The asset management colossus believes three key themes will shape a post-covid world of rising climate risk and extraordinary economic imbalances.
Ben Powell, the chief investment strategist for Asia Pacific at BlackRock’s Investment Institute in Singapore, said: “To state the obvious, the last 18 months have been rather unusual. It hasn’t been a normal slowdown – it’s been a natural disaster-style situation.”
He was speaking at an online press briefing last Wednesday (July 14). Powell said: “It’s not a normal recovery, taking place over months, quarters, or even years. This is akin to turning the lights back on.”
The Institute, BlackRock’s research arm, sees three key themes emerging in the fractured post-covid landscape: “the new nominal” of tripping-hazard interest rates and central banks keeping the stimulus taps open despite the “double whammy” of higher GDP and inflation; “China stands out” as it looks to improve the quality of its explosive growth; and the “journey to net zero” against the backdrop of a global consensus on the need to combat climate change.
Of these themes, the most controversial is likely to be the view on China. The question of whether the world’s most powerful economy is still an emerging one is at front of mind for many managers, who remain unsure whether it can escape the “middle-class trap” that has kneecapped other emerging markets like Brazil and South Africa. But Powell says that the view is neither “bullish nor bearish” but an observation of fact: China no longer fits conveniently into the emerging markets space it previously shared with still-nascent economies like India.
While the Chinese Government’s recent regulatory crackdown on the burgeoning domestic fintech space has seen some investors re-evaluate their views on the sovereign risk associated with China, BlackRock believes that the crackdown will “weigh on the quantity of growth in the near term but potentially improve the quality in the long run.”
“We think China is a standalone destination for portfolios, somewhat similar to how we think about the US… rather than another part of a broader index,” Powell said. “Carving out a discrete China view is the right way to go, given its importance for global economics and markets.”
But if the China question is answered for BlackRock, the net-zero question isn’t. BlackRock became the proverbial loudest voice in the ESG conversation in January of 2020, when Larry Fink, the chief executive, used his annual letters to other CEOs and investors to announce the company would divest its active investments in thermal coal and apply ESG screens and functionality to new fund launches and it’s much more substantial passive investment options.
BlackRock has an overweight allocation to tech to play the net-zero theme but concedes that the lack of a global roadmap and the abrupt nature of change as investors ditch stranded assets means there will be no orderly transition.
“There is still a substantial underappreciation in markets of how profound these changes are going to be, and the related point that the path to net-zero is unlikely to be a smooth one,” Powell said. “There’s going to be fits and starts… It’s a very difficult and challenging project and one that is going to need the help of markets, and that will present opportunities for investors.”
BlackRock is overweight global equities due to the frantic activity restart and supportive monetary and fiscal policy that springs from the new nominal theme, but remains underweight credit and developed market bonds “because they don’t give you what they used to” – an “obvious but nonetheless very important” consideration.
“The challenge is, how do you recreate what [US] treasuries or other developed market government bonds have been so good at it in the portfolio over many decades?” Powell said.
“We’ve spent a lot of time thinking about broadening away from a traditional government bond allocation towards illiquids, alternatives, and reaching a little bit further afield in terms of geographical exposure to get the portfolio in line with return expectations and hopes.”
The Institute has downgraded the US and UK to neutral because they’ve had their “turning the lights back on moment” of maximum acceleration in economic activity, and upgraded Europe and Japan, where it is overweight and neutral respectively as the recovery continues in terms of both covid-19 case numbers and consumer consumption.
“I would focus on the upgrade aspect of the Japan call. Great companies both in Europe and Japan are geared into a global economic restart, combined with the benefits of domestic reopenings – the Japanese Olympics are still to come, and we’re potentially seeing quite balance-sheet healthy Japanese consumers get back out there to spend in a way that we’ve already seen in the US and elsewhere.”