The latest Outlook published by the BlackRock Investment Institute has received some attention. According to the report, powerful structural trends are testing limits and threaten to intersect with the near-term outlook and become market drivers. Trade frictions and deglobalization are weighing on growth and boosting inflation.

While Blackrock expects that growth should edge higher in 2020, thus limiting recession risks and providing a favorable backdrop for risk assets, dovish central bank policies that drove markets in 2019 are largely behind us.

Inflation risks look underappreciated. 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.

US equity expectations are subdued after an extended period of outperformance and amid 2020 election uncertainties. Foreign stocks are preferred, in particular EM and Japanese stocks, as well as EM debt and high yield bonds. As for safer fixed income, U.S. Treasuries are still given a safe haven bonus and are preferred to other core government bonds. Short maturities and inflation-linked bonds should be used as resilience against risks of regime shifts and inflation rising.

Three primary themes are discussed in the report:

1. ​Growth edges up – Blackrock sees an inflection point in global economic growth as easier financial conditions start filtering through. The growth mix is shifting as the modest pickup is likely to be led by manufacturing, business spending and interest rate-sensitive sectors such as housing.

Implication: Blackrock maintains a moderate pro-risk stance and sees potential for cyclical assets such as Japanese and EM assets to outperform tactically.

2. Policy pause – We see economic fundamentals driving markets in 2020, with less risk from trade tensions and less scope for monetary easing surprises or fiscal stimulus. Major central banks appear intent on maintaining easy policies — and interest rates and bond yields look likely to linger near lower bounds.

Implication: Income streams are crucial in a slow-growth, low-rate world. We like EM and high yield debt.

3. Rethinking resilience – Yields are testing lower limits in developed markets, making many government bonds a less effective portfolio ballast in equity market selloffs. A focus on sustainability can help add resilience to portfolios, as markets wake up to environmental, social and governance (ESG) risks.

Implication: We prefer U.S. Treasuries to lower yielding peers as portfolio ballast and like inflation-protected securities against inflation risks.

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