BlackRock’s chief investment strategist said that after significant market growth, he is more cautious about US stocks in the second half of the year due to the risk of weakening fiscal stimulus and potential election volatility.
BlackRock Investment Institute, in the second half of the yearsaid he keeps stocks at a neutral, or benchmark weight in portfolios. As part of this, he is overweight on European stocks, underweight in emerging markets and a neutral, or more cautious look at US stocks. It also promotes better names in all directions.
“We entered a year with overweight shares and loans. At the very end of February, when the storms around the coronavirus became apparent, we reduced these investments to a neutral weight, ”said Mike Pyle, chief investment strategist at BlackRock. But when he returned to risk overweight in early April, it was just a loan, an asset class that the Fed and other central banks are buying.
“Strong support policies meant that credit assets would be smoother and more stable … compared to equity assets,” Pyle said.
He said that the call for US stocks is not very negative, just cautious, and he expects US stocks to work in accordance with global markets at the end of the half-year, after outstripping growth.
Stocks sold out last week as investors reacted to the resurgence of coronavirus in some states and concerns that could hinder economic recovery. The S & P 500 fell 2.9% in the week to 3,009, and now it has grown by about 16% in the second quarter, compared with an increase of more than 20%.
“I would say that we are cautious in the US market as a whole because of the financial history and remaining problems related to public health measures and what we consider to be a rather unstable election season with policy uncertainties in the background,” Pyle said. He said that tensions between the US and China could also be negative, and they are likely to persist regardless of who wins the US election.
Pyle said strong policies in March supported the economy and helped US markets recover. However, he said he was concerned about the future path of fiscal stimulus.
“At the end of July, we are concerned about the fiscal cliff around unemployment insurance and support for small businesses,” he said. According to him, it is also unclear what support Congress will be ready to provide to the states and local authorities.
“I think that we are likely to see the actions of Congress. Question mark: will this be enough? Will it be designed correctly to support the economy, ”said Pyle.
“Considering financial support in the amount of more than 2 trillion US dollars, as well as the Fed’s response to monetary policy, we are looking to the future, and we are worried that the United States risks cutting its budget policy too quickly at the end of the half-year,” he said. ,
Pyle said he is worried about the wider US market facing headwinds as companies try to recover. “I would say that on the positive side, we are still prone to technology, still prone to parts of healthcare,” he said.
European equities, however, have better prospects due to a strong political response, and the economy is reacting.
“We believe that this will enable Europe to win in the second half of the year, which will be a real access to broad emerging markets,” he said. “Despite the fact that the risks remain, this is a much more reliable political basis than we thought two or three months ago,” he said.
Pyle said there are broader trends that investors need to pay attention to, and they have accelerated thanks to the coronavirus and reaction to it. Deglobalization is one, and this trend should continue.
“Deglobalization, which we see as a very important issue on the strategic horizon. We think that you are increasingly seeing how countries and regions separate their economies from each other, which over time reduces the correlations between economies and decreases the correlations for financial markets between these countries, ”he said. he said.
Another is the inflow of capital into ESG investments, or strategies that take into account the environmental, social and management factors of the company.
“One of the interesting things about 2020, in general, is that flows to ESG-oriented funds or portfolios continue to grow even during drawdowns in March, as well as a result of recovery,” he said. “It is noteworthy that we observed historical instability, but one of the constant was that customers continue to allocate capital for sustainable strategies.”