A sign for BlackRock Inc hangs above their building in New York City.
Lucas Jackson | Reuters
In light of the pace of Covid-19 vaccine deployments and the potentially heavy fiscal stimulus in the United States, the BlackRock Investment Institute is opting for a more risk-based approach in 2021.
The U.S. investment house announced Monday that it had downgraded government bonds to underweight and credit to neutrality, while revaluing stocks. “Underweighting” is holding less assets than benchmarks, which implies the belief that the asset will underperform.
Rising inflation expectations have pushed the benchmark 10-year US Treasury yield higher in recent weeks, causing the stock market resurgence to pull back as investors questioned whether unprecedented levels of bank stimulus plants could be canceled earlier than expected.
However, speaking to CNBC’s “Squawk Box Europe” on Tuesday, BlackRock chief fixed income strategist Scott Thiel noted that the rebound in Treasury yields was not particularly significant in a market. historical context and that real yields – those adjusted for inflation – had remained consistently negative.
“We believe that the economic impact of the Covid crisis will be around a quarter of the economic impact of the global financial crisis, but the stimulus is something like four times as much,” Thiel said.
“So when we try to apply some sort of regulation or cyclical game plan to this crisis, there are a lot of important things missing, and one of them is the idea that the economy will really come out of it. very aggressively. “
In a note Monday, BlackRock strategists pointed out that a 1% increase in 10-year U.S. break-even inflation rates – a measure of market inflation expectations – typically led to a $ 0 rise. 9% of 10-year Treasury bill yields since 1998.
“Yet since the breakeven point last March, inflation has climbed 1.2% and nominal yields have only increased 0.5%. Inflation-adjusted yields, or real yields, are par therefore fell more into negative territory, “they said, demonstrating how the Covid shock differs. in terms of the pace of restoration of economic activity.
High quality growth and cyclical stocks
Tech stocks were among the main victims of the wave of nervousness in equity markets caused by rising bond yields, as investors avoided so-called growth stocks and favored more economically sensitive cyclical stocks before. an anticipated economic recovery.
Growth stocks are those of companies considered to have a large and sustainable positive cash flow and higher future earnings, with revenues expected to grow faster than peers in the industry.
However, Thiel has suggested that some of the key themes that have emerged from the coronavirus crisis – which have seen Big Tech stocks propel markets to record levels since the market downturn of March 2020 – are here to stay.
“Many trends related to Covid are here to stay and they can fluctuate over time, but there has obviously been a big shift towards the internet and we expect that to continue,” Thiel said.
“But we also believe that investors should be exposed to cyclicality, to the re-emergence of global trade, which is why we like emerging market equities and why we have partly shifted our underweighting in European equities to neutral. “
Thiel suggested that investors needed exposure to both sides of the US-China ‘bipolar world’ in equity markets, but expected the underlying rate environment to be ” essential to the mission ”.
“This is our new nominal, the idea that interest rates – especially real rates – are going to rise, but not as much as they historically would and will be less volatile and so far that’s what we have seen, ”he added.
BlackRock took a neutral stance on corporate credit and said in Monday’s note that it now favors equities due to more attractive valuations.
“Our point of view there on a tactical basis is that the spreads have returned to pre-Covid levels, the interest rates themselves are very low, so from a total return point of view we see the market. corporate bonds more challenged than stock markets, ”said Thiel explained.
“On a strategic basis it’s the same idea, that valuations look very comprehensive and we would prefer stocks.”
