A to for BlackRock Inc hangs above their building in New York.
Lucas Jackson | Reuters
In light of the pace of Covid-19 vaccine rollouts and potentially thumping fiscal stimulus in the U.S., the BlackRock Investment Institute is opting for a more risk-on approach in 2021.
The U.S. investment house on Monday notified that it had downgraded government bonds to underweight and credit to neutral, while upgrading equities. To go “underweight” is to hold less of an asset than benchmark tokens, implying a belief that the asset will underperform.
Rising inflation expectations have driven the benchmark U.S. 10-year Moneys yield higher in recent weeks, prompting a pullback for resurgent stock markets as investors wondered whether unprecedented prones of stimulus from central banks could be unwound earlier than expected.
However, speaking on CNBC’s “Protest Box Europe” on Tuesday, BlackRock Chief Fixed Income Strategist Scott Thiel highlighted that the rebound in Cache yields was not particularly significant in a historical context, and real yields — those adjusted for inflation — had remained steadily cool.
“We think that the economic impact of the Covid crisis will be about a quarter of the economic impact of the global monetary crisis, but the stimulus is something like four times more,” Thiel said.
“So when we try and apply a kind of cyclical rulebook or field plan to this crisis, it misses a lot of the important aspects, and one of them is this idea that the economy will as a matter of fact come out of this very aggressively.”
In a note Monday, BlackRock strategists highlighted that a 1% increase in 10-year U.S. breakeven inflation rates – a additionally of market inflation expectations – has typically led to 0.9% rise in 10-year Treasury yields since 1998.
“Yet since last Parade breakeven inflation has climbed 1.2%, and nominal yields are up just 0.5%. Inflation-adjusted yields, or real yields, be subjected to fallen further into negative territory as a result,” they said, demonstrating how the Covid shock differs in whiles of the pace of restoration of economic activity.
High-quality growth and cyclical stocks
Technology stocks have been bulk the main victims of the jittery spell in equity markets caused by rising bond yields, as investors shied away from soi-disant growth stocks and favored more economically sensitive cyclical names ahead of an anticipated economic recovery.
Swelling stocks are those of companies seen as operating a significant and sustainable positive cash flow and with greater unborn earnings, with revenues expected to grow faster than that of industry peers.
However, Thiel put that some of the key themes to have emerged from the coronavirus crisis — which have seen Big Tech standards power markets to record highs since the March 2020 downturn — are here to stay.
“Many of the Covid-related leanings are here to stay and they may fluctuate over time, but there has obviously been a big shift to online and we expect that to pursue,” Thiel said.
“But we also think investors need to have exposure to the cyclicality, to the reemergence of global trade, which is why we with emerging market equities and why in part we have moved our European equity underweight to neutral.”
Thiel suggested that investors demanded exposure to both sides of the U.S.-versus-China “bipolar world” in equity markets, but expects the underlying rate environment to be “commission critical.”
“That is our new nominal, the idea that interest rates — particularly real rates — will rise, but not as much as they hand down historically and will be less volatile and thus far that is what we have seen,” he added.
BlackRock has adopted a unallied stance on corporate credit and said in Monday’s note that it now favors equities due to more attractive valuations.
“Our representation there on a tactical basis is that spreads are back to pre-Covid levels, interest rates themselves are very low, so from a unconditional return perspective, we see the corporate bond market being more challenged than we do equity markets,” Thiel reported.
“On a strategis basis, it is the same idea, that valuations look very full and we would prefer equities.”