Market Outlook 2020 Sour To Start But Sweet In The End

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Global Market Outlook 2020 – Q2 update: Cycle, further interrupted

“Events, dear boy, events” was how former British prime minister Harold Macmillan described the unpredictability of politics, and the same can be said of investment strategy. As of mid-February, our expectation for a global mini-cycle recovery was on track. Green shoots were apparent in manufacturing indicators and a phase 1 trade deal had been agreed between the U.S. and China.

By mid-March, however, events had taken over. The virus outbreak has quickly progressed to an economic shock as governments across the globe enact strict containment policies. Borders have been closed, and schools and universities shut down. Markets are panicked by uncertainty over the duration of the virus threat and the extent of further containment measures. This has been compounded by fears that monetary policy has reached its limits with almost all central banks at the zero-lower bound 1 . We expect that more aggressive fiscal stimulus measures will offset any shortfall in monetary firepower. The main uncertainty is the duration and depth of the virus-induced recession. Our central case is that global growth begins to recover in the second half of the year as the virus outbreak fades, but expert medical opinions on the longevity of the virus threat vary.

The chart below shows that the result has been a severe risk-off event since the U.S. equity market peak on February 19.

“Confidence should recover on the back of substantial stimulus once the virus ‘all clear’ is given.”

2020 recession now likely

Containment measures around the world are having a large economic impact.

Global gross domestic product (GDP) growth will probably be negative for the first quarter, and the shutdown in economic activity from the virus containment measures virtually assures negative growth in the second quarter. The number of virus cases is likely to increase, which means more drastic containment measures may continue to be implemented. It is also possible that stresses in credit markets create a wave of defaults and liquidity issues that cascade across investment markets.

China’s experience shows it is possible to contain the virus. Outside the stricken Hubei province, there have been an average of only 10 new cases per day in China during the first 18 days of March. South Korea is likewise having success in containing the outbreak. The fatality rate from the virus also seems lower than originally feared, with many estimates now placing it below 1%. Most deaths so far have been confined to the elderly and those with pre-existing respiratory conditions.

Provided the virus is transitory, perhaps contained in the second quarter, the global economy should be poised to recover in the second half of 2020. There were signs of recovery in global economic indicators before the virus escalated in China during February. In addition, 2020 had seen the largest easing in monetary policy by global central banks since the 2008 financial crisis.

Since the virus outbreak, major central banks have eased even further, in some cases significantly, and governments are starting to issue substantial fiscal stimulus measures. U.S. Treasury Secretary Steven Mnuchin has proposed a $1.2 trillion stimulus package, which equates to 5.5% of U.S. GDP. Finance ministers and central bankers around the world are making “whatever it takes” statements. China is enacting large monetary and fiscal stimulus.

The combination of monetary and fiscal stimulus on top of last year’s easing, combined with the reduction in China-U.S. trade tensions, argue for a solid recovery when the virus threat recedes.

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However, there are risks to this view of an economic recovery in Q3, including:

  • The progress of the virus can’t be forecast. The number of cases in the U.S. may be under-reported, and there could be a dramatic escalation in confirmed cases. The containment measures may be more drastic, and the recession could continue into Q3.
  • The economic impact of the virus may turn out larger than expected. There is evidence that labor markets have already been damaged, and the shock to consumer and business confidence could generate a self-sustaining economic downturn. There also could be a credit-market event that leads to rising defaults and liquidity issues, which in turn creates fears of a 2008-style downturn.
  • Global supply chain disruptions may have a larger and more sustained negative impact on global growth.
  • Central banks have limited firepower compared to previous recessions. The U.S Federal Reserve, Bank of England, Bank of Japan and European Central Bank (ECB) are already at the zero-lower bound.

The most material risks in our view are that the number of virus cases increase exponentially, and virus containment measures continue through Q3. The others seem less likely. Confidence should recover on the back of substantial stimulus once the virus ‘all clear’ signal is given. The issues around supply chains are longer-term. These have been under pressure since the China-U.S. trade war started. The virus outbreak adds to this but shouldn’t hamper the economic rebound.

A re-run of the 2008 financial crisis seems unlikely. Tier 1 capital ratios 2 for large U.S. banks are significantly improved from 2007 and should cushion against the risk of a severe drawdown. Bank mortgage lending has been prudent. Consumer balance sheets are reasonably healthy. It’s true that central banks have less scope to cut interest rates, but if needed they can turn to quantitative easing and other unorthodox policies. There also will be substantial political pressure on governments to provide fiscal stimulus.

