Stocks will rally even further in 2021 as the coronavirus landscape rewrites the playbook for how quickly the market recovers from downturns, BlackRock says
- BlackRock lifted its near-term outlook for stocks to "overweight" from "neutral" on Monday, saying that the coronavirus pandemic will give way to a much faster economic recovery than what has been seen in past recessions.
- The economic losses seen throughout the coronavirus pandemic will be a "fraction" of those seen after the financial crisis, the firm added.
- BlackRock recommended investors take on more risk through high-quality momentum stocks and some cyclical plays.
- Looking past 2021, the investment management firm expects secular shifts in global trade and economic policy to diminish the appeal of government bonds and lift emerging-markets equities.
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Stocks already sit at record highs, but BlackRock sees equities climbing higher in 2021 amid a rapid economic rebound.
The investment management firm raised its tactical outlook on global equities to "overweight" from "neutral" on Monday, implying it expects stocks to rise over the next six to 12 months. The market has already rebounded from its March lows on hopes for a vaccine, and some strategists fear stocks' rebound moved too quickly.
BlackRock instead thinks the pandemic threw out the typical playbook for investing during a downturn, and instead ushered in a "new investment order." The recovery will accelerate shifts in how economies operate, bring societal transformation, and rewire global trade relationships. While the shifts will affect asset allocation in the long-term, investors looking for gains over the next year should boost their bets on stocks, the firm said.
"We see the shock as more akin to that of a large-scale natural disaster followed by a swift economic restart," BlackRock's strategists said, adding that the cumulative economic losses will be a "fraction" of those seen after the financial crisis.
BlackRock's longer-term outlook for equities remains "neutral" due to heightened valuations and a more difficult environment for dividend payments and earnings growth. The firm is bullish on credit in the near term and bearish toward government bonds for the long term.
Vaccine distribution set to take place in 2021 led BlackRock to recommend taking on more portfolio risk in the new year. Structural tailwinds stand to lift the tech giants that thrived through the pandemic, and exposure to the sector also protects against a stimulus disappointment or delay in vaccine rollouts.
Longer-term, the firm expects a policy revolution and higher inflation to cut into Treasury bonds' appeal. The pandemic will accelerate a move toward sustainability and trigger a "wholesale reassessment of the strategic portfolio", BlackRock said. A continued trade rivalry between the US and China will lead investors to shift some cash to China-exposed themes, it added.
In stocks, BlackRock recommends investors take the barbell approach that most investment banks have similarly advised. Such positioning consists of stakes in high-quality momentum stocks balanced with exposure to some cyclical names. The strategy allows investors to reap the benefits of reopening and low rates without suffering too much from short-term volatility.
Emerging-markets stocks appear to be a strong play beyond 2021, the firm's strategists said. These equities are "principal beneficiaries of a vaccine-led global economic upswing," and a weaker US dollar and more stable trade relationships should further boost the group. BlackRock downgraded European equities to "underweight," noting that the market has an unhealthy exposure to financial stocks pressured by historically low rates.
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