How investors can catch a second wind in 2021

A sporting guide to how we see the markets

Gargi Pal Chaudhuri Aug 5, 2021

As athletes compete to showcase their speed, endurance, strength and precision, countries are likewise striving to restart their economies and keep the pandemic in check.

At this stage in the recovery, macroeconomic considerations including inflation, unemployment, fiscal and monetary stimulus efforts all are top of mind for most investors. These forces, combined with public health data points including vaccine rates, shape how we view potential opportunities through 2021 and beyond.

The ideas that follow expand on the iShares midyear 2021 outlook and ETF implementation guide by matching sporting events with our macro views.

100m dash | Reopening trades still have legs

While peak economic growth may be behind us in the U.S., value- and cyclical-oriented investments may still hold appeal as the vaccine-led, fiscal and monetary policy-supported global economic restart continues. Value and cyclical sectors such as financials and energy still look attractive to us in the near term.

Triathlon | The trifecta of digital, sustainable and physical infrastructure

Just like a triathlon, infrastructure investing includes three elements. A recently announced $1.2 trillion bipartisan infrastructure plan has advanced to the Senate and could lead to historic investments toward revitalizing and rehabilitating U.S. infrastructure.1 Spending could benefit companies in a wide range of industries since the plan covers existing infrastructure including road and bridges, digital infrastructure including cyber security and 5G networks, and clean energy infrastructure including electric vehicles.

Swimming | Making a splash ‘across the pond’

In a packed pool, European stocks have found their stroke after a disappointing 2020. We see the “reopening theme” broadening to Europe, following the path of the global vaccine rollout. We also see Japanese stocks as poised to benefit in the medium term from higher earnings growth in the second half of this year despite the recent uptick in virus cases and restrictions.

Marathon | ESG, long journey to 2050

It’s a marathon not a sprint when it comes to investing according to environmental, social and governance (ESG) considerations. More investors are seeking a similar risk and return to the broad market, with a more sustainable outcome.

The idea that climate risk represents investment risk has moved from a novelty in the investment world to something approaching mainstream thinking in just a few years. By some estimates annual clean energy investment will need to more than triple by 2030 to around $4 trillion to build a “net zero” global economy — one that emits no more greenhouse gas than it removes from the atmosphere by 2050.2

We believe that financial markets are only beginning to appreciate the potential impact of the shift toward sustainability on asset prices. The convenience that ETFs provide can drive a synchronized move toward sustainability that we believe over time will help make the most sustainable assets become more valuable and the least sustainable assets less valuable.3

Weightlifting | Raising a value-quality ‘barbell’

As economic growth peaks and COVID-19 variants remain a risk, we favor a “barbell” approach to stock investing — pairing “value” with “quality” to access companies that may be primed to perform in this mid-cycle environment. A strategic value-quality barbell approach to the stock market could offer better risk-adjusted returns and resilience to portfolios at this stage of the economic recovery, in our view. We think quality-oriented companies have the pricing power to pass rising input costs through to customers and strong enough balance sheets to weather potentially thinner profit margins and higher taxes.

Gymnastics | Staying flexible in the short term

We see potential for gradually higher yields as bond markets continue to price in the global economic restart — especially given the pullback in recent months.4 The rising-price trend — the closely watched Consumer Price Index in June rose at its fastest rate since 2008 — also has legs in both the short and medium terms, we believe.5 For this reason we favor floating rate bonds and short-duration Treasury Inflation-Protected Securities (TIPS). These have tended to be less sensitive than long-duration bonds during periods of rising interest rates. Additionally, our analysis shows that convertible bonds can potentially guard against rising interest rates and fast-rising inflation.6

Pole Vault | China  

We see China as a distinct driver of global growth, deserving of its own spotlight. It led the way in the first leg of the activity restart, paving a route for other countries including the U.S. to follow. Investors are also increasingly separating China from the rest of their emerging market allocations, to express a distinct view on Chinese growth.

Archery | Targeting yield

High yields are an ever-shrinking target in the sights of income investors given the lower-for-longer interest rate environment. The prospect of higher inflation at a time when interest rates are historically low makes this a challenging time to earn steady income. When inflation is rising quickly, dividends have a key advantage compared with bond coupons: potential for growth. Over the past 150 years, dividends paid by U.S. companies have grown 3.7% per year compared with 2% per year for inflation.7 High dividend exposures could thread the needle between generating income and growth that can potentially outrun inflation.

Fencing | Parrying inflation risks

Over the medium term, structural factors may cause inflation to lunge higher than it has been over the previous decade, including higher production costs and the Federal Reserve’s recent commitment to achieve above 2% target inflation (known as Flexible Average Inflation Targeting). Investors may not fully appreciate the pace that could be set with accommodative central bank policy and pent-up demand hitting the tape. We believe short-term TIPs and a basket of commodities may help hedge against inflation, since they are inputs in inflation gauges including the consumer price index.

Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Jasmine Fan

Investment Strategist