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Eyes on financial conditions. Learn more Learn more. Market backdrop The Federal Reserve embraced a material improvement in its outlook, while making clear that the bar for reassessing the policy rate path was not met and that it was too soon to talk about tapering bond purchases. Week ahead March. Directional views Strategic long-term and tactical month views on broad asset classes, March Asset Strategic view Tactical view Equities We are overweight equities on a strategic horizon. We see a better outlook for earnings amid moderate valuations.
Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indexes. Tactically, we stay overweight equities as we expect the restart to re-accelerate and interest rates to stay low.
We tilt toward cyclicality and maintain a bias for quality. Credit We are underweight credit on a strategic basis as valuations are rich and we prefer to take risk in equities. On a tactical horizon, credit, especially investment grade, has come under pressure from tightening spreads, but we still like high yield for income.
Govt Bonds We are strategically underweight nominal government bonds as their ability to act as portfolio ballasts are diminished with yields near lower bounds and rising debt levels may eventually pose risks to the low-rate regime. This is part of why we underweight government debt strategically.
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We prefer inflation-linked bonds as we see risks of higher inflation in the medium term. We are underweight duration on a tactical basis as we anticipate gradual increases in nominal yields supported by the economic restart. Cash We use cash to fund overweight in equities. Holding some cash makes sense, in our view, as a buffer against supply shocks driving both stocks and bonds lower.
Private markets We believe non-traditional return streams, including private credit, have the potential to add value and diversification. Our neutral view is based on a starting allocation that is much larger than what most qualified investors hold. Many institutional investors remain underinvested in private markets as they overestimate liquidity risks, in our view. Private markets are a complex asset class not suitable for all investors.
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Tactical granular views Six to month tactical views on selected assets vs. We see the tech and healthcare sectors offering exposure to structural growth trends, and U. Europe We are neutral European equities. We believe the broad economic restart later in the year will help narrow the performance gap between this market and the rest of the world. Japan We are underweight Japanese equities. Other Asian economies may be greater beneficiaries of a more predictable U. A stronger yen amid potential U. Emerging markets We are overweight EM equities. We see them as principal beneficiaries of a vaccine-led global economic upswing in Other positives: our expectation of a flat to weaker U.
Asia ex-Japan We are overweight Asia ex-Japan equities. Many Asian countries have effectively contained the virus — and are further ahead in the economic restart. UK We are overweight UK equities. The removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome erode. We also see UK large-caps as a relatively attractive play on the global cyclical recovery as it has lagged peers. Momentum We keep momentum at neutral. The factor has become more exposed to cyclicality, could face challenges in the near term as a resurgence in Covid cases and a slow start to the vaccination efforts create potential for choppy markets.
Value We are neutral on value despite recent underperformance. The factor could benefit from an accelerated restart, but we believe that many of the cheapest companies — across a range of sectors — face structural challenges. Minimum volatility We are underweight min vol. We expect a cyclical upswing over the next six to 12 months, and min vol has historically lagged in such an environment. Quality We are overweight quality.
We like tech companies with structural tailwinds and see companies with strong balance sheets and cash flows as resilient against a range of outcomes in the pandemic and economy.
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Size We are overweight the U. We see small- and mid-cap U. Fixed income Asset Tactical view U. Treasuries We are underweight U. We see nominal U. This leads us to prefer inflation-linked over nominal government bonds. We see potential for higher inflation expectations to get increasingly priced in on the back of structurally accommodative monetary policy and increasing production costs.
German bunds We are neutral on bunds. We see the balance of risks shifting back in favor of more monetary policy easing from the European Central Bank as the regional economic rebound shows signs of flagging. Euro area peripherals We are neutral euro peripheral bond markets.
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Yields have rallied to near record lows and spreads have narrowed. The ECB supports the market but it is not price-agnostic - its purchases have eased as spreads have narrowed. Global investment grade We are underweight investment grade credit. We see little room for further yield spread compression and favor more cyclical exposures such as high yield and Asia fixed income. Global high yield We are moderately overweight global high yield.
Spreads have narrowed significantly, but we believe the asset class remains an attractive source of income in a yield-starved world. Emerging market - hard currency We are neutral hard-currency EM debt. We expect it to gain support from the vaccine-led global restart and more predictable U. Emerging market - local currency We are neutral local-currency EM debt. We see catch-up potential as the asset class has lagged the risk asset recovery. Easy global monetary policy and a stable-to-weaker U. Asia fixed income We are overweight Asia fixed income. We see the asset class as attractively valued.
Asian countries have done better in containing the virus and are further ahead in the economic restart.
Global Growth
Read more We believe the recent rise in nominal government bond yields, led by real yields, is justified and reflects markets awakening to positive developments on the faster-than-expected activity restart combined with historically large fiscal stimulus — all helped by a ramp-up in vaccinations in the U. We expect short-term rates will stay anchored near zero, supporting equity valuations.
The Fed could be more willing to lean against rising long-term yields than the past, yet the direction of travel over the next few years is clearly towards higher long-term yields. We see important limits on the level of yields the global economy can withstand. Market implication : We favor inflation-linked bonds amid inflationary pressures in the medium term. Tactically we prefer to take risk in equities over credit amid low rates and tight spreads.
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Read more The Biden administration is engaging in strategic competition with China, particularly on technology, and has criticized Beijing on human rights issues. The tensions were on display in a bilateral diplomatic meeting in Alaska. We see assets exposed to Chinese growth as core strategic holdings that are distinct from EM exposures.
There is a case for greater exposure to China-exposed assets for potential returns and diversification, in our view. Market implication : Strategically we favor deliberate country diversification and above-benchmark China exposures.
Tactically we like Asia ex-Japan equities, and see UK equities as an inexpensive, cyclical exposure. Read more The pandemic has focused attention on underappreciated sustainability-related factors and supply chain resilience. We see tech as having long-term structural tailwinds despite its increased valuations, yet it could face challenges from higher corporate taxes and tighter regulation under a united Democratic government.
The pandemic has heightened the focus on inequalities within and across countries due to the varying quality of public health infrastructure — particularly across EMs — and access to healthcare. M arket implication : Strategically we see returns being driven by climate change impacts, and view developed market equities as an asset class positioned to capture the opportunities from the climate transition. Tactically we favor tech and healthcare as well as selected cyclical exposures. Wei Li. Elga Bartsch. BII provides connectivity between BlackRock's Yu Song. Ben Powell. He is based in Singapore.