“A Biden-versus-Trump contest likely will be largely neutral for markets”

Not feeling the Bern

It’s been easy to overlook amid the COVID-19 and oil market shocks, but the other important recent event for markets has been the shift in favoritism for the Democratic presidential nomination away from the self-described socialist Bernie Sanders and towards the party’s status-quo, centrist candidate, Joe Biden.

A Sanders presidency would represent a structural shift for the U.S. equity market. He favors the regulation and breaking up of the tech giants, the abolition of private health insurance and the repeal of Donald Trump’s large corporate tax cuts. But such change isn’t likely now with Biden heavily favored in betting markets to win the Democratic nomination. The economic turmoil caused by COVID-19 means he also may have a better chance of beating Trump in the November election. A Biden-versus-Trump contest likely will be largely neutral for markets. A Sanders-versus-Trump election would have been an additional worry-point, creating uncertainty about the strength of the eventual market rebound.

Regional snapshots

United States

The government’s virus containment measures mean a technical recession – negative GDP growth in Q1 and Q2 – is probable. As of March 19, the S&P 500® Index has declined 29% from its 2020 peak, which is on par with a moderate economic recession. A reasonable amount of economic pain is already in the price.

A risk is that the sharp plunge in cash flows causes highly indebted companies to default, triggering a credit-crunch in the broader economy. This threat should be lessened by the Fed’s 150 basis points (bps) of emergency easing, asset purchases, and the resumption of an alphabet soup of crisis-era liquidity management facilities.

Fiscal policy will be important in offsetting the recession. The nature of the COVID-19 shock should force bipartisan agreement on large stimulus measures. More immediately, though, Congress and the U.S. Treasury can put emergency funding channels in place for stressed industries facing liquidity pressures.

Tailwinds from monetary and fiscal policy should eventually promote stronger economic conditions when the virus disruption has cleared. The upside risk is that should the number of new virus cases begin to decline in Q2, the subsequent recovery will be boosted by the strongest stimulus measures in more than a decade.


Europe is the worst-affected region outside of China by COVID-19. It has high exposure to global trade, particularly China, the ECB has little monetary policy firepower and the rules around fiscal policy in the Eurozone make stimulus measures difficult to implement. Italy is in quarantine and strict containment measures have been put in place in France and Spain. These seem likely to be adopted by other European countries.

The combination of these factors means that the Eurozone stock index has been the hardest hit of the major bourses, down more than 35% as of mid-March.

The Eurozone is likely to experience a deeper recession than the U.S. but should also experience a bigger economic bounce when the virus subsides. It will be one of the main beneficiaries of the rebound in global trade. Eurozone equities are now very attractively valued, and we would look for the European stock market to be one of the best performers in the recovery.

United Kingdom

The UK economy has two main advantages over Europe:

  1. The Bank of England, unlike the ECB, has been able to cut interest rates by 65bps , taking its policy rate to the effective zero-lower-bound.
  2. The ability to quickly implement fiscal easing. The UK government has announced over 1% of GDP in stimulus measures.

The FTSE 100 Index has been hit by a trifecta of challenges: Brexit uncertainty from the end-2020 deadline for an agreement, the large exposure to multinational firms with profits based overseas, and the high weighting to energy companies that have been hurt by the oil price collapse. The UK equity market has already been a poor performer, hit by three years of Brexit wrangling following the 2020 referendum. The COVID-19 declines take the FTSE 100 into exceptional value territory. It has a trailing PE ratio of under 10-times and a dividend yield pushing towards 7%.


Japan’s economy was weak at the end of 2020, weighed down by the October value-added tax (VAT) increase and a natural disaster caused by the largest typhoon in half a century. The COVID-19 disruption has almost certainly pushed the economy into recession.

Stimulus measures are underway. The Bank of Japan has limited firepower, but has increased its purchases of government bonds, corporate bonds, and equities via exchange-traded funds (ETFs). The government is likely to announce emergency fiscal measures. Japan’s structural weaknesses in terms of weak monetary policy and persistent deflation mean it will likely remain an economic laggard relative to other developed economies.


China was the first country to enter the COVID-19 crisis and see a downward trend in the number of new cases. High frequency trackers of daily economic activity show that economic activity is resuming. Traffic congestion in Shenzhen and Shanghai has returned to normal levels and coal consumption by power generators is trending higher.

