Blackrock 2021 Global Outlook

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Investment Themes

01. The new nominal

We see stronger growth and lower real yields ahead as the restart accelerates and central banks limit the rise of nominal yields – even as inflation expectations climb. Inflation will have different implications to the past. Strategic implication: We underweight government bonds and see equities supported by falling real rates.

A Democratic victory without Senate control would reinforce market trends such as the hunt for yield and growth stocks.

02. Globalization rewired Covid has accelerated geopolitical transformations such as a bi-polar U.S.-China world order and a remaking of global supply chains – placing greater weight on resilience and less on efficiency. Strategic implication: We favor deliberate country diversification and above-benchmark China exposures.

03. Turbocharged transformations The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality, and the dominance of e-commerce at the expense of traditional retail. Strategic implication: We prefer sustainable assets amid a growing societal preference for sustainability.

New playbook needed

The traditional business cycle playbook does not apply to the pandemic. We see the shock as more akin to that of a large-scale natural disaster followed by swift economic restart. Early in the crisis, we assessed that the ultimate cumulative economic losses – what matters most for financial markets – would likely prove to be a fraction of those seen in the wake of the global financial crisis (GFC). 

This view was conditional on robust policy support to tide households and businesses through the income shock. The early results of Covid-19 vaccine trials give us greater confidence in this framework. They suggest the economic restart can re-accelerate significantly in 2021 as pent-up demand is unleashed. Markets will likely be quick to price in a full economic restart given the better visibility on the outlook.

Restart challenges

The U.S. and Europe face challenges in the very near term: A resurgence of virus cases may result in outright economic contraction. Risks of policy fatigue are rising, especially in the U.S., and ongoing policy support is vital to limit any permanent economic scarring. Yet positive vaccine news is a game changer in that we now know we are building a bridge to somewhere, providing clarity for policymakers, companies and markets about getting to a post-Covid stage.

Whole portfolio resilience

As a result, we favor looking through any near-term market volatility. We increase our overall pro-risk stance by upgrading equities on a tactical basis, and take a sectoral approach. We like tech and healthcare due to the pandemic’s transformative shifts – and balance this with a preference for prime beneficiaries of the economic restart, such as emerging market (EM) equities and U.S. small caps. We are overweight Asia ex-Japan equities and Asia fixed income on the region’s effective virus response, and favor assets exposed to Chinese growth. 

The policy revolution has big implications for our strategic views as we see a more muted response of nominal yields to a higher inflation regime. Central banks appear committed to limit any rises in nominal yields even as inflation picks up. Investors will need a new playbook to navigate this. We underweight government bonds and maintain a higher strategic allocation to equities than in typical periods of rising inflation. 

Sustainability is a key component of our views as we see a tectonic shift to sustainable assets playing out over decades. Contrary to past consensus, we expect this shift to help enhance returns. Private market exposures are one way to pursue portfolio resilience with a sustainable lens.

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