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The future is running at us. The coronavirus shock is accelerating structural trends in inequality, globalization, macro policy and sustainability. This is fundamentally reshaping the investment landscape and will be key to investor outcomes.

The shock will have long term consequences that are already starting to play out. Policymakers are funneling funds directly to the non-financial, private sector, with debt monetization a likely end result. The pandemic is reinforcing structural trends such as ecommerce and sustainability; amplifying deglobalization and geopolitical fragmentation; and may deliver a generational shock to the emerging world.

The most important action investors need to take today, in our view, is to review their strategic asset allocation to help ensure portfolios are resilient to these supercharged trends. On a tactical horizon, we keep our overweight in corporate credit on the back of targeted policymaker intervention and a global thirst for yield. We upgrade European equities as we see the region offering more attractive exposure to a cyclical uptick than many emerging markets, due to its ramped-up policy response and robust health systems. We downgrade U.S. equities after a stretch of outperformance as we see risks of fading fiscal stimulus and election uncertainty.

To help investors navigate this process, we highlight three key themes for the markets in the second half of 2020, along with ways to implement these views in your portfolio.

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1. Activity restart

What to know: Economies are slowly restarting, but at differing paces. We are tracking the evolution of the virus and mobility. The longer it takes for activity to restart, the more cracks might appear in the financial system.

What to consider: We have turned neutral on equities on a strategic, twelve-month time horizon given the challenging backdrop for earnings and dividend payouts and prefer to take risk in credit. In a six to twelve-month time horizon, we like the quality factor in a challenging business climate and Europe for its cyclical exposure.

2. Policy revolution

What to know: The policy revolution means that policymakers are increasingly funneling funds directly to the real economy. Without guardrails, the blurring of monetary and fiscal policy may heighten inflation risks in the medium term.

What to consider: From a long-term investment perspective, we are underweight nominal government bonds and like inflation linked bonds. In the short run, credit is supported by significant and sector-focused policy measures, and coupon income is key in a low rate world.

3. Real resilience

What to know: Supercharged structural trends will likely change the nature of portfolio diversification. Countries, sectors and companies will make a comeback as diversifiers in a more fragmented world, potentially offering resilience to real economy trends.

What to consider: In the long run, we favor sustainable assets, private markets and country exposures. In the short-term, we are tactically overweight government bonds as ballast against broad risk asset selloffs.

Christopher Dhanraj
Director, Head of iShares Investment Strategy
Jasmine Fan contributed to this article.
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