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Blackrock’s mid-year outlook

Published on 09-02-2021

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The new nominal: reflation trade goes global


Canada’s restart of economic activity is entering a powerful phase this summer, aided by broadening vaccine distribution and pent-up demand for contact-intensive services idled during the spring. We expect growth momentum to shift away from the U.S. to regions that faced more extensive lockdowns on slower access to vaccines, but which are quickly catching up, such as continental Europe and Canada.

This divergence extends to monetary policy. At the heart of our “new nominal” theme from the midyear global outlook from the BlackRock Investment Institute (BII), is an expectation that the Federal Reserve’s new average inflation targeting framework will lead to a more moderate monetary policy response to higher inflation than in the past. The Bank of Canada (BoC), by contrast, has remained steadfast in its long-standing commitment to keep inflation at the midpoint of its 1%-3% target range. This implies a relatively more hawkish stance to an anticipated improvement in the economic outlook. The BoC is not entirely unfettered, however, and the divergence in frameworks could prompt Canadian dollar strength, which may create headwinds to Canada’s economy and especially its export competitiveness.

Easy money prevails

That said, the big picture is still one of very easy monetary policy conditions in the face of a powerful reopening, which underpins our pro-risk stance. We have a preference for equities over credit. We remain overweight stocks, and upgrade more cyclical regions such as Europe and Japan at the expense of the U.S. market. We see Canadian shares outperforming U.S. peers in the next six to 12 months for similar reasons: improved growth momentum, a relatively high weighting to cyclically sensitive industry sectors, and cheaper relative valuations.

We are becoming more negative on U.S. Treasuries and Canadian government bonds as we see the broadening economic restart nudge bond yields higher. We find better value in U.S. inflation-protected bonds given recent underperformance but have trimmed exposure to high yield bonds on tight spreads.

The new nominal: reflation trade goes global

We think the restart-driven peak growth in the U.S. may be behind us; therefore, we are tempering our views on broad U.S. stocks and choosing to be more targeted in our preference for small-caps and cyclically-oriented sectors. We turn more constructive on European stocks, inflation-linked bonds, and a diversified basket of commodities in the second half of 2021.

While the “reflation trade” centered on high growth and fast-rising inflation was most pronounced in the U.S. during the first half of 2021, we see it broadening to the rest of the developed world, following the path of the global vaccine rollout. We think that central bankers globally will take additional steps to avoid undercutting the economic restart. For example, the European Central Bank (ECB) moved in March to quicken the pace of its asset purchases after bond investors unexpectedly drove bond yields higher globally. Since then, the euro area has been catching up on its activity restart, supported by the ECB remaining squarely focused on maintaining easy financing conditions. That’s why we are upgrading our view on European stocks to “overweight” and downgrading our view on U.S. stocks to “neutral.”

Inflation is likely to run higher in the U.S. relative to the last global economic recovery given a backdrop of strong economic growth, sustained fiscal and monetary policy support, higher production costs, and supply chain diversification in the wake of the pandemic. These trends potentially bode well the Canadian stock market, which has a high concentration in cyclically oriented sectors, such as financials. The same is true for U.S. small-cap stocks, which have historically benefitted from higher economic growth.

Within fixed income, there is a risk in the second half of 2021 that bond yields move moderately higher. We therefore remain “underweight” government bonds, anticipating a higher inflationary backdrop and reflecting the economic growth that has already taken hold. Given our view on interest rates and inflation, we favor short-duration Treasury Inflation-Protected Securities (TIPS) and bonds that are linked to floating rates.

Gargi Pal Chaudhuri, Managing Director, is BlackRock’s Head of iShares Investment Strategy Americas, based in New York.

Kurt Reiman, Managing Director, is BlackRock’s Chief Investment Strategist for Canada and is a member of the BlackRock Investment Institute (BII).

Notes and Disclaimer

As of July 31, 2021. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

© 2020 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.


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