BlackRock's global research chief explains why the stock market's principal driver just changed - and breaks down how investors should adjust to the big shift
- Halfway into 2019, BlackRock's top investment professionals met to review their outlook and concluded that there was a new principal driver of global markets.
- In an exclusive interview with Business Insider, Jean Boivin, the global head of research for the BlackRock Investment Institute, discussed why the firm formulated this view and the investing decisions it recommends.
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One of the outcomes of the Great Recession has been a preoccupation with what will trigger the next big crisis.
The issue of where we are in the cycle, what might trigger the next recession, and what the answers to these two questions would mean for stocks have been at the forefront of investors' minds.
But this fixation recently changed for BlackRock, according to Jean Boivin, head of the firm's investment institute. The principal driver of global markets going forward is now the competition between the US and China, which he says has morphed into a conflict that will be both structural and persistent.
"We've evolved from a concern of questions about drivers of where we are in the cycle to trade and geopolitical tensions now being front and center," Boivin said in a recent interview with Business Insider.
He added: "They were part of the noise we were hearing around, but now they've reached a level where they are affecting the macro environment."
The impact of these tensions won't come as news to even the most casual consumer of financial news. But when the firm's investors met to debate their mid-year outlook in June, the geopolitical conflict prompted them to change their investing approach and recommendations. The $6.5 trillion investment giant now advocates lowering allocation to some non-US risk assets and raising cash.
"Markets will be in a benign environment," Boivin said. "This is why we continue to advice taking risk in US equities in particular, and we've upgraded our European equities from underweight to neutral."
However, they downgraded their view on Japanese and emerging-market stocks linked to China. In their view, the market is too optimistic about China's ability to keep its economy humming through stimulus measures.
Over in developed markets, the saving grace is the swift response of central banks to the unfolding geopolitical crisis, Boivin said.
In a major shift last month, the Federal Reserve gestured that it will lower interest rates at its July meeting if economic conditions warrant a cut. The European Central Bank has adopted a similarly dovish stance to ward off a deep crisis.
"Given that we see higher risk but central banks are providing a near-term benign environment, this kind of allows us to buy some time to build more resilience in portfolios," Boivin said.
In the interim, it would be unwise for investors to ignore the risks that stem from geopolitics.