Post-Covid, BlackRock Is "Pro-Risk" In 2021

Charles Paikert

9 December 2020

very powerful dynamics” has caused the New York-based asset manager,to “upgrade” its equities call, Mike Pyle, BlackRock Investment Institute’s chief investment strategist, said at the firm’s 2021 Global Outlook Media Roundtable. BlackRock's views carry weight: at the end of September this year, the firm oversaw a total of more than $7.808 trillion in client assets.

The anticipated post-COVID world will require “a fundamental rethink of investment portfolios,” according to BlackRock. (This news service mentioned some of the BII’s views yesterday.)

Not so fast, economist and investment advisor Gary Shilling said in his latest Insight report.

While the new vaccines have dramatically changed the economic outlook, “the euphoria seems overdone,” Shilling maintained. “Economic weakness could well persist for another year - disappointing to equity bulls but beneficial to Treasury bondholders.”

“Stocks are priced for perfection,” oblivious to warning signs such as the volatility in the VIX, which has closed above 20 for almost 200 consecutive trading sessions, said Shilling, founder of A Gary Shilling & Co. In eight past periods when the VIX topped 20 for at least 100 days, the S&P 500 has fallen, Shilling said, citing Dow Jones Market Data. (The VIX is an index of options volatility and one of the “fear gauges” that wealth managers track, such as swap spreads.)

Where BlackRock is allocating
BlackRock argued that the traditional business cycle playbook “does not apply to the pandemic,” which is more like a natural disaster than the last economic crisis, said Jean Boivin, head of the BlackRock Investment Institute.

In the short-term, the asset management giant is overweighting equities, including selected cyclical overexposures such as US small caps and emerging markets. Long term, the asset manager prefers inflation-linked bonds, sustainable assets and assets tied to Asian growth, especially in Japan and China.

As for possible near-term market volatility, BlackRock investors should keep their eyes on the post-COVID future and look past bumps in the road.

“The New Nominal”: inflation won’t affect yields
According to BlackRock’s 2021 Outlook, central banks are likely to limit the rise of yields even as inflation expectations rise. The firm calls this anticipated trend “the new nominal,” said Elga Bartsch, head of Macro Research.

Nominal yields will respond “less to rising inflation than in the past,” Bartsch said. “There will be more to run for growth and inflation.”

Indeed, Bartsch expects rates to decline even further. Accordingly, BlackRock is underweighting government bonds and expects the falling rates to boost equities.

A new report from the Federal Reserve Bank of St Louis underscored that view, showing that the average US investment grade corporate bond at 1.85 per cent now yields the annual expected inflation rate over the next decade, estimated at 1.89 per cent.

The “real” yield on the benchmark 10-year Treasury is now in negative territory at minus 0.97 per cent, pushing up equity prices, a trend BlackRock expects to continue.

Chinese assets should be ‘core holdings’
The post-COVID world will also see a “rewiring” of globalization, according to BlackRock. The pandemic has accelerated geopolitical trends, most notably a “bipolar US-China world order,” according to Pyle.

The tech sector will undergird the strategic rivalry between the two countries and investors need exposure to both global powerhouses, Pyle said. Assets exposed to Chinese growth that are distinct from emerging markets exposure should be “core strategic holdings,” according to BlackRock.

Risks include China’s high debt levels, yuan depreciation and potential US-China conflicts. But investors will be “well compensated” for taking those risks, according to BlackRock.

New era for sustainable assets
The pandemic has also “turbocharged” trends including sustainability, rising inequality and the dominance of e-commerce, the Outlook report said.

In fact, BlackRock expects “a tectonic shift to sustainable assets playing out over decades. Contrary to past consensus, we expect this shift to help enhance returns.”

While investors previously had to determine how much they had to give up when investing in sustainable assets, Boivin said, BlackRock now sees sustainable investments as a long-term driver of returns that should be “considered for allocation.”