BlackRock Institute gets more bullish on the economy, recommends US large caps, emerging markets, UK

  • The BlackRock Investment Institute team has updated its 2021 forecast. In the new report they outlined their global economic outlook and recommended global asset allocation.
  • Below are a few key quotes and figures displayed by the BlackRock Investment Institute team for investors to evaluate:

Global Outlook

  • “We broaden our tactical pro-risk stance in light of major developments since the publication of our 2021 outlook in December: the vaccine rollout and up to $2.8 trillion of additional U.S. fiscal spending this year. Inflation expectations have risen sharply while real rates are steady in negative territory. We prefer equity over credit and turn underweight government bonds – in line with our strategic views.”
  • “Activity in many services sectors is already compressed with less room to decline further. Businesses have also adapted to an environment of social distancing, allowing operations to continue. Vaccine rollouts are likely to stoke a sharper-than-anticipated rebound.”
  • “Rising U.S. 10-year yields reflect the repricing higher of inflation expectations. We believe central banks have strong incentives to lean against any rapid rise in nominal yields. Yet we still see gradual increases in yields as markets price in a rapid economic restart supported by fiscal stimulus. We underweight U.S. Treasuries as a result.”

Directional Asset Class Views

  • “We turn overweight equities on a strategic horizon. We see a better outlook for earnings amid moderate valuations. Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indexes. Tactically, we stay overweight equities as we expect the restart to re-accelerate and interest rates to stay low. We tilt toward cyclicality and maintain a bias for quality."

  • “We are underweight U.S. Treasuries. We see nominal U.S. yields rising but largely due to a repricing higher of inflation expectations. This leads us to prefer inflation-linked over nominal government bonds.”

  • “We are overweight U.S. equities. We see the tech and healthcare sectors offering exposure to structural growth trends, and U.S. small caps geared to an expected cyclical upswing in 2021."

  • ”We are overweight EM equities. We see them as principal beneficiaries of a vaccine-led global economic upswing in 2021. Other positives: our expectation of a flat to weaker U.S. dollar and more stable trade policy under a Biden administration.”
  • “We are overweight Asia ex-Japan equities. Many Asian countries have effectively contained the virus – and are further ahead in the economic restart. We see the region’s tech orientation allowing it to benefit from structural growth trends.”

  • “We are overweight UK equities. The removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome erode. We also see UK large-caps as a relatively attractive play on the global cyclical recovery as it has lagged peers.”
  • “We are overweight the U.S. size factor. We see small- and mid-cap U.S. companies as a key place where exposure to cyclicality may be rewarded amid a vaccine-led recovery.”

Fiscal Debate

  • “The fiscal response to the COVID-19 shock is now a multiple of the response after the global financial crisis. Our hypothesis holds: the ultimate cumulative impact on growth is likely to be a fraction of the 2008 crisis. We believe this matter most for financial markets.”

How to implement Blackrock's advice with ETFs

  • The BlackRock Investment Institute has provided investors with their updated outlook for 2021(Full Report). Here are ETFs to use to implement their recommended asset allocation:
  • U.S. ETFs: Vanguard Information Technology ETF (NYSEARCA:VGT), First Trust NASDAQ-100-Tech Index ETF (NASDAQ:QTEC), iShares U.S. Technology ETF (NYSEARCA:IYW), Fidelity Covington Trust - Fidelity MSCI Health Care Index ETF (NYSEARCA:FHLC), Health Care Select Sect SPDR ETF (NYSEARCA:XLV), iShares U.S. Healthcare ETF (NYSEARCA:IYH).
  • Emerging Market ETFs: Schwab Emerging Markets ETF (NYSEARCA:SCHE), SPDR Portfolio Emerging Markets ETF (NYSEARCA:SPEM).
  • Asia ex Japan ETFs: iShares MSCI All Country Asia ex-Japan Index ETF (NASDAQ:AAXJ).
  • UK ETFs: SPDR Index Shares Funds - SPDR Solactive United Kingdom ETF (NYSEARCA:ZGBR)Small Cap ETFs: Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT).
  • Note that Blackrock recommends overweighting Asia ex-Japan, in contrast to Bridgwater which thinks that Japanese equities are "as undervalued as we've seen in decades", and recommends a very different global allocation.
  • Finally, is there a risk to US equities from rising bond yields? The S&P can likely withstand a 10-year yield moving up to 1.75% before compression on P/E valuations becomes more pronounced, according to one market expert.

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