Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist and Kurt Reiman, Senior Strategist for North America 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 pandemic has turbocharged transformations that were already under way – from sustainability to inequality. Yet markets have not fully priced in the durability of these trends, we believe, even with the glimpse into the future offered by the pandemic. We favor technology and healthcare on a tactical horizon, as they offer both quality characteristics and are likely beneficiaries of structural growth trends.
Healthcare and technology led the U.S. stock market in generating earnings and revenue growth in 2020. They also stand out in generating high free cash flow yields and return on equity, as the chart shows. The quality characteristics of these two sectors could help provide some resilience against any bumps along the road to the economic restart, in our view. At the same time, they offer long-term growth potential given structural shifts such as digitalization and aging societies. Such quality exposures sit on one side of our bar-belled approach to tactical asset allocation; on the other side, we like selected cyclical exposures such as emerging market equities and U.S. small caps, which we see as benefiting from a vaccine-led restart. Market pricing has come a long way since late last year, yet we still see accelerated structural trends not yet fully reflected. We believe they could drive performance over the tactical horizon. History suggests financial markets are imperfect at pricing in long-term trends, even when these shifts – such as demographic changes – are expected long in advance.
Stock markets have hit new highs, led by the steady outperformance of tech stocks. We don’t see overall equity valuations as obviously stretched, as we expect low interest rates and a vaccine-led economic restart to support risk assets over the next six to 12 months. We also see sector-specific drivers for growth. The pandemic has made the case for accelerating the shift to digital across a broad range of industries. One factor to consider: Rising production costs amid the rewiring of global supply chains – another structural trend reinforced by the pandemic – has made cost-saving technology investment a priority over traditional capex. Other trends are also supportive of the sector. About 38% of the U.S. workforce teleworked in early-mid January, according to the U.S. Census Bureau. We expect the share of employees working remotely at least part-time to fall once the restart materializes – but to remain above the pre-pandemic levels. This shift improves the outlook for companies behind the software, cloud and security infrastructure necessary to support a more dispersed workforce.
We see the healthcare sector potentially benefitting from structural trends such as demographic shifts, emerging market healthcare spending growth and innovation across the board. For example, telemedicine has gained popularity during the pandemic, and could become a long-term solution for some care needs due to its cost and operational efficiency. We also see the relatively low valuation of the healthcare sector as appealing, and the risk of major policy change in the U.S. appears low given Democrats’ slim majority in the Senate. An expansion of Obamacare could be positive for the managed healthcare industry in the U.S, or health insurance providers. Elsewhere in the sector, the pandemic has hit demand for elective procedures and cancer care. A vaccine-led economic restart would likely help drive a rebound in these businesses.
Another key trend is the tectonic shift toward sustainable investing. We will soon incorporate climate considerations into our capital market assumptions – our long-run estimates of risk and return – to help investors prepare their portfolios for a transition to a lower carbon economy.
The bottom line: We favor tech and healthcare in tactical portfolios for their quality characteristics and the potential to benefit from long-term structural trends. A risk to our view: The pandemic has afforded greater visibility into future trends, yet more of this may now be priced in – and our visibility is still imperfect; some trends could reverse or change over time.
U.S. stocks hit record highs as Congress made progress on the $1.9 trillion spending plan. U.S. 10-year Treasury yields rose to the highest levels since last March, yet the magnitude of the increase is much less than that in the corresponding inflation expectation during the period. Inflation-adjusted yields have been negative and stable – in line with our new nominal theme. Former European Central Bank President Mario Draghi has been tapped to form a new Italian government, pushing Italian government bonds yields down.
China’s Total Social Financing data – a broad measure of credit and liquidity growth in the world’s second largest economy – will be in focus, after weaker-than-expected data last month. The data could shed light on ongoing policy support amid softer activity data as virus restrictions have tightened. In the U.S., the preliminary University of Michigan survey data will be key to watch for signs of a consumption boost following renewed fiscal policy support.
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