Government stimulus is coming. Local provinces have announced infrastructure projects, and the People’s Bank of China has cut interest rates and the reserve ratio requirement several times. Banks have been encouraged not to call in loans while there is pressure on cash flows. The main uncertainty is whether the combined monetary and fiscal stimulus will be as large as in 2020/16, which created a V-shaped recovery in 2020. We don’t think it will be nearly as large, as China’s leadership is still worried about excessive debt levels. But it will be substantial and position China for a strong rebound when the threat from the virus starts to subside.


The twin shocks of the COVID-19 outbreak and the collapse in the oil price has complicated what was already a lackluster economic outlook for Canada. Economic growth is at risk of falling below the 1.0% lower-end of our forecast range. The Bank of Canada has responded with 100bps of easing and increased liquidity provisions, with more likely to come. Prime Minister Justin Trudeau recently announced plans to roll out a stimulus package valued at roughly 3% of Canadian GDP. Beyond the immediate concerns around the virus, the structural watchpoint will be the collateral damage inflicted on highly indebted households.

Australia/New Zealand

The Australian economy was already soft—under the weight of a cautious consumer and slowing housing market—and the COVID-19 threat will accelerate this trend. The Reserve Bank of Australia has made two emergency rate cuts totaling 50bps that take the cash rate to 0.25%. It has implemented its first steps into unconventional policy by setting a target of 0.25% for the three-year government bond yield. Quantitative easing through government bond purchases is not far away.

The government has announced a fiscal stimulus package worth 1.2% of GDP, and the Australian dollar is fulfilling its traditional shock absorber role by depreciating and softening the blow on export-exposed industries. Australia’s outlook appeared promising heading into 2020 with its biggest trade partner, China, about to be boosted by a phase-1 trade deal with the U.S. The virus outbreak has substantially delayed this outlook.

Adding risk

Our cycle, value and sentiment (CVS) investment process for tactical decisions looks for times when fear or euphoria cause markets to overshoot. Most of the time, the market consensus embodies the “wisdom of crowds”, and there are no strong tactical opportunities. But markets sometimes descend into the “madness of crowds” where herding creates tactical opportunity.

Our composite sentiment indicator combines a range of indicators, such as technical market measures, positioning signals and surveys of investors.

The market action on March 12, when global equities fell by 10% in a single day saw this indicator provide one of its most extreme “buy” signals.

The signal from our CVS investment process is to cautiously lean into riskier assets. Equity value has improved after the large market decline. The cycle outlook is supported by the substantial amount of stimulus being implemented, even though the near-term outlook is for recession. The message from our composite sentiment indicator is that investors have panicked and herded into a pessimistic outlook, which supports taking a contrarian view.

The main uncertainties are around the duration of the virus threat and whether it will re-escalate when the extreme containment measures in many countries are relaxed. It’s likely that markets will find a bottom when the daily number of new virus cases in Europe and the U.S. begins to decline.

Asset class preferences

  • The equity markets that have been hardest hit by the COVID-19 crisis should be those that benefit the most from the eventual rebound. U.K. and Eurozone equities are attractively valued. Europe’s high weighting to cyclical stock should help it outperform in the recovery.
  • Emerging markets equities should also benefit from the eventual recovery. They are attractively valued and will gain the additional benefit of reduced trade-war tensions.
  • High-yield credit is now very attractively priced after selling off as a result of the COVID-19 shock and oil price collapse. Energy companies make up a large share of the high-yield bond market. The spread to U.S. Treasuries on March 19 was close to 900 basis points. The spread could widen further if the virus news deteriorates, but this historically has been a good entry point into high-yield exposure, although there is obviously considerable uncertainty in the market and liquidity risk that investors will need to consider in deciding whether to take advantage.

Government bonds are universally expensive. They may rally further if the COVID-19 crisis escalates further, but they are at risk of underperforming once the post-virus recovery is underway.

Our main expectation around currencies is that the safe-haven rally in the U.S. dollar should unwind once we are in the post-virus recovery phase. This will favor currencies such as the Australian dollar, New Zealand dollar, Canadian dollar and British pound, which after significant depreciation are substantially undervalued at the end of the first quarter relative to long-term purchasing power parity comparisons.

1 Zero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy. A central bank that is forced to enact this policy must also pursue other, often unconventional, methods of stimulus to resuscitate the economy.

2 Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves, but may also include non-redeemable non-cumulative preferred stock.

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The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of March 23, 2020. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.

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2020 Global Market Outlook – Q2 Update

Rare Earths Outlook 2020: Trade War to Dominate Supply and Demand

What’s the rare earths outlook for 2020? Here analysts and CEOs share their thoughts on what’s ahead for the rare earths market.

