Pandemic-spurred policy “revolution” will continue to drive asset allocations in 2021, says BlackRock

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The world’s largest asset manager, BlackRock, has predicted that the “revolution” in monetary and fiscal policy spurred by the Covid-19 pandemic will dampen government bond real yields in 2021. The asset manager favours inflation-linked bonds, as well as risk assets such as equities and high-yield credit.

Central banks across the world responded to the coronavirus crisis last spring by lowering interest rates and buying bonds, totalling 190 rate cuts and USD1.3 billion spent every hour since March 2020 on asset purchases. 

Interest rates are expected to enter an era of “lower for longer”, despite the potential for rising inflation as vaccination programmes are rolled out and the global economy continues its recovery in 2021.

BlackRock Investment Institute writes in a recent market note: “A key takeaway is how swiftly macro policies can evolve and the lasting impact this can have on market dynamics. The policy revolution that started in 2020 is still a key driver of our investment views for this year.”

The Federal Reserve has already outlined plans to allow US inflation to exceed the 2 per cent target temporarily, without hiking rates, in a new monetary policy framework. 

Nevertheless, a member of the ECB’s governing council recently warned that eurozone governments should not depend on low interest rates continuing to allow debt to be easily serviced, and should instead “prepare for a rise in interest rates”.

“A key consequence of the policy revolution is the potential for a more muted response of nominal yields to higher inflation,” writes the asset manager.

JPMorgan has estimated that 75 per cent of sovereign bonds from developed markets are already offering negative real yields.

BlackRock continues: “We expect nominal yields to be capped by central banks as they have signalled they will be more willing to let economies run hot with above-target inflation. The result: stronger growth and declining real (inflation-adjusted) yields.” 

BlackRock is underweight nominal government bonds, instead favouring inflation-linked bonds and equities, which will be supported by falling real rates. 

The asset manager also notes the importance of long-term structural trends as drivers of asset performance, as the pandemic reinforced the focus on sustainability, and the rise of e-commerce against traditional retail. 

BlackRock says it is taking a “barbell approach” to risk assets over the next six to 12 months, with “quality assets such as tech and healthcare stocks on one end, and selected cyclical exposures on the other”. 

The firm is overweight in quality assets with strong balance sheets and cash flows, which it considers more resilient to potential bumps on the road to a full activity restart, as opposed to traditional “value” sectors in which structural challenges due to the pandemic may continue to limit upside “even with a rapid restart”.

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