Now that BlackRock has largely taken over Wall Street, whispers from its corridors are heavily weighted, and the latest two are troubling: It’s downgrading U.S. stocks and prefers the Asian market.
In other words, the king of Wall Street says it’s time to diversify.
After major market movement that has seen U.S. equities bounce back from a dismal March, BlackRock sees a new surge in COVID-19 cases as likely to put a dent in this trend.
On Monday, BlackRock--which oversees nearly $6.5 trillion in global assets--downgraded U.S. stocks from neutral to overweight, and advised clients to start shopping internationally for diversification.
Why? Because the amazing performance of the U.S. equities market this summer has largely been propped up by trillions of dollars in government stimulus and the Federal Reserve’s effort to save the corporate bond market by buying the bonds.
Now, unemployment checks will dry up. More stimulus remains in question, and COVID-19 is no longer flattening--it’s reviving itself with a vengeance as Americans in large numbers decide they simply don’t care or are impervious to the virus.
What investors will be watching carefully is the next policy decision to come out of Congress and the White House about stimulus. If they announce there will be no more unemployment benefits when they end in three weeks, there could easily be an equities sell-off.
Forbes quoted BlackRock analyst Mike Pyle as saying, “Any premature reduction of stimulus in July...would increase the risk of financial vulnerabilities among businesses and households facing cash flow stress.” This then leads one to ask, as Forbes did, why BlackRock is even neutral--and why everyone shouldn’t just flee this sinking ship.
Because the ship isn’t sinking, per se. According to Pyle, there is a line-up of U.S. companies that will benefit from “structural trends accelerated by the pandemic”. And those are largely tech and communication companies.
So that means it’s time to dip some toes in international waters to diversify a bit.
BlackRock is banking on Asia, predicting that China, South Korea, Japan and Taiwan will outperform global emerging markets in the next 6-12-month period.
It’s putting money on a Chinese recovery, which isn’t hard to see after the Chinese market surge this week on recovery data.
Ben Powell, chief Asia Pacific investment strategist at BlackRock Investment Institute, told Bloomberg: “China of course still has got a meaningfully positive interest rate both real and nominal, which is relatively rare globally.”
Related: What Does A Strong Euro Mean For Gold Prices?
Beyond that, there is still a lot China can do in terms of monetary and fiscal policy. At the same time, economies that have a lot of the right kind of Chinese exposure (South Korea, Japan, Taiwan) stand to do better by hitching a ride on the China recovery train.
While the media can barrage us with trendy headlines suggesting that U.S. equities are a sinking ship and China is the only way forward, that black-and-white thinking doesn’t really hit the mark when it comes to unraveling BlackRock’s new strategy.
Instead, it should be viewed as a mew “macro framework” for investing based on the financial shock of the global pandemic.
“We used to frame things as to where we were in the business cycle,” ThinkAdvisor quoted BlackRock Investment Institute head Jean Bovin as saying. “That is not the story anymore. The shock has fundamentally changed the investment environment and landscape .. that requires a deeper rethink of how we build portfolios.”
That means thinking not in terms of “recession” and “recovery” but in terms of economic “restart”.
And when everything really restarts, “asset class diversification alone is not going to work anymore. Real resilience of portfolios” that can withstand low global yields, climate change and other sustainability-related risks and geopolitical fragmentations as a result of de-globalization will be necessary,” BlackRock said in its midyear outlook.
By Tom Kool for Safehaven.com
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