Rare earths started the year as metals that few people outside of the sector knew about. However, by Q2, the critical metals were receiving mainstream attention as China considered cutting off US access, causing concerns about a supply shortage.

While the trade war did dominate the news cycle, prices were less volatile than expected; they spiked early in the year before slipping back down and remaining steady for the remainder of 2020.

Rare earths, which are used in the high-strength magnets found in much of the latest tech, from smartphones to wind turbines to electric vehicles, will remain a primary issue for the resource sector well into the next decade as more countries in the west work to create supply chains that depend less on China.

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“Despite the continuous talk by some in the media about China potentially weaponizing its rare earths during trade negotiations with the US, prices of most rare earths have trended lower or stayed fairly flat for most of the year, with few exceptions,” said Luisa Moreno, managing director of Tahuti Global.

Moreno noted that the most in-demand and noteworthy of the rare earths, neodymium and praseodymium, did not sustain the price bump the export scare brought on during the first half of 2020.

“The magnet elements neodymium and praseodymium have also shown weak prices, particularly when comparing the average prices at the first quarter of the year relative to the third and fourth quarters.”

That said, there were two metals from the group of 17 that saw price growth throughout the year.

“The only elements that have shown a notable increase in prices were dysprosium and terbium. Both are used in permanent magnet motors for electric vehicles and are significantly less common than neodymium,” Moreno explained. “Dysprosium prices in particular increased by 45 percent in Q3 compared to Q1. Dysprosium and terbium prices have weakened in the last quarter of the year, but they are still higher compared to the average first quarter prices.”

Although the threat of a Chinese export embargo never materialized, rare earths market participants still used the opportunity to ramp up discussions about building and strengthening supply chains to be less reliant on Chinese producers and separators.

“Five, six years ago, 98 percent of the rare earths came from China, and now about 60 percent do,” Mercenary Geologist Mickey Fulp told the Investing News Network (INN). “The west or anywhere outside of China is at least contributing a significant amount of rare earths. The problem once again is all the downstream capability is still concentrated in China.”

The rare earths supply chain is quite complex, and is partially comprised of traditional explorers, developers and miners. But like other metals such as lithium, there are also processing, separation and refinement steps that must take place.

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Moreno pointed out, “(The) US is the largest importer of rare earth elements (REEs) from China by volume, but Japan is actually the largest importer of REEs from China by value. The US exports almost as much REEs (in content) to China as it imports; although REEs that the US exports to China are not refined, is likely a REE mix concentrate from Mountain Pass. The US is likely to continue to export REEs to China in the immediate future.”

Rare earths outlook 2020: Supply diversity a key motivator

In late July, the US secretary of defense released a memorandum highlighting the importance of domestic production of rare earth metals and alloys. The government said it is committed to finding ways to strengthen its domestic supply chain.

For analyst and sector watcher Moreno, the US stance on the need to develop a robust procurement strategy was the most important news of the year for rare earths. Nations like Australia and Canada are making similar efforts of their own.

“A number of agreements have been signed, but the actual dollar amounts behind the efforts are not clear,” she said. “For instance, the US has signed rare earth and strategic minerals development agreements with Canada, Australia, Botswana, Botswana, Zambia, the Democratic Republic of Congo, Namibia, Argentina, Peru (and) Brazil, among others.”

One of the companies that could play a role in building the North American supply chain is Avalon Advanced Materials (TSX:AVL,OTCQB:AVLNF), a diversified technology and battery metals company with several projects in Canada, including a rare earths project in development in the Northwest Territories.

“As Avalon expected, the threat to security of supply of critical minerals attracted a lot of mainstream media attention and new interest from the government in helping to establish these new supply chains,” Don Bubar, president and CEO, told INN.

“However, considerable investment is required in developing new processing capacity before new primary supply can be turned into the refined products needed by end users.”

While political attention and promises are good for the news cycle, for explorers, developers and even some producers, it’s more of an issue of putting money where the talk is.

As Bubar explained, the most challenging aspect of the market for North American companies is raising the capital required to fund the processes needed for production.

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“Most mineral development companies operating in North America are publicly traded and rely on equity markets for raising venture capital,” he said. “For non-exchange traded commodities that lack visibility on pricing, like rare earths, raising capital is challenging. Development companies need to attract strategic investors, including government, that understand the market and the processing challenges.”

