Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Ben Pwell, Chief Investment Strategist for APAC and Yu Song, all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
The pandemic has accelerated the rewiring of globalization – with a bipolar U.S.-China world order at its center. We see the Biden administration taking a sharply different approach to China in trade and climate policy. Yet overall tensions look set to stay elevated amid ongoing economic and technological competition – and we believe investors need exposures to both poles of global growth.
Source: BlackRock Investment Institute and the International Monetary Fund (IMF), with data from Haver Analytics, December 2020. Notes: The orange line shows China’s annual real GDP growth rate. The dotted lines are IMF forecasts. The yellow bars show China’s past and expected share of global GDP. There is no guarantee any forecasts made will come to pass.
Globalization rewired, one of the three key investment themes introduced in our 2021 global outlook, is about an acceleration of geopolitical transformations. At its center: a bi-polar U.S.-China world order and the remapping of global supply chains. This is not the same as deglobalization. China is opening its capital markets to global investors, and still attracting foreign investment. China’s share of global GDP is approaching 20% – more than four times its weight in 2000 – even as its growth rate has slowed over time. See the chart above. China’s growth has returned to the pre-pandemic trend, leading other major economies in recovering from the Covid shock. China new five-year plan is expected to include a heightened focus on developing key technologies, pursuing net-zero carbon emissions and allowing greater market pricing of credit risk. Against this backdrop we expect U.S.-China relations to continue to be marked by intense rivalry, particularly in technology, as both countries seek self-sufficiency in critical industries of the future. China is looking to master foundational technologies such as semiconductors, in which it has traditionally lagged the U.S.
We expect a clear change of tenor and tone in the Biden administration’s foreign policy approach, including a shift to working with allies on key issues: China, Russia, Iran, democracy and cyber security. The Biden administration will likely use alliances with groups of countries to engage with China on issues such as trade and technology. The nomination of veteran diplomat and Asia specialist Kurt Campbell to serve the new role of Indo-Pacific Coordinator is a signal of such an approach – as well as the administration’s expectation that intense competition is likely to dominate U.S.-China relations. This is taking place as China has emerged stronger from 2020 with its successful containment of the virus and a lead in the economic restart. It has also signed important trade deals including an investment agreement with the European Union, and a regional free trade agreement with a number of Asia-Pacific nations including Japan and South Korea.
Climate is likely to become a central priority of both domestic and foreign policy under the Biden administration – and an area for potential cooperation amid broader tensions in U.S.-China relations. The Biden administration plans to rejoin the Paris Agreement on climate change, and has nominated former Secretary of State John Kerry as U.S. climate envoy. China has committed to sharply reduce the carbon intensity of its economy over the next decade – and aim for net zero carbon emissions by 2060. The administration will likely seek to balance cooperation on climate change and public health within a broader U.S.-China agenda that includes areas of potential heightened tensions such as trade and human rights. Frictions may extend to the financial arena, as evidenced in the forced delisting of some Chinese companies in the U.S. market. We see this as a reason for carefully implementing China exposures, perhaps including greater direct allocations to China-listed securities over time. Yet how to implement China exposures will depend on investor constraints, including political and legal ones.
The bottom line: We believe investors need exposure to both poles of global growth in an increasingly bipolar U.S.-China world order. Strategically, we see assets exposed to Chinese growth as core holdings that are distinct from emerging market exposures. There is a clear case for greater portfolio allocations to China-exposed assets for returns and diversification, in our view. Tactically, we are overweight Asia ex-Japan equities as many Asian countries have been more effective at containing the virus and are further ahead in the economic restart. Risks to China-exposed assets include China’s high debt levels, currency volatility and heightened U.S.-China conflicts. But we believe investors are well compensated for these.
Market Updates
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, January 2021. Notes: The two ends of the bars show the lowest and highest returns over the last 12 months, and the dots represent returns compared with 12 months earlier. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot gold, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI USA Index, Bank of America Merrill Lynch Global Broad Corporate Index, MSCI Emerging Markets Index, J.P. Morgan EMBI index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index and spot Brent crude.
Market backdrop
U.S. stocks eased from record highs as President-elect Joe Biden announced a proposed $1.9-trillion fiscal package. U.S. Congress has launched impeachment proceedings against President Donald Trump for the second time. The early stages of the vaccine rollout have been slower than expected as a more infectious strain of the virus is spreading, but we don’t see this materially changing the cumulative economic impact of the virus shock.
Week Ahead
- January 19th: Germany ZEW Indicator of Economic Sentiment
- January 21st: European Central Bank policy meeting; Bank of Japan policy meeting
Monetary policies of two major central banks will be in focus this week. The attention will be on the European Central Bank’s (ECB) views on the recent rise in government bond yields: whether it has tightened financial conditions and if the bank signals any intention to lean against it.
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