The recovery of the markets after the shock of the Covid-19 pandemic is still in progress, but last week, fears of rising inflation were compounded by the threat of the Delta variant. Britain loosened restrictions, despite fears of the virus spreading, and will be a test case of what to expect. The US issued a warning against travel to the UK, and US indices corrected downward with a vengeance. The Nasdaq recorded its worst day since October, the CBOE VIX Index (the "Fear Index") shot up at a double-digit rate and investors fled to safe assets. It didn't take long for the market to correct itself, but the jitters remain.
BlackRock, the world's largest financial asset management company, with $9.1 trillion in assets under management, still supports risk assets, but notes in its 2021 Midyear Report that, "This juncture could be as critical as the shift to the neoliberal consensus in the 1980s."
In an interview with Globes, Anath Levin, CEO of BlackRock Israel, says, "We are at a historic point in time. As long as debt raised by countries is directed towards the development of infrastructure and growth industries, or to tackling climate change, we're creating long-term growth and jobs. The main question is, which path are we on, at a time when new policy paradigms seek to replace the old ones.
"Despite rising inflation, central banks are being patient and are not changing monetary policy for the time being, both on the assumption that temporary factors are driving up prices, along with disruptions created by the coronavirus, and in order to atone for times in the past when they undershot the target. This is a major shift from the neo-liberal consensus adopted in the early 1980s by many countries, including Israel, that helped contain inflation and led to four-decades of declining inflation and interest rates. However, markets are pricing in a more rapid rise in interest rates than the Fed projects. This mismatch and together with the general uncertainty could stoke volatility on the market."
Levin adds, "We see the recent bond yield rises as driven by inflation, rather than by expected interest rate hikes, making the unique environment that we have called 'the new nominal constructive for equities' - meaning there will be a more moderate response to interest rate hikes than to inflation. But the 'financial crisis of 2008 playbook' won't work in the present case, as the historic combination of monetary and fiscal policy designed to support economies during the pandemic is expected to lead to a higher inflation regime. This means that we don't currently expect another decade of rising stock and bond prices."
"We're not going back to lockdowns and paralyzed economies"
Are you concerned about the Delta variant? The UK has waived restrictions - could that cost us dearly?
"Our assumption is that the return to economic activity is here to stay, and we won't go back to lockdowns and a world in which the pandemic paralyzes economies once more. True, we aren't biologists, but we do know that vaccines are more developed than a year ago. The world has gathered more information about dealing with infection. In terms of the stock market, we see that technology and healthcare sectors are benefiting from the situation. However, we've reduced our allocation to shares in large US companies because they are at risk of both higher taxation and increased regulation; we prefer second-tier stocks that will benefit from the recovery.
"This isn't a huge supercycle like the post-2008 recovery, but looking twelve months ahead we will be tracking government funds to see where they're going - whether towards growth-oriented places or not."
"The world will spend a lot of money on dealing with climate change"
How do you view investment in environment and climate change?
"This is the biggest issue in the world today, as exemplified by natural disasters. Climate risk is an investment risk, so we need to analyze the impact on investment; the implication of a net-zero carbon emissions world. Behind climate risk is a clear economy that determines which raw materials will benefit more, meaning there will be demand for certain raw materials that will lead to growth. In this context, the question also arises of what China will do, as it is no less ambitious in this area than the US.
"It will be interesting to see how this growth takes place alongside the journey towards net-zero carbon emissions. Obviously there will be areas that win and others that will lose. The world will spend a great deal of money to deal with this thing - Bill Gates estimates it at $50 trillion. Some economists are talking about an increase of almost 40% in green energy usage, so we're just at the beginning of this road."
"Investing in infrastructure protects against shifts in inflation"
Which sectors do you recommend investing in today?
"We continue to believe in technology companies in the broadest sense, partly in connection with more stringent climate policies. We're in favor of equities in Europe and Japan and neutral about equities in China. We view China separately from emerging markets, and we're curious to see how they manage their growth. There's an interesting transition there to prioritizing the quality of growth over quantity, but how China will do it - that's a very big question. "
BlackRock believes that the Chinese economy continues to stand out, and although growth in the country has slowed recently, at the same time its policy stance is relatively tight. The regulatory crackdown on large, dominant companies continues to receive emphasis. "These two factors are essential in China’s efforts to improve the quality of growth," says Levin. "Therefore, from a tactical point of view, we have taken an overweight stance on Chinese debt, and a neutral one on Chinese equities."
What about investing in infrastructure?
"The question is mainly where these investments will be directed, and whether they will really go to create future growth engines in the US. The Biden administration, for example, is today trying to drive the growth for the next 20 years, not for one year. This should be reflected in the level of shareholder risk. The movement of equity towards infrastructure will only intensify - there are capital sources that can fund this. Since 2011, infrastructure investments have tripled (in the private and public markets), and in our opinion, this should redouble again and again.
"I'll also mention that investments in infrastructure provide protection against what mainly frightens investors today: changes in inflation."
Published by Globes, Israel business news - en.globes.co.il - on July 28, 2021
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