The rare earths market is much more opaque than the markets for other metals, especially in the area of price transparency, which makes it hard for investors to follow.

Don Lay, CEO of sector junior Medallion Resources (TSXV:MDL,OTC Pink:MLLOF), also sees financing as the most pressing challenge facing companies in the space. He thinks investors should use this time to educate themselves and find out where they can best put their money in this developing sector.

“It’s a tricky market, but fascinating, and it will likely be very rewarding over the next few years,” he said. “Australia has a very active REE investment market led by the producer Lynas (ASX:LYC,OTC Pink:LYSCF). But there are several developers with market caps around US$100 million.”

As Lay mentioned, Lynas leads the Australian market and much of the global sector outside of China. The producer came to prominence when Japan invested in its growth to circumvent China’s market dominance; the move followed a trade dispute that left the Asian nation without the critical metals it needed for its rapidly growing technology sector in the early and mid-2000s.

It has been a good year for Lynas, whose share price has climbed 48 percent year-to-date. The Australian government is looking to capitalize on rare earths interest as well.

At this year’s International Mining and Resources Conference in Melbourne, Australia, David Grabau, senior investment specialist for resources and energy at Austrade, spoke about the opportunity the sector presents for the continent.

“There’s a whole lot of scope here, and in terms of Australia’s involvement in this subsector, what we’re focusing on is where we think we have some competitive advantage,” he said on the sidelines of the event. “What we would like to see is more consistency in the market so that international financiers and equity investors might be able to play a larger role.”

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Rare earths outlook 2020: Collaboration needed for sector growth

Removing opaqueness to entice investors will remain a primary goal of the rare earths sector into the new year, as will the need for collaboration across borders.

In mid-November, Australia and the US entered a deal to build a joint supply chain, and the industry is also working to develop the relationships and capacity needed for a value chain between the countries.

Separately, Lynas is working with Texas-based Blue Line on a separation facility in the southern state.

Avalon said it has also benefited from Australian interest in North America, with private Australian company Cheetah Resources (now Vital Metals (ASX:AVL)) joining forces with the Canadian company to develop the Nechalacho project. Avalon is looking at new ways to produce the metals.

“The potential for economic recovery of rare earths from coal mine wastes and fly ash has been receiving a lot of study in the US,” he said. “This has accelerated recently with the introduction of new US government initiatives to reduce reliance on China as a source of these critical minerals.”

Kiril Mugerman, CEO of GeoMegA Resources (TSXV:GMA,OTC Pink:GOMRF), a rare earths recycling company based in Quebec, wants investors to be cautious and to consider looking for alternative production streams like recycling as ways to get involved in the market.

He noted that no REE mines have been acquired in the last decade, and only three projects, one of which is now bankrupt, have entered production in that time — evidencing the difficulty in the sector.

Of the two that have been successful, Mugerman said, “One is a small operation in Africa, and one is a large project in Australia that was bankrolled by Japan and is intent on doubling production and making sure no new mines go into production outside of China. It’s a difficult sector, and with pricing staying at the current level long term, investors should focus on companies who are refining, recycling and producing final product with a low CAPEX.”

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Sector spectator Fulp also said it is difficult to get much rare earths production beyond that which Lynas and China control, and new projects have yet to prove their economic viability. However, he is a believer in one US-based rare earths company.

“MP Materials is going to be important in the US,” he said. “Mountain Pass is the best rare earth deposit in the world, there is no doubt about that … it has plenty of neodymium and praseodymium, and those are two really important ones.”

Fulp sees MP Materials taking a leading role in the North American narrative as long as it can meet specific conditions.

“Let’s hope they can get their mill running and processing, so the only thing they don’t have is separation capability, which hopefully is going to come from what Lynas is doing in Texas.”

Despite the challenges the rare earths market faced in 2020, those INN spoke to remain confident that the growing importance of the critical metals will translate to price growth and prosperity long term.

“We think pricing for neodymium oxide will keep moving between US$40 and US$50 per kilogram, a healthy range,” said GeoMegA’s Mugerman. “Demand growth will keep coming from more usage. More stability and international growth will help bring electric vehicles faster to global adaptation.”

Bubar of Avalon sees more partnerships leading to a stronger sector.

“The Canadian and American federal governments have also committed to collaborating on establishing supply chains for critical minerals, including rare earths,” he said. “Further news on this initiative should spur continued investment interest in rare earth development companies.”

Heading into the new year, Moreno advised watching relations between Washington and Beijing.

