trade deal. The UK has approved the AstraZeneca/Oxford Covid vaccine as evidence has emerged that a more infectious strain of the coronavirus is spreading. We prefer to look through any near-term volatility and use it to add to high conviction investments.
- January 4th: Manufacturing purchasing managers’ index (PMI) for Japan, China, the euro area, U.S
- January 6th: Services PMI for Japan, China, the U.S., France, Germany; euro area composite PMI
- January 7th: Euro area flash December inflation
- January 8th: U.S. nonfarm payrolls
U.S. December nonfarm payrolls data will be in focus this week. The November report and other job market data in recent weeks have been disappointing, as rising Covid deaths have led to more business restrictions and pointed to near-term risks. We see the positive vaccine news as a game changer as it provides clarity for policymakers, households and businesses about getting to a post-Covid stage.
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