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Market watch

US and Global Market Outlook (September 2020)

Issue date: 2020-09-30

By BlackRock 

Market backdrop

Activity has started to normalize around the globe, albeit with renewed localized lockdowns to contain virus clusters. Market volatility is returning after months of steady advances in risk assets. Valuations have risen, and we could see greater volatility in coming months as a result, especially as the U.S. election closes in. A contributing factor: Negotiations over the size and makeup of a new U.S. fiscal stimulus package have stalled. In addition, the pandemic is still spreading in many countries, and U.S.-China tensions have escalated.

What’s the challenge?

The public health and ensuing economic crises are exacerbating entrenched forms of inequality across income levels, ethnicity and countries. Many emerging markets (EMs) are facing health, policy and deglobalisation 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. The world has changed, leading us to a completely new macro framework and major view changes. Our revamped 2020 investment themes reflect this, and now include strategic, or long-term, implications. 

Theme 1: Activity restart

  • Mobility is key to tracking the virus shock. Metrics that gauge the movement of people using mobile phone location data can help capture individual behaviors. They are more closely tied to economic activity than the severity of lockdowns, our analysis shows.
  • This means the response of people to the virus is more important than government policies alone. We also find restricting mobility and imposing lockdowns has a bigger effect on the key services industry than easing those measures.
  • The longer it takes for activity to normalize, the deeper the economic scars will be. The pace of the activity restart depends on how successful countries are in suppressing the virus as they reopen.
  • Our mobility research suggests the risk of renewed virus outbreaks may be highest in the U.S. among developed nations. China is on the leading edge of economic reopening.
  • The pandemic’s longer-term investment implications are about changing societal preferences, sectoral adjustments, digitalization and the relocation of global supply chains. Alternative data sources are key to getting a handle on this.

Theme 2: Policy revolution

  • There has been a much-needed policy revolution to cushion the coronavirus shock. Policymakers are relying less on financial sector transmission to stimulate activity –and more on direct support to the real economy. There is a blurring of fiscal and monetary policies as well as government intervention in the economy and financial markets.
  • The global policy response to the pandemic has been unprecedented in speed and size. The combined sum of fiscal and monetary actions is covering the virus hit to the economy in both the U.S. and euro area. See the Filling the gap chart.
  • We now see a risk of policy fatigue in the U.S. as policymakers face a series of “fiscal cliffs” and may cut fiscal relief prematurely. By contrast, Europe has ramped up stimulus efforts.
  • We wrote last August about the necessity for effective monetary and fiscal coordination in a major shock because it would reduce lost output and could lessen risks such as rising inequality. Without proper guardrails and a clear exit strategy, however, we warned of a medium-term risk of uncontrolled deficits with commensurate monetary expansion and, ultimately, rising inflation.

Filling in the gap
Estimated virus hit to GDP vs. offsetting policy measures, 2020

* The euro area is represented by averages of Germany, France, Italy and Spain.
Sources: BlackRock Investment Institute, with data from the Federal Reserve, ECB, BOJ, BOE and Haver Analytics, June 2020. Notes: The chart shows the magnitude of the negative shock (orange) and the associated positive policy response (yellow) as percentages of GDP. We use estimated 2020 targets for the U.S. and euro area central bank purchases and lending programs. The euro area includes the ECB’s Targeted Longer-Term Refinancing Operations. The UK includes central bank support for the Term Funding Scheme.

Theme 3: Real resilience

  • Structural shifts are challenging the resilience of portfolios. With the policy revolution pushing yield curves close to their lower bounds, we see government bonds providing less diversification benefits in strategic allocations.
  • Many assets are vulnerable to the physical and regulatory implications of climate change and other sustainability-related risks. The pandemic has sparked concerns about fragile supply chains and companies’ social license to operate, accelerating a trend toward sustainable investing.
  • China and the U.S. are intensifying their strategic rivalry across multiple dimensions, resulting in an increasingly bipolar world. Investors need to balance the investment case for gaining exposure to both poles with possible investment restrictions on each side. Greater geopolitical fragmentation means that portfolio resilience will have to be driven by deliberate diversification across countries and regions.
  • Investors need to embrace uncertainty in this environment. Our methodology for constructing portfolios explicitly takes into account fundamental uncertainty around long-term mean returns. The coronavirus shock only underscores the importance of uncertainty for building portfolio resilience.
  • Private markets, which are not suitable for all investors, offer this potential. Managers have a say in structuring the investments – and can add custom-made resilience as a result. Private markets can give investors exposure to emerging technologies and other real-economy trends that is not available in public markets, in our view. And they are bigger and deeper than ever.

This material is provided by BlackRock and is intended solely for informational or educational purposes. This material and the information provided herein must not be relied upon as a forecast, research, investment or financial product advice and is not intended to be (in any manner) a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2020 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is not indicative of future performance and is no guide to future returns.

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.

The information provided here is not intended to constitute financial, tax, legal or accounting advice. You should consult your own advisers on such matters. BlackRock does not guarantee the suitability or potential value of any particular investment. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

©2020 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.



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