Global Weekly Commentary: What lies beyond the restart?
Key points
Midyear outlook forum
BlackRock’s senior executives and portfolio managers discussed what lies beyond the restart – and investment implications - at our semi-annual forum.
Market backdrop
U.S. consumer price index (CPI) jumped in May and key drivers appear related to activity restart. Stocks rallied to record highs and bond yields fell.
Fed in focus
The Federal Reserve’s policy meeting will be in focus this week. We expect the Fed to stress the transitory nature of the inflation surge.
BlackRock’s senior executives and portfolio managers gathered virtually at our midyear outlook forum at a critical juncture in markets – with a pro-risk consensus over the tactical horizon. Beyond the near-term restart, they expressed a wide range of views on topics including growth and inflation, and identified a few key long-term investment themes including the climate transition, China and policy.
Chart of the week
U.S. GDP growth trend after the global financial crisis and Covid shock
Sources: BlackRock Investment Institute, Reuters with data from Haver Analytics, June 2021. Notes: The pink line represents the extrapolation of the five-year growth trend preceding the global financial crisis (GFC). The yellow area represents a range of assumptions for trend growth following the Covid shock. The orange line represents actual U.S. GDP up to the first quarter of 2021 and the median forecast from the second quarter of 2021 to the last quarter of 2022, based on the latest Reuters poll as of May 13, 2021. We plot the log of GDP so that the slope of the line indicates the trend growth rate.
The global economy and markets are at the most consequential moment since our outlook forums started a decade ago. The bounce back from the Covid shock has been remarkably swift, reflecting our view that this is a restart, not a usual business cycle recovery. This is in stark contrast to the global financial crisis (GFC) and the “lost decade” that followed. Median forecasts now point to a period of above-trend growth of the U.S. economy, according to the latest Reuters poll. See the chart above. This is unusual, as typically growth takes time to pick up to trend again after a downturn. The bigger question: What lies beyond? Views among forum participants differed on whether the restart is the start of a broader pickup in animal spirits, the acceleration of trends that boost potential growth, or a return to something more like a typical mid- or late-cycle. Many saw U.S. inflation exceeding the Fed’s target in the medium term – a big turnaround from the tepid inflation expectations of a year earlier. The BlackRock Investment Institute (BII) sees U.S. CPI inflation averaging just under 3% between 2025-2030, and believes this is still underpriced by markets.
Strong consensus emerged among forum participants on some long-term investment themes. These include the transition to a net-zero economy, an enduring policy revolution, opportunities in Chinese assets despite structural U.S.-China tensions, and the key role of technological innovation. Tech will be critical for solving structural problems such as ageing societies and the resulting decline of labor participation; it is also key to our sectoral views on incorporating the effect of climate change – and that of the “green” transition – in our long-term return assumptions. The net-zero transition requires huge investments, changes in business models and innovation. There is no roadmap for such a tectonic shift – one that we believe markets are underappreciating. The transition could create sustained demand for commodities such as copper and lithium that are critical for electrification, but may also exacerbate a near-term supply/demand imbalance in oil, spurring price volatility.
China is key to the net-zero transition. China, the world’s largest greenhouse gas emitter, has pledged to achieve carbon neutrality before 2060 and peak carbon emission by 2030. More broadly, we view China-related assets as core strategic holdings as we believe investors need exposures to China in an increasingly bi-polar U.S.-China world order.
We see our new nominal investment theme – that calls for a more muted response in interest rates to higher inflation than in the past – not only playing out but just getting started. We see central banks, notably the Fed, as likely leaning against sharp long-term yield rises. The upshot: We see a lower path of short-term interest rates compared with our previous expectation and current market pricing – and this has significant implications for our strategic views.
Our strong conviction on these long-term investment themes has helped inform our strategic views. These include a preference for assets that are likely to benefit from the climate transition, Chinese assets as core holdings, and a preference for inflation-linked bonds over nominal bonds. The direction of travel is clear, yet it is crucial to identify nearer-term opportunities along the path between now and then. Over the tactical horizon, we are pro-risk amid the broadening restart. The easy monetary policy and massive fiscal spending have triggered some concerns about asset price bubbles, but we see little evidence to date of systemic financial imbalances arising. We will reflect on the implications of the economic restart on asset classes and update our views in the upcoming midyear global outlook to be released on July 6.
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