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2020 Global Outlook
2020 Global Outlook

Testing limits

Powerful structural trends are testing limits – and threaten to intersect with the near-term outlook and become market drivers.

?Coronavirus update

Powerful structural trends are testing limits — and threaten to intersect with the near-term outlook and become market drivers. Rising inequality and a surge in populism have implications for taxes and regulation. Trade frictions and deglobalization are weighing on growth and could boost inflation. Interest rates are nearing lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real-world consequences, affecting asset prices as investors start to pay attention.

The coronavirus outbreak and related containment measures are likely to cause considerable disruptions to economic activity in the near term. We now see the global economy on a lower track and material downside risks to earnings estimates. While the shock is of unknown depth and duration, we do not see it derailing the expansion once it has gone through the system. But there is a risk it does. As a result, we have pulled back our moderately pro-risk stance to a neutral one. Elevated uncertainty around the growth outlook underlies our call for a focus on portfolio resilience.

Our base case: The drag on economic activity is temporary, with underlying economic fundamentals still supportive of the global economic expansion. The risk to this view is that the hit to economies from the outbreak and containment measures undermines fundamentals and triggers the end of this cycle. We are on the lookout for any signs of a liquidity crunch or deterioration in financial conditions. Many small-and medium-sized enterprises in Europe and China, among other regions, could be susceptible to cash flow crunches if the outbreak endures, and easy financial conditions have been crucial in supporting global growth since late last year.

Over a longer horizon, this outbreak adds to the trade tensions in compelling companies to rethink their global manufacturing footprints. This combination of supply shocks could weigh on growth, increase production costs, pressure profit margins and drive up inflation.

Financial vulnerabilities are climbing, but our overall gauge of vulnerabilities across the U.S. economy stands well short of its peaks ahead of the last recession, as the chart below shows.

U.S. recession risk limited
Breakdown of BII’s financial vulnerabilities index and U.S. recession bands, 1990-2020

Breakdown of BII’s financial vulnerabilities index and U.S. recession bands, 1990-2020
  • Source

    Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2020. Note: The chart shows a breakdown of our financial vulnerabilities index (FVI). The FVI is based on six sources of vulnerabilities: the financial sector, corporate sector, households, sovereign debt, external vulnerabilities and asset valuations. The FVI is an aggregate measure of these sources of vulnerabilities whose extremes have historically been associated with periods of financial stress. Forward-looking estimates may not come to pass.

We will likely see considerable near-term disruptions in economic activity on the back of efforts to contain the virus. This may push some developed economies towards the brink of a technical recession, notably Japan and the euro area. We should see a rebound in activity once the disruptions dissipate, but there are now material downside risks to full-year GDP and earnings estimates.

Any further tightening of financial conditions will likely be met by additional easing by major central banks, although many have diminished policy space. Fiscal policy will likely be part of the toolkit, with governments ramping up public health spending and providing relief to the hardest hit industries and regions.

We have downgraded the value equity style factor to underweight, are overweight the more defensive quality and minimum volatility factors, and are reviewing our tactical calls across asset classes.

Yields that are approaching lower bounds make government bonds less effective portfolio ballast, especially outside the U.S. This causes a rethink of portfolio resilience. We advocate portfolio resilience through the quality and minimum volatility equity factors, the ballast properties of government bonds – especially U.S. Treasuries – and cash. We see long-term Treasuries, TIPS and sustainable investing strategies as sources of resilience against potential regime shifts in strategic allocations.

View our March update in charts

Chief Investment Strategist Mike Pyle shares the three themes we see shaping markets and portfolios this year.

Our 2020 Investment themes

The spreading coronavirus could cause a downshift in global growth for 2020, although we see the expansion intact for now.
Policymakers will try to limit the coronavirus’ outbreak economic fallout, and we could see coordinated action in case of temporary liquidity crunches.
Yields are testing lower limits, making many government bonds less effective as portfolio ballast in equity market selloffs.
Our investment views
We shift our moderate pro-risk stance to a neutral position due to the many uncertainties associated with the coronavirus outbreak and its impact.
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Key debates

Some 100 BlackRock investment professionals gathered in New York at our 2020 Outlook Forum to debate how powerful structural trends will play out over the next year. Some of the key conclusions continue to help frame our outlook.

See the debate

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute?(BII). The institute leverages BlackRock’s expertise and produces proprietary ...
Elga Bartsch
Head of Macro Research, BlackRock Investment Institute
Elga Bartsch, PhD, Managing Director, heads up economic and markets research at the Blackrock Investment Institute (BII). BII provides connectivity between BlackRock's ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Mike Pyle, CFA, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute ...
Scott Thiel
Chief Fixed Income Strategist, BlackRock Investment Institute
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...