A sign for BlackRock Inc. hangs over their building in New York.
Lucas Jackson | Reuters
Given the pace of Covid-19 vaccine adoption and potentially strong fiscal incentives in the US, BlackRock Investment Institute is opting for a riskier approach in 2021.
The US investment house announced on Monday that it had downgraded government bonds to underweight and credit to neutral, while appreciating stocks. To be underweight means holding fewer assets than benchmark indices, which implies the assumption that the asset is underperforming.
Rising inflation expectations have pushed benchmark yields on 10-year US Treasuries higher in recent weeks, causing resurgent equity markets to decline as investors wondered if unprecedented stimulus from central banks could unwind sooner than expected.
Scott Thiel, Chief Fixed Income Strategist at BlackRock, stressed in CNBC’s “Squawk Box Europe” on Tuesday that the recovery in government bond yields was not particularly significant in historical context and that real yields – adjusted for inflation – had remained consistently negative.
“We believe that the economic impact of the Covid crisis will account for about a quarter of the economic impact of the global financial crisis, but the incentive is about four times as high,” said Thiel.
“So when we try to apply some kind of cyclical set of rules or a game plan to this crisis, there are a lot of important things that are being overlooked, and one of them is the idea that the economy is really going to come out very aggressively.”
In a statement on Monday, BlackRock strategists stressed that a 1% rise in US 10-year breakeven inflation rates – a measure of market inflation expectations – since 1998 has typically resulted in a $ 0 increase in 10-year Treasury yields. 9% led.
“But since last March break-even inflation has risen 1.2% and nominal returns have risen only 0.5%. As a result, inflation-adjusted or real returns have fallen further into negative territory,” they showed how differently the Covid shock is in terms of the pace of economic recovery.
Quality growth and cyclical stocks
Tech stocks were among the main victims of the stock market thrill caused by rising bond yields as investors shied away from so-called growth stocks and preferred more economically sensitive cyclical names before an expected economic recovery.
Growth stocks are those of companies that generate significant and sustained positive cash flow and higher future profits. Revenues are expected to grow faster than those of industry peers.
However, Thiel suggested that some of the key themes that emerged from the coronavirus crisis, where the power markets of big tech stocks have seen record highs since the March 2020 downturn, will persist.
“Many of the Covid-related trends persist and can fluctuate over time, but there has obviously been a major shift to online and we expect this to continue,” Thiel said.
“However, we also believe that investors need to be exposed to the cyclical nature and resurgence of world trade. This is why we like emerging market equities and have partially moved our European equity underweight to neutral.”
Thiel suggested that equity market investors need exposure to both sides of the “bipolar world” between the US and China, but expects the underlying interest rate environment to be “business critical”.
“This is our new face value, the idea that interest rates – especially real rates – will go up, but not as much as historically and less volatile, and that’s what we’ve seen so far,” he added.
BlackRock has taken a neutral stance on corporate credit, stating in Monday’s announcement that it now favors stocks because of more attractive valuations.
“We tactically assume that the spreads will be back at the pre-Covid level and that the interest rates themselves will be very low. From a total return perspective, we see the corporate bond market as more challenging than the stock markets,” said Thiel.
“On a strategic basis, it’s the same idea that the valuations would look very complete and we would prefer stocks.”