BlackRock has developed a “completely new macro framework” for investing as a result of the coronavirus shock to the global economy and global financial markets.
“We used to frame things as to where we were in the business cycle,” said Jean Boivin, head of the BlackRock Investment Institute, who discussed the firm’s midyear investment outlook in a webinar. “That is not the story anymore. The shock [of the pandemic] has fundamentally changed the investment environment and landscape … [and] that requires a deeper rethink of how we build portfolios.”
Continuing that theme, Elga Bartsch, who heads up economic and markets research at the BlackRock Institute, said the current global economic downturn “is not a recession” and its reversal will not be a recovery but “a restart” of the economy, which has strategic (longer term) and tactical (short term) implications for investors.
While the cumulative loss of nominal GDP will be far less than the loss from the global financial crisis because of the coordinated fiscal and monetary response around the globe, the investment landscape will shift, according to Bartsch and her colleagues who authored the BlackRock Investment Institute midyear outlook.
“Asset class diversification alone is not going to work anymore,” according to the BlackRock outlook. “Real resilience of portfolios” that can withstand low global yields, climate change and other sustainability-related risks and geopolitical fragmentations as a result of de-globalization will be necessary.”
Resilience and deglobalization are among several themes of the BlackRock mid-year outlook, which also includes “activity restart” of the global economy and “policy revolution,” its term for the coordinated fiscal and monetary response by governments. All have implications for portfolio allocations.
BlackRock’s Short-Term Outlook
BlackRock now favors corporate credit over equities for the short and long term, with an overweight rating on credit and neutral rating on stocks.
In its tactical outlook for the next six to 12 months, BlackRock has downgraded U.S. equities to neutral and upgraded European equities to overweight in part because U.S. policymakers may reduce fiscal relief prematurely while Europe has ramped up stimulus efforts.
BlackRock has also downgraded emerging market equities and debt to underweight with the exception of Chinese and South Korean stocks, which have a neutral rating.
The world’s largest asset manager is now underweight government bonds for the near term given the extremely low yields, and neutral long term.
BlackRock’s Longer Term Outlook
Longer term, BlackRock favors inflation-linked government bonds over nominal government bonds because of expectations of rising inflation due to rising deficits as well as increased government regulation of industries and deglobalization, which will affect global supply chains.
“Inflationary pressures could build up once the initial deflationary shock” from the pandemic-fueled demand shock dissipates. Companies will likely need to increase prices to compensate for lower margins due to reduced capacity stemming from new regulations and more expensive and local supply chains as the deglobalization trend continues.
Deglobalization also means investors will not get exposure to international assets simply by investing in multinational companies. Such “indirect exposure will be less important in portfolios, which will require more deliberate diversification across regions,” said Scott Thiel, chief fixed income strategist, who suggested investing in Chinese government bonds or other foreign bonds issued by growing economies.
The pandemic has also “supercharged the shift toward sustainability,” according to BlackRock, which expects to see more of an emphasis on the social or “S” within ESG-focused investments as well as a shift beyond environmental, social and governance criteria.
“The pandemic spotlights issues such as employee safety and satisfaction and forces companies to reconsider their social purpose…. What matters is the resilience of companies to shocks, and we see sustainability becoming a core part of the investment process as a result.”
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