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BlackRock Commentary: Three investing lessons of 2021

Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Elga Bartsch, Head of Macro Research, and Beata Harasim, Senior Investment Strategist, 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.

A new, highly contagious, virus strain could trigger growth downgrades, worsen risk sentiment and have significant sectoral impact. We are concerned about the human toll and expect renewed restrictions on activity. We still favor equities for now, but would change our stance if vaccines or were to prove futile. If they are effective, the strain only delays the restart oftreatments economic activity, and we would lean against any stock market pullbacks. Less growth now means more later.

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Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, November 2021. Notes: charts show the yield on U.S. and German 10-year benchmark inflation-linked government bonds.


2021 has been marked by a confluence of events that have no historical parallel: a unique growth surge, a supply-driven spike in inflation and new central bank frameworks that are stress-tested in real time. Our anchor to interpret this macro environment has been that normal business cycle logic does not apply. The COVID-19 shock was more akin to a natural disaster, followed by a powerful restart of economic activity. This restart is nothing like the long, grinding recovery following the 2008-2009 financial crisis. It’s more like the world turned the lights back on. Economic activity surged, corporate profits rebounded at an astonishing pace in the restart, and developed market (DM) equities ripped. The chart shows how analysts have scrambled to upgrade their earnings forecasts to a 52% jump in 2021 (the red line). We had long warned of higher inflation after decades of disinflation. Inflation is here now. It’s being driven by supply bottlenecks coupled with unusually strong household spending on goods, rather than services. We expect it to settle at higher levels than pre-COVID even as pressures from supply bottlenecks ease. In the past, central banks would already have started to raise policy rates, and bond yields would have spiraled upward. Not this time.

Many central banks were content to let inflation run higher, and bond yields moved up only modestly relative to the inflation picture. The New nominal theme helped foretell this unusually muted response to rising inflation, and was the compass that has guided us throughout the year. The Fed last week belatedly acknowledged inflation risks, and we expect it to start raising rates next year. That’s a big change, but what matters are the rate trajectory and destination. We don’t see rates going as high as they would have historically in the next phase of the New nominal.

The second investing lesson of 2021: the transition to a more sustainable world is happening now, not at some distant point in the future. First, surging fossil fuel prices in 2021 have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way leading to growth and inflation volatility. But we think inflation pressures would be even more acute and growth lower in case of a disorderly transition or no-climate-action scenario. Second, the tectonic shift toward sustainable investing is already playing out, and we believe this will give sustainable assets a return advantage for years to come. Climate-driven repricing has already started, we believe, with carbon-efficient sectors able to lower their cost of capital. Lastly, carbon-heavy companies are not waiting for new climate policies but are changing their business models now, opening up selected investment opportunities.

Our third lesson of 2021 is having courage of conviction. Our macro framework – the New nominal playing out in the restart – kept us positive on equities and underweight government bonds throughout the year. But we did not put enough risk behind our view in hindsight, even considering this has been a tricky environment where things can change quickly. Having courage of conviction is not about adding risk per se, it is also needed when your framework tells you it’s time to pull back on risk-taking. The speed and magnitude of some market moves also surprised us. An example: the swings in 10-year U.S. Treasury yields as different market narratives on growth, inflation and the virus took hold in quick succession.

Where does all of this leave us heading into 2022? We are still overweight equities even as the Omicron virus strain and the Fed’s catching up to inflation reality have hurt risk sentiment. We expect new virus variants to delay, but not derail, the restart and see policy rates rising only modestly in the New nominal’s next phase. Our 2022 Global outlook will lay out the full picture next week, including refreshed granular views for tactical and strategic asset allocation.

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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 Dec. 3, 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 USA Index, MSCI Europe Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, spot gold, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark government bond


Market backdrop

Markets suffered a risk-off bout as the Omicron virus strain spread, and Fed chair Jerome Powell warned of inflation risks in the restart and indicated the Fed may wrap up its asset purchases earlier than planned. We expect the Fed’s interpretation of its employment objective to set the timing of the kick-off on rates and their pace. We see inflation settling at a level higher than pre-COVID even as pressures from supply bottlenecks ease, as we expect a muted policy response to inflation.

Week Ahead

  • Dec 7:  U.S. and China trade data
  • Dec 9: China PPI and CPI
  • Dec 10: U.S. CPI and University of Michigan sentiment; UK GDP estimates; China money and credit data

U.S. inflation data are the key focus this week, especially after the Fed has caught up to inflation reality and warned of inflation risks last week. The Fed’s inflation target has been met, so now the key is how the central bank will interpret the other side of its mandate – full employment. The timing and trajectory of rate rises will depend on this. We see the rate path as historically shallow. U.S. and China trade data may give a read on how fast supply-demand imbalances are dissolving.

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 December 6th, 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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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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