Global Weekly Commentary: Why we stay moderately pro-risk
Upholding our views
The improving macro backdrop, a strong risk rally and rising volatility leave us moderately pro-risk over coming months, with a preference for credit.
Fiscal discussions stall
The outcome of negotiations of a new U.S. fiscal package looks increasingly binary: a sizable fiscal package or nothing at all before the November election.
Markets will watch for any details of the Federal Reserve’s new average inflation targeting framework as the central bank holds its policy meeting this week.
The broad macro backdrop has been improving, risk assets have rallied a long way, and increasing market volatility points to risks that investors will need to navigate as the U.S. presidential election draws closer. All this leaves us moderately pro-risk as we head into year end, with a preference for credit.
Chart of the week
Labor market support in selected developed economies, September 2020
Sources: BlackRock Investment Institute, with data from Haver Analytics, BLS, Eurostat, ONS, DARES, Spanish Labor Ministry, INPS, Autor et al (2020), September 2020. Notes: The latest estimates are for August in the U.S, July in the euro area and June in the UK. Official estimates of workers still covered by the U.S. PPP scheme are not publicly available, so we used the estimate published by Autor et al for June as the latest. Peak bars show the levels at the point where the take-up of furlough schemes was at its highest from March 2020. Euro area is based on an average of Germany, France, Italy and Spain.
We see localized restrictions – rather than a return to national lockdowns – as the main virus control approach over coming months. Fatality and hospitalization rates per infection have dropped even with higher case counts. Against this backdrop we use three signposts to assess the recovery: activity, policy support, and permanent scarring. The restart has so far surprised on the upside. This reaffirms our view that the cumulative shock from the virus should be a fraction of that from the global financial crisis, even though the harder part of the recovery lies ahead. Policy is still supportive of the restart, as illustrated in the chart by the fiscal support measures provided to key labor markets. Europe’s short-time work or furlough programs have supported a large proportion of the labor force, as the green bars show. The U.S. has focused on additional unemployment benefits. Both the UK and U.S. face risks stemming from an early end to such programs.
Monetary and fiscal policy have played a key supporting role for the private sector. U.S. jobs data have pointed to a further fall in the unemployment rate and an increase in labor participation. In Europe, labor market policies have kept a lid on the increase in unemployment. Yet they may delay the inevitable adjustment of some industries to a post-Covid world and weigh on productivity and wages in the long term. The key recent shift in monetary policies: The Federal Reserve has adopted an average inflation targeting framework and shifted to using “shortfalls” from full employment as key to assess labor market conditions. This raises the likelihood of higher medium-term inflation – and introduces other risks such as political challenges that may make it harder for the Fed to fight future inflation episodes.
So far we have seen limited evidence of permanent damage to the economy, even though many firms and individuals are going through a painful period of readjustment. U.S. bankruptcy filings for large firms rose sharply through July but have fallen in August. Some U.S. firms use bankruptcy proceedings to protect themselves from creditors while structuring for a post-Covid world. In Europe, bankruptcy data have been distorted by the temporary relaxation of requirement for unviable firms to cease trading. Euro area bank lending to non-financial firms is still growing strongly, providing companies with a lifeline. Yet we see risks that the policy support could produce unviable “zombie firms.”
The recent U.S. stock market selloff may be triggered by the unwinding of crowded positions in tech – this year’s best-performing sector. It also highlights some fundamental risks investors need to navigate in coming months, such as the increasing dominance of tech stocks in the market. Policy exhaustion is also a risk. A premature retrenchment could hamper the activity restart just as we get to the harder part of it. This might open the door to more considerable scarring of the real economy. The virus spread may pick up pace when the Northern Hemisphere enters colder seasons. The U.S. election in November also looms large, with the potential for drastically different implications on policy and markets.
The bottom line: We remain moderately pro-risk over the next six to 12 months. We prefer credit over equities tactically, as stocks have become more expensive relative to credit. In credit we favor high yield for its income potential and are neutral on investment grade. In equities we prefer the euro area market due to its cyclical exposure. We are underweight emerging markets outside Asia and neutral on EM Asia as the latter has fared better in both virus control and market performance.
© 2020 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Sep 14, 2020, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.
In the U.S. and Canada, this material is intended for public distribution. In EMEA Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised 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, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. From 31 December 2020, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Switzerland, this document is marketing material. This document 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 the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. 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). In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2020 BlackRock, Inc. All Rights Reserved. BLACKROCK and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.