BlackRock has upgraded U.S. equities to overweight and downgraded European stocks to underweight based on structural differences between the two that have accelerated during the coronavirus pandemic.
The U.S. stock market is dominated by big tech companies, which have outperformed during the pandemic. It also has a big share of other high quality companies, in health care and communications services, which are supported by long-term growth trends, according to the BlackRock Investment Institute’s latest weekly commentary.
In addition, positive news about coronavirus vaccines has accelerated BlackRock’s outlook for a 2021 restart of the U.S. economy.
The European stock market, in contrast, has a smaller share of tech and communications services than the U.S. and larger share of financial stocks, which are under pressure from the global low interest rate environment.
But both U.S. and European markets face “challenging months ahead” because of the resurgence of COVID cases, which “support the case for further outperformance of large-cap tech and health care companies,” according to the BlackRock commentary from market strategies led by Mike Pyle, its global chief investment strategist.
China is a different story. Its economy is poised for a quicker return to its pre-Covid growth trend because of better virus control, which bodes well for Asian markets, ex-Japan, and emerging markets generally, according to BlackRock.
Its strategists recommend a barbell strategy that includes high quality companies benefiting from structural growth trends on one side, and selected cyclical exposures on the other, including overweights in emerging market, Asian equities excluding Japan and U.S. mid- and small-cap companies.
“We see the vaccine development providing a constructive backdrop for risk assets as we approach 2021, but advocate a balanced approach: quality companies that should outperform even if fiscal support disappoints; and selected cyclical exposures that are likely to thrive as the timeline for widespread vaccine deployment advances,” Pyle states in the report.
A key risk for BlackRock’s outlook for U.S. equities: not enough fiscal relief.
Treasury Secretary Steve Mnuchin has already announced the Treasury will not extend beyond year-end Federal Reserve lending facilities that are due to expire at the end of the year, including programs for small and mid-sized businesses and state and local governments as well as corporate credit markets.
In Europe, Hungary and Poland are currently opposing an historic $900 billion recovery fund, which requires the approval of all EU member states.
As a result of these risks, BlackRock is underweight nominal government bonds and inflation-linked government bonds for strategic and tactical portfolios but overweight high yield on a tactical basis. The firm’s tactical views apply to 6- to 12-month time horizons and its strategic views are long-term, beyond 12 months.
“Policy support — both fiscal and monetary — is still a crucial bridge before the rollout of effective vaccines,” according to BlackRock.
Long term, BlackRock states “portfolio resilience,” which is supported by long-term structural trends, “has to go beyond broad asset class diversification and include alternative sources of returns and a focus on sustainability.
“The adoption of sustainable investing is a tectonic shift, carrying a return advantage for years to come — and the coronavirus shock seems to be accelerating this shift,” it added.
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