In its weekly market commentary, the BlackRock Investment Institute said one of the key investment learnings from 2020 had been that the effects of the pandemic on financial markets were not as severe as the 2008 crisis, and that government policy had helped provide a quick “reset”.
“Early in the crisis we assessed the ultimate cumulative economic losses – what matters most for financial markets – would likely prove to be a fraction of those seen in the wake of the 2008 global financial crisis,” BlackRock said.
“We saw the COVID shock as more akin to a large-scale natural disaster that would be followed by a swift economic restart – if policy support could provide a bridge.”
The investment manager said following an “extraordinary policy response” from governments, it had upped its allocations to equities during the crisis.
“On a tactical horizon we upgraded credit and increased our preference for quality assets – and held our moderate pro-risk stance over the rest of 2020,” BlackRock said.
“We also see the ongoing policy revolution as a major underpinning of our 2021 global outlook. The ongoing fiscal and monetary policy support in 2021 will help prevent economic scarring as Covid vaccines create a bridge to a post-pandemic economy, in our view.”
BlackRock said given the stated preference of central banks to allow loose monetary policy at the risk of inflation, further strong growth in risk asset prices was likely to occur through 2021.
“We expect nominal yields to be capped by central banks as they have signaled they will be more willing to let economies run hot with above-target inflation,” the report said.
“The result: stronger growth and declining real yields. We see this combination as under-appreciated by markets, and a potential booster to risk assets even as the prospect of a widespread COVID vaccination campaign has buoyed markets in recent months.”
The investment manager said it believed stocks with a focus on technology and sustainability would continue to outperform in 2021, and that a potential switch to value stocks as economic growth took off later in the year would be premature.
“The pandemic has reinforced an increased focus on sustainability and the dominance of e-commerce at the expense of traditional retail. This helps inform our barbell approach to risk assets over the next six to 12 months – quality assets such as tech and healthcare stocks on one end, and selected cyclical exposures on the other,” BlackRock said.
“We maintain our overweight in the quality style factor – a view that worked out well throughout 2020. We see traditional ‘value’ sectors facing structural challenges that have been exacerbated by the pandemic, which could limit their upside even with a rapid restart.”
