BACK TO SCHOOL: 5 KEY THEMES TO TRACK


Wei Li 08/Sep/2020

  • We highlight 5 key themes, based on the summer’s macro and market developments. What drove positive summer sentiment, and what does it mean heading into the autumn?

  • We focus on global activity recovery, the summer’s tech-driven rally, geopolitics, inflation, and thematic trends.
  • For each theme, we highlight iShares implementation ideas to help investors position for an uncertain autumn, amid fears of second-wave virus infections and potential geopolitical risks.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. All amounts given in USD.

Summer may have come to an abrupt end with early September’s market volatility, but context for these moves is important: the S&P 500 is still up 7% YTD, and tech stocks (the epicentre of both the summer rally and the recent sell-off) are up 27% YTD and 67% from March lows.1 The concentration in tech means the rout is not – yet – a harbinger of broad rotation shifts. Despite the sudden correction, risk assets pushed to new highs through the summer, with sentiment buoyed by earnings beats, reported vaccine progress, and improved mood music around US-China trade. Yet as this week has shown, deep uncertainty heading into the autumn – especially around second-wave infections and the US election – mean that resilience and the need to diversify portfolio diversifiers are more important than ever – especially as many risk assets are priced for perfection, with little room for error.

1Source: BlackRock and Bloomberg, as of 7 September 2020.

Index performance in 2020

Graph showing index performance in 2020 by % return.

5Y total asset returns (%)

2015 2016 2017 2018 2019 YTD 2020
Developed equities ($) -0.9 6.6 22.4 -8.7 27.7 4.1
S&P 500 1.4 10.9 21.8 -4.4 31.5 8.4
Nasdaq 5.7 6.3 28.2 -3.9 35.2 23.9
MSCI Europe 8.2 2.0 10.2 -10.6 26.1 -11.5
FTSE 100 -4.9 13.8 7.6 -12.5 12.1 -22.4
Topix 11.7 0.0 21.8 -16.3 17.7 -5.0
MSCI EM ($) -5.8 9.9 30.6 -10.1 18.0 4.9
China A 9.4 -13.1 6.6 -24.6 22.3 10.0
CRB Commods -14.4 13.2 2.2 -5.4 -1.9 -1.6
Crude oil -35.0 55.8 17.7 -19.5 22.7 -34.6
Gold -10.4 8.1 13.5 -1.6 18.3 26.8
Global IG -3.8 4.2 9.3 -3.5 11.4 7.2
Global HY -4.2 14.7 10.2 -3.3 13.7 2.1
EMD $ 1.2 10.2 9.3 -4.6 14.4 3.3
10Y UST n/a n/a n/a n/a n/a 0.2
German Bund n/a n/a n/a n/a n/a 0.9
Italian BTP n/a n/a n/a n/a n/a 1.2
Dollar 9.3 4.0 -9.9 4.4 0.2 -3.4

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: Bloomberg, as of 4 September 2020. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

1. Global activity recovery

Global activity continues to recover, but recent data has started to reach a natural speed limit with the immediate post-lockdown rebound largely behind us. We expect the recovery to hold, especially in Europe, but a weaker US dollar paired with a stronger euro – and Europe’s under-performance vs. the US this summer – reinforces our call for selectivity in European equities, focusing on indices with a domestic tilt. While fears over a second wave have tempered sentiment towards value, quality remains the name of the game, as we look to companies that can grow in a low growth world – see our latest Index Insights quality & growth analysis for more. More concrete vaccine progress and activity recovery could benefit laggards such as industrials and small caps.

2. Tech drives gains

The summer’s tech-driven rally narrowed through August, with tech names accounting for nearly all of the S&P 500’s YTD gains. Concerns about a tech bubble will be heightened in light of early September’s market rout, but in contrast to the dot.com era, in 2020 tech earnings and profits have come through nicely: in the Q2 earnings season, the tech sector was a standout with EPS growth at 1% in the US and 11% in Europe YoY, versus broad market earnings contractions of -33% and -28%, respectively. On top of this, strong balance sheets and cash flow generation mean that the sector scores highly on quality metrics, adding to portfolio resilience in this uncertain environment. It should come as no surprise that against this backdrop, global tech has outperformed global equities by 28.6% YTD and has also been the most popular sector in global ETP flows, gathering US$25.4B by the end of August – almost 50% of the total flow allocated to sector ETPs YTD.2

2Source: BlackRock and Markit, as at 31 August 2020. Past flows into global ETPs are not a guide to current or future flows and should not be the sole factor of consideration when selecting a product.

3. Easing of US-China tensions

US-China tensions have temporarily eased, but as we head into the US election it is important to remember global sentiment remains captive to fast-changing geopolitical headlines. Earlier this summer, markets seesawed around reports of a US ban on TikTok, before subsequent headlines suggesting less severe restrictions fuelled a global risk rally. More recently, US-China headlines boosted sentiment further, with both sides reaffirming their commitment to the phase one deal agreed last year. While for now the mood music has improved, clients are asking us if they should switch out of ADRs for fear of greater regulatory scrutiny and delisting pressure. The bottom line: to access the twin engines of global growth, investors should consider owning the US and China in their portfolios. Owning China increasingly means going onshore as the two spheres of influence continue to decouple in a world of deglobalisation. Chinese assets may help to boost diversification, and sentiment towards them has trended upwards, particularly China A-shares and 10Y government bonds.

4. Abundant political activity

Politics is coming to the fore this autumn – and uncertainty abounds. With the 31 December deadline looming, our base case for Brexit remains for both sides to agree on a ‘skinny deal’ that maintains most terms pending future negotiations. Meanwhile, the US election campaign has been ramping up. Yet while the US administration struggles to secure a fiscal deal, we’ve seen progress on the monetary front, with Fed Chair Powell’s speech at Jackson Hole signalling a shift towards average inflation targeting. Inflation was already at the top of minds in the run up to Jackson Hole, with US inflation breakevens having recovered from the Covid-19 drop and inflation-linked ETP flows surging. We have seen a marked increase in client interactions on the topic, with clients either looking to hedge out the medium-term risk or play a potential rise in inflation. This interest comes alongside the second largest inflow month for inflation-linked ETPs on record, with US$3.3B added in August.2 While we work through the implications of various US election outcomes (watch out for our US election implementation guide), the industrials sector looks likely to benefit from renewed capex and a focus on infrastructure spending, and clients are telling us that they will increasingly use sectors to position for the election.

5. Focus on thematics

Following the continued strength in sustainable flows, thematic products are also on track for a record inflow year after the summer, with investors taking advantage of structural shifts accelerated by Covid-19. Almost $20B has been added to global thematic exposures so far this year (including $5B into EMEA-listed funds), underpinned by three clear trends: tech, healthcare, and climate change.2 The shift to working from home has given renewed momentum to technology – specifically digitalisation and digital security – while healthcare innovation has also been in focus, given the current pandemic and structural ageing populations. Check out the Thematics team’s August update for more on the themes being ‘structurally accelerated’ by Covid-19, and our Thematic Index Insights analysis.