September update
Markets have rallied sharply from their virus lows, driven by the policy revolution and economic restart. Tighter valuations increase the risk of further market volatility, particularly ahead of the divisive U.S. elections. Against this backdrop we stay moderately pro-risk on a tactical basis, with a preference for credit.
The activity restart has broadened. Yet it is moving at different speeds between countries, driven by differences in dealing with virus dynamics. The lower incidence of new deaths partly explains the relatively muted market response to a renewed rise in infections. The timeline for a vaccine has surprised to the upside following accelerated efforts worldwide. Yet immunization is not a panacea for the economy and a recovery to pre-Covid levels will take time.
An unprecedented joint monetary-fiscal policy response is providing a bridge for disrupted income streams. Fiscal stimulus fatigue is becoming a risk – especially in the U.S. – even as Europe has stepped up its fiscal support. The Fed’s new monetary policy framework is set to have significant implications for inflation outcomes as it allows for inflation overshoots and doesn’t worry about labor markets overheating. Combined with structural changes accelerated by Covid-19, such as deglobalization, we see a higher inflation regime in the medium term.
The public health and economic crises are exacerbating entrenched forms of inequality across income levels, ethnicity and countries. Many emerging markets (EMs) are facing health, policy and deglobalization challenges. The pandemic has exposed vulnerabilities of global supply chains and added impetus to geopolitical fragmentation. It has led to a policy revolution that blurs the boundaries between fiscal and monetary action – which could address some of the rising inequalities. And it has put a premium on sustainability, corporate responsibility and resilience of companies, sectors and countries.
Market sentiment has been driven by the pandemic’s near-term evolution and the policy response, but these structural limits are transforming the investment landscape and will be significant to investment outcomes. In other words, the future is now.
At BlackRock, we are focusing on creating real resilience for the whole portfolio. This goes beyond using financial resilience to build a better blend of returns - it’s about ensuring the portfolio is well positioned at a more granular level to underlying themes, including sustainability. The most important action investors need to take today, in our view, is to review their strategic asset allocation to ensure portfolios are resilient to the supercharged trends.
We emphasize three strategic calls. First, the policy revolution combined with the risk of supply shocks, raises the potential for higher inflation in the medium term and challenges the role of nominal government bonds as ballast over a strategic horizon. Second, the pandemic has accelerated a tectonic shift toward sustainability. Third, deglobalization and fragmentation call for a focus on real resilience: diversifying across companies, sectors and countries that are positioned well for these trends.
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