“It is possible that the White House may delay any hard trade negotiations with China until after the November 2020 election in the US, to avoid rocking the markets. If that happens, prices may stay stable throughout 2020,” she said.

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Medallion Resources is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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Coronavirus reshapes our investment themes

March update

The coronavirus pandemic is set to deliver a sharp and deep economic shock. Market moves are reminiscent of the darkest days of the financial crisis, but we don’t think this is a repeat of 2008. Stringent containment and social distancing policies will bring economic activity to a near standstill, and lead to a sharp contraction in growth for the second quarter. However, provided bold policy actions are taken to bridge households and businesses through the shock, activity should return rapidly with limited permanent economic damage. This includes drastic public health measures to stem the spread of the infection, as well as coordinated monetary and fiscal policies to prevent disruptions that could cause lasting economic damage.

3 updated investment themes for 2020

Market volatility has continued and economic growth is now poised to contract in the second quarter. Our latest episode of the BlackRock Bottom Line shares why we have updated our three investment themes for 2020.

With economic growth poised for contraction in the second quarter, our experts at the BlackRock Investment Institute have updated their 2020 investment themes.

Economic activity is coming to a near standstill because of stringent containment and social distancing policies. But we believe activity should return rapidly with little permanent economic damage – as long as coordinated government and central bank actions help businesses and households through the shock.

The sizable policy response is already setting the stage for an eventual – and strong – recovery. We also believe drastic public health measures are required to stem the outbreak. The key: making sure small businesses and households don’t face cash flow crunches that could tip the economy into a crisis.

Recent 2008-like market moves have affirmed our preference for U.S. Treasuries as buffers against stock selloffs. But the sharp drop in Treasury yields also raises the risk of a yield snapback.

We favor sticking to benchmarks and rebalancing into the equity decline. Coupon income from bonds is crucial in a yield-starved world. We still like U.S. Treasuries over lower-yielding peers for portfolio resilience.

We see encouraging signs from major central banks and governments that such a monetary and fiscal response is starting to take shape. The pledged policy response has been swift – and we expect total fiscal stimulus to be similar in size to that of the global financial crisis but compressed into a shorter timeframe. Recent policies by Australia, Canada and the UK are the type of coordinated monetary and fiscal action that we have flagged a need for in dealing with the next downturn. While the shock is of unknown depth and duration, what we do know is that the containment measures and social distancing mechanically bring economic activity to a halt. The impact on economic activity will likely be sharp – and deep. And virus fears have led to a sharp tightening of financial conditions – and plunge in growth expectations. See the chart below. We see the shock as akin to a large-scale natural disaster that severely disrupts activity for one or two quarters, but eventually results in a sharp economic recovery.

Virus fears are tightening financial conditions
BlackRock U.S. and euro area financial conditions indicators, 2020

Sources: BlackRock Investment Institute, March 2020. Data as of 12 March 2020. Notes: The chart shows our financial conditions indicators (FCI) for the U.S. and euro area. Our FCIs give a forward view of where our Growth GPS may head and are expressed in GDP terms, based on its historical relationship with our Growth GPS. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass. Read details of the methodology on the BII Macro dashboard.

Markets, in our view, will ultimately settle down if three conditions are met: 1) visibility on the ultimate scale of the coronavirus outbreak and evidence the infection rate has peaked over the long term; 2) deployment of credible and coordinated policy packages; and 3) confidence that financial markets are functioning properly. Once we better understand the scale and impact of the outbreak, the policy response is setting the stage for an eventual – and strong – recovery. We stay neutral on risk assets and believe investors should take a long-term perspective. For some investors this may include rebalancing back toward benchmark weights, as the scale and rapidity of market moves have likely left many portfolios effectively overweight bonds and underweight equities.

We emphasize portfolio resilience through a benchmark allocation to government bonds, quality equities, cash and sustainable investing. We prefer geographies with the most policy space – such as the U.S. and China in both equities and credit, and favor quality exposures. In equities, we have upgraded the U.S. market both because of its quality bias and expected fiscal stimulus. We move to underweight Japanese equities because the outbreak’s impact adds to the earlier economic damage of a sales tax increase. In fixed income, we have reduced Treasury Inflation-Protected Securities (TIPS) to neutral after a huge decline in rates, though we still see value in the long term.

Over a longer horizon, this pandemic 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.

Our 2020 investment themes

Insights and Resources

General Disclosure: 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 March 2020 and may change. The information and opinions are derived from proprietary and non-proprietary 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 material 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 forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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