BlackRock has raised stocks to overweight for 2021 based on its belief that the restart of the economy will accelerate with vaccine distribution.
The company tactically increases shares from neutral, that is, over a period of six to twelve months. From a long-term strategic perspective, BlackRock remains equity neutral due to valuations and a challenging environment for earnings and dividend distributions. The S&P 500 has hit new highs this year and is up more than 14% even after the big sell-off in March.
“The big change in terms of the outlook itself is to improve overall risk-weighted assets and see 2021 as a very constructive year for risk-weighted assets,” said Mike Pyle, BlackRock’s global chief investment strategist. BlackRock published its outlook for 2021 on Monday.
According to Pyle, BlackRock has tactically trimmed investment-grade credit to underweight, preferring high-yield debt for potential income. The company has also moved emerging market debt to neutral and Asian fixed income to overweight.
“We see 2021 as a really strong year for a fresh start in terms of economic activity, but also a year in which central banks will keep interest rates in a pretty tight range,” Pyle said.
Pyle said the company continues to focus on stocks of quality companies, particularly in the US. The company’s strategists prefer companies that perform even when tax support is disappointing, and they prefer some cyclical exposures. Sectors that surprised upwards were housing, cars and materials.
Tech also remains attractive and is expected to maintain its high profit margins in a low interest rate environment. Tax hikes were seen as an impending risk to the tech, but the fact that a split Congress was elected in November made this less likely.
Trends like cloud computing, online advertising, and digital payments offer growth opportunities, and technology areas like semiconductors and software could lead the way.
In addition to US stocks, BlackRock is also overweight emerging markets and most Asian stocks. It was underweight Japanese and European stocks.
Underweight government bonds
BlackRock’s position on government bonds is neutral and underestimates Treasuries over a six to twelve month period. However, TIPPS or inflation-linked securities for government bonds outweigh the odds that should benefit from rising expectations of higher inflation due to accommodative monetary policy and rising production costs.
“The strategic case for holding nominal government bonds has diminished significantly as yields are closer to perceived floors. Such low interest rates reduce the asset class’ ability to act as a ballast against sell-offs in the stock markets,” the Outlook says. “We prefer inflation-linked bonds as we see the risk of higher inflation in the medium term. On a tactical basis, we are keeping duration neutral as unprecedented policy adjustments suppress returns.”
Pyle said the market will start pricing higher inflation.
“Our call is that kind of four or five years into 2025, we expect the US CPI to hit a range of 2.5% to 3% in our base case,” he said. “That is more or less the view that the Fed will successfully achieve the overshoot. We believe that, especially as the vaccine is deployed and we continue to focus on this strong restart over the next year, the markets will begin pricing that result will.”
BlackRock’s call for inflation aligns with the view that growth will be stronger. Inflation is expected to rise, but without the typical rise in nominal bond yields due to central bank policy.
“Often times, people associate a rising inflationary environment with an environment that has a negative impact on risk-weighted assets. We think that is wrong,” he said.