Global Weekly Commentary: A cyclical rotation
Key points
A cautious tilt
We favor a cautious tilt into cyclical assets, with expectations for a rebound in global trade and manufacturing activity.
Growth outlook
We see growth stabilizing and gradually picking up over the next six to 12 months thanks in part to easy financial conditions.
Davos forum
This week’s Davos forum will likely shine a light on big structural themes such as the intensifying focus on sustainability.
Markets have greeted the new year with optimism. The signing of a limited “Phase 1” deal between the U.S. and China reinforces our expectation for global trade tensions to take a pause in 2020. Generally positive economic data and an encouraging start to the latest quarterly earnings season also back our call for a potential bounce in risk assets. In equities, we are overweight emerging market (EM) and Japanese equities, and have upgraded the value style factor to neutral.
Chart of the week
Earnings and return sensitivity to global industrial output, 2000-2019
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Refinitiv, MSCI, the Netherlands Bureau for Economic Policy Analysis, and the National Bureau of Economic Research, January 2020. Notes: Each region’s equity market is represented by the respective MSCI index. Sensitivity to global industrial production is calculated by comparing the changes in 12-month forward earnings estimates and equity market total return to the changes in global industrial production on a rolling three-month basis. We used the world industrial production data from the Netherlands Bureau for Economic Policy Analysis and forward earnings based on I/B/E/S estimates in this study, from the start of 2000 to October 2019 excluding recessions.
Cyclical assets have severely underperformed in recent years, including amid a global growth slowdown. We believe a rebound in global trade and capex should pave the way for stronger performance of cyclical assets over a six-to-12 month horizon, even as we see some long-term trends weighing on these assets, such as the structural downshift in China’s growth. We studied the sensitivity of corporate earnings and equity returns to fluctuations in global manufacturing activity over the past two decades in different regions. See the chart above. The conclusion? Earnings estimates – as well as equity returns – in EM and Japan have historically been the most sensitive. This suggests these equity markets may have room for outperformance during a global growth pickup.
Recent data support our expectation for a pickup in growth this year. World trade volumes appear to have stabilized after sharp declines since 2018. China has reported better-than-expected trade data – alongside rebounding industrial profits and improving manufacturing activity. Financial conditions have eased significantly in developed economies since early 2019, and look poised to filter through to support the real economy in the next six to 12 months. Our BlackRock GPS, which gauges where consensus gross domestic product (GDP) forecasts may stand in three months’ time, indicates global growth should be accelerating slightly through the year. We see this environment as positive for cyclical EM assets.
Japanese equities may benefit from the same dynamics – as well as a pause in U.S.-China trade tensions – due to the export-oriented nature of the Japanese economy. A few other factors work in its favor. A weakened Japanese yen – currently at the lowest level against the dollar since mid-2019 – has historically tended to help lift Japanese stocks. We expect the Bank of Japan to stand pat on its ultra-loose monetary policy and the government to launch sizable fiscal stimulus this year, providing further support for the market. An ongoing improvement in corporate governance is another positive. Share buybacks have surged – up 40% in 2019 to a record high of 7 trillion yen (about $64 billion), according to Morgan Stanley. This should help boost return on equity and share performance. Yet most foreign investors are still underweight the market.
We have also upgraded the value style factor to neutral on a tactical basis amid expectations for a modest cyclical upswing in this late-cycle period. We expect a firming in industrial and trade activity – as well as a steepening yield curve – to underpin the factor. The underperformance in recent years – with the drawdown in value now the third worst and the longest in almost 100 years based on the Fama-French data set – also supports our tactical call. Among other factors, we are moderately overweight quality, which includes many global firms that stand to benefit from easing trade tensions.
Bottom line: We favor a cautious tilt into cyclical assets, including Japanese and EM equities. In bonds, we prefer EM and high yield debt. The risks to our view include profit margin erosion and an unexpected slowdown. For now we expect revenue growth to boost corporate earnings even as profit margins decline, but higher costs – from wage increases or supply chain disruptions - may eat into profits.
General Disclosure: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Jan. 20, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
In the U.S. and Canada, this material is intended for public distribution. In the UK and outside the EEA: Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorized activities conducted by BlackRock In the event where the United Kingdom leaves the European Union without entering into an arrangement with the European Union which permits firms in the United Kingdom to offer and provide financial services into the European Union (“No Deal Brexit Event”), the issuer of this material is: BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and BlackRock (Netherlands) B.V. for in the European Economic Area, however, prior to a No Deal Brexit Event and where a No Deal Brexit Event does not occur, BlackRock Investment Management (UK) Limited will be the issuer. BlackRock (Netherlands) B.V.: Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Trade Register No. 17068311. For more information, please see the website: www.blackrock.com. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock (Netherlands) B.V. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. In the Kingdom of Saudi Arabia this information is only directed to Exempt Persons, Authorized Persons or Investment Institutions, as defined in the relevant implementing regulations issued by the Capital Markets Authority (CMA). In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In Latin America, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security. If any funds are mentioned or inferred in this material, such funds may not have been registered with the securities regulators of any Latin American country and thus, may not be publicly offered in any such countries. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. No securities regulator within Latin America has confirmed the accuracy of any information contained herein.
The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2020 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM0120U-1062649