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Home | The future is running at us

The future is running at us

The future is now, and its coming at us very fast. We are looking at paradigm shifts all over the world and their implications will last.
Carson Jester

2020/07/03

Insight from Blackrock

The future is now

The public health and ensuing economic crises are exacerbating entrenched forms of inequality across income levels, ethnicity and countries. Many emerging markets (EMs) are facing health, policy and deglobalization challenges. The pandemic has exposed vulnerabilities of global supply chains and added impetus to geopolitical fragmentation. It has led to a policy revolution that blurs the boundaries between fiscal and monetary action – which could address some of the rising inequalities. And it has put a premium on sustainability, corporate responsibility and resilience of companies, sectors and countries.

Investors grapple with these issues today. The focus of our virtual Midyear Outlook Forum in early June was decisively on longer-term trends as a result: inequality, globalization, macro policy and sustainability. Market sentiment has been driven by the pandemic’s near-term evolution and the policy response, but these four structural shifts are transforming the investment landscape and will be significant to investor outcomes.

The world has changed, leading us to a completely new macro framework and major view changes. Our revamped 2020 investment themes reflect this, and now include strategic, or long-term, implications.

The broad view

We quickly concluded Covid-19 would cause an unprecedented near-term economic contraction – but that an overwhelming policy response would help mitigate the damage and make the cumulative GDP shortfall much smaller than that of the GFC.

As a result, we advocated taking advantage of historic opportunities in sustainability in late February and risk assets in strategic portfolios in late March. We have since turned neutral on equities in our strategic framework after the significant rally but keep our overweight in credit. Higher spread levels make up for increased default risk, in our view.

On a tactical basis, reflecting a shorter investment horizon, we turned cautious on Feb. 28, taking both equities and credit to neutral. We returned to a mild pro-risk stance on April 6, overweighting credit and favoring up-in-quality assets with strong policy backstops. This was reflected in a preference for U.S. stocks, investment grade credit and the quality factor.

We have now downgraded U.S. equities to neutral amid risks of fading fiscal stimulus and election uncertainty, and have turned cautious on emerging markets. We have upgraded European equities as we see them offering the most attractive exposure to a cyclical upswing. We are keeping our credit overweight because of a global hunt for yield and central bank purchases.

Tactical calls

We maintain a modest pro-risk stance overall, given our macro assessment of the virus shock and the strong policy response. This is balanced by a preference for up-in-quality assets that have policy backstops and are high up the corporate capital structure.

We prefer credit over equities as a result. This includes overweights in investment grade credit (our quality bias), high yield and euro area peripheral debt. The common thread: renewed asset purchases by central banks, a stable interest rate backdrop and attractive income in a world where decently yielding assets are hard to find.

We have downgraded EM equities and USD-denominated debt. Many EM economies are still battling to contain the virus outbreak and lack policy space to cushion the blow.

We have upgraded European equities to overweight. The region offers more attractive cyclical exposure than EMs due to its public health measures and ramped-up policy response. We are raising Japanese equities to neutral for similar reasons.

We have downgraded U.S. stocks to neutral after a strong run of outperformance. Risks include policy fatigue, a re-emergence of the virus, intensifying U.S.-China tensions, and a turbulent election season. We also cut Asia-ex Japan equities to neutral as renewed U.S.-China tensions may hurt investor sentiment as China balances its growth and stability objectives.

From a factor perspective, we increase our overweight in quality, for what we see as its likely resilience against a range of future outcomes. The possibility of a cyclical uptick has caused us to upgrade the value factor to neutral and downgrade minimum volatility to neutral. We also remain neutral on momentum.

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