BlackRock sees bipolar world, swift global economic restart

BlackRock was not particularly concerned about an equity market bubble.
BlackRock was not particularly concerned about an equity market bubble.PHOTO: EPA-EFE

SINGAPORE - The global economy is undergoing a geopolitical transformation which will ultimately result in a bi-polar world dominated by the United States, on one end, and China on the other, said global investment giant BlackRock.

"The coronavirus pandemic has accelerated geopolitical transformations such as a bipolar US-China world order, and a rewiring of global supply chains for greater resilience," BlackRock noted in a report last week. "We believe investors need exposure to both poles of global growth."

BlackRock's managing director and chief investment strategist for Asia-Pacific Ben Powell was particularly optimistic on the prospects for China and North-east Asia.

"China is already undergoing activity restart, and we hope this is the canary in a coal mine for the rest of the world six months forward," he said. "In 2021, they will embark on the battle against pollution, inequality and debt."

Mr Powell saw China's economic growth being appreciably above the 7 per cent trend, noting that some areas "have yet to normalise". He was also upbeat on other North Asian economies like Taiwan and South Korea, and saw significant bounce-back in the two populous economies of India and Indonesia.

However, BlackRock was underweight on Europe, citing political and leadership uncertainties over the next few years.

BlackRock, which has some US$8.8 trillion (S$11.67 trillion) of assets under management, was not particularly concerned about an equity market bubble.

"The euphoria makes sense as the market is pricing in activity restart," Mr Powell said.

"This is not a cyclical recovery. It is a moment in time when we are seeing blended support from both fiscal and monetary policies. We could see the highest GDP growth ever since the 1970s. Meanwhile, we are in a new nominal in yield, with the likelihood of real yields in negative territory."

He noted that, after going through the tumult of the pandemic, policymakers were inclined to tolerate some inflation pressures as they go for "too much growth" and "too much jobs".

Indeed, with governments and central banks worldwide pump priming struggling economies with fiscal and monetary stimulus, BlackRock reckoned the pandemic has been a great accelerator of structural trends.

"The traditional business cycle playbook does not apply to the pandemic," it noted. "We see the shock as more akin to that of a large-scale natural disaster followed by swift economic restart."

But, amid all this, US-China tensions will persist.

BlackRock noted the new Biden administration, while taking a different tenor in its approach to China, was likely to have a sharply differing approach in trade and climate policy. Human rights will also be an area of friction between the two economic giants.

"Overall tensions look set to stay elevated amid ongoing economic and technological competition," its weekly commentary noted.

Still, both countries could find areas of cooperation in public health and climate change policies.

BlackRock's bottom line: "We believe investors need exposure to both poles of global growth in an increasingly bipolar US-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."

Among the risks to China-exposed assets are China's high debt levels, currency volatility and heightened US-China conflicts. "But we believe investors are well compensated for these," BlackRock concluded.