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Blackrock takes pro-risk stance

Higher global growth and easy financial conditions should support emerging market asset prices, according to Blackrock's Apac strategist.
Ben Powell, Blackrock

“We see an inflection point in global economic growth as easier financial conditions start filtering through,” said Ben Powell, chief investment strategist for Asia-Pacific at the Blackrock Investment Institute, speaking at a media briefing on Tuesday.

“Therefore, we remain modestly overweight equity and credit due to the firming growth outlook and pricing that still looks reasonable against the macro backdrop,” he said.

However, Blackrock, one of the world’s largest money managers with AUM of $6.84trn,  has made “meaningful changes to its granular views”, which includes the “potential for a bounce in cyclical assets in its base case”.

The firm joins an increasing number of asset managers, including Schroders, and DWS which have turned more positive on risk assets next year.

Powell’s strong calls are overweight positions in emerging market and Japanese equities, as well as emerging market and high yield bonds. On the other hand, he is cautious about US equities amid 2020 election uncertainties.

Growth should edge higher in 2020, limiting recession risks, which is a favourable backdrop for risk assets, he said, adding that that the composition of growth is shifting, being led now by manufacturing, business spending and interest rate-sensitive sectors such as housing.

“This makes growth the key support of risk assets, especially cyclical assets.”

By implication, Blackrock’s main emerging market equity overweight exposure is to Latin America and/or EMEA – although Powell would not specify which individual countries.

The firm’s equity market top picks in Asia are Indonesia, where Powell expects interest rate cuts amid declining inflation and a stable political environment, and Taiwan, where corporate earnings should benefit from rising demand for technology products.

The firm is “tactically” neutral towards Asia equities, including China where Powell believes there will be a “measured and controlled economic slowdown”.

Blackrock is extending its operational footprint in the onshore China market, and most recently was reported to have said that it will apply for a fully foreign-owned mutual fund licence.

“Of course, strategically, China has enormous potential as the country’s contribution to economic growth continues to expand,” he added.

Fixed income

Major central banks also appear intent on maintaining easy monetary policies, so interest rates and bond yields look likely “to linger near lows”, although the dovish central bank pivot that drove markets in 2019 is now largely behind us, according to Powell.

“Yields are testing lower limits in developed markets, making many government bonds, especially outside the US, less effective portfolio ballast in equity market selloffs,” said Powell.

“This causes a rethink of portfolio resilience.”

Powell prefers US Treasuries to other core government bonds, favours short maturities in the near term and inflation-linked bonds as protection against any surge in inflation, and looks to emerging market and high yield bonds for income.

“There is little likelihood of interest rate hikes, so the implication is that access to income streams will be crucial for investors in a slow-growth, low-rate world, which should favour emerging market and high yield debt,” he said.

Powell highlighted the appeal of Indonesia’s 10-year local currency government bonds, yielding around 7%, and China government bonds, which should continue to attract foreign portfolio inflows due to their inclusion in major indices.

Unexpected perils

The main risks to Blackrock’s sanguine outlook for risk assets are a set-back in US-China trade negotiations, and an unexpected pick up in inflation.

“There has been a pause in the US-China trade conflict, but any material escalation of global trade disputes could undermine market sentiment and cut short the expected manufacturing and capex recovery that underlies our tactical views,” said Powell.

Perhaps a more fundamental, but outlying risk is “a gradual change in the macro regime, with growth flat-lining as inflation rises”, said Powell.

“However, we do not expect this to happen,” he stressed.


Blackrock tactical views on selected assets vs. broad global asset classes by level of conviction

Source: Blackrock Investment Institute, December 2019

Part of the Bonhill Group.