There are three ‘big picture’ trends that will influence investment decisions during the second half of 2021. Karim Chedid, Head of Investment Strategy at iShares EMEA, BlackRock (the largest asset manager globally), says that today’s asset allocation discussions are dominated by interest rate and inflation expectations, deglobalisation, and shifts in structural investment trends.
He was presenting to an IndexMore Collaborative Investment Insights webinar, jointly hosted by Satrix and iShares, the largest index providers locally and globally, respectively.
Chedid argues that the good news for global investors is that the level of permanent economic damage caused by the 2020 recession is far lower than that caused following the 2008 Global Financial Crisis (GFC), with both the credit cycle and credit markets far healthier today than then. In this context, we could see a return to pre-pandemic economic growth trends by end-2021 in the United States (US) and early-2022 across Europe. China, meanwhile, completed their V-shaped growth rebound in 2020 already.
The core message midway through 2021 is that the global economy is restarting rather than recovering. “Investors must not lose sight of the fact that our first-half experience represents an economic restart and not a recovery,” Chedid says. His view is informed by the nature of the 2020 recession, which he describes as “a recession of design” rather than a cyclical recession. “The recession was created by authorities putting restrictions in place around economic activity in order to try and stop the spread of the virus,” he says. Governments then used fiscal stimulus and monetary policy to “build a bridge” to allow businesses and consumers to cross over the chasm of recession.
The restart experienced in the first half of 2021 has exceeded analysts’ expectations, to which iShares EMEA responded by refocussing on three macro-outlook themes when allocating capital for the second half of the year. These broad trends include:
Theme 1, The new nominal
“We see continued negative real interest rates continuing to be a positive factor for risk assets,” says Chedid. The asset manager’s pro-risk/pro-equity view is underpinned by the US Federal Reserve’s current ‘weighted average inflation framework’ policy, which it uses to motivate a continued muted response to growing inflationary pressures in the US, preventing short term interest rate hikes. For the layperson, the argument goes: Stick with carefully-selected equities for as long as cash is being eroded by negative real interest rates.
Theme 2, globalisation rewired
The deglobalisation that emerged during the pandemic is likely to accelerate, and many analysts expect a multi-year decline in global trade as countries focus inwardly, and companies take steps to address risks in global supply chains. BlackRock expects US / China tensions to continue and says that the decoupling of these superpowers will be net positive for both economies, explaining the asset manager’s overweight position in these markets.
Theme 3, Turbocharged transformations
“We remain focused on some of the long-term structural trends that we saw emerging during the pandemic, including sectors like infrastructure, healthcare and technology,” says Chedid. The asset manager is still focused on cyclical and value factors, but it will add technology shares during market dips.
A discussion on post-pandemic economic growth is incomplete without considering the global vaccine rollout. A successful rollout is imperative if the world hopes to cross the ‘bridge’ that has been built at great cost, with governments issuing four times as much debt as during the Global Financial Crisis of 2008. “Broadly speaking, the vaccine rollout has been a resounding success in the UK, US and many countries in the European Union,” says Chedid. He adds that while slow vaccine progress in emerging markets (EMs) is a risk, there are other factors that will support EM asset classes in the second half of 2021.
Another important trend is that of asset allocation towards sustainable investing. “The shift to sustainable has been huge, post-pandemic, with year-to-date inflows into sustainable equity exchange traded funds (ETFs) in Europe exceeding inflows into non-sustainable opportunities,” says Chedid. Asset managers showed clear preferences for sustainable over non-sustainable assets when they rebuilt portfolios immediately following the March 2020 financial market downturn.
What happens next? BlackRock is overweight US equities, neutral European equities and underweight Japan. “We are also overweight EM equities, due to the weak dollar; the more stable trade policy under Biden; and improving interest rate outlooks,” concluded Chedid. He also indicated that they are overweight China in the EM basket due to its growth outlook and diversification benefits. The asset manager’s EM focus is mostly on Asia at present, with the United Kingdom singled out as a favourite in Europe for its cyclicality and better equity market exposure to a significant economic upswing.
Satrix’s global ETFs are powered by iShares, the largest ETF provider globally.
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