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As the curtain comes down on 2020, and rises on 2021, I’m sure I’m not alone in hoping that next year will return some normalcy to society. From the enormous personal, social and economic toll of the pandemic, to civil strife and a bitterly contested election, 2020 has been unlike any year in generations.

For investors, 2020 was a rollercoaster, to put it mildly. From the historic selloff and volatility in March to the rebound later in the year — and a lot of swings back and forth in between — the year was one that challenged all of us. However, throughout all the ups and downs of 2020, one feature held steady: more and more investors turned to iShares ETFs to navigate the markets. They helped provide liquidity when it was largely frozen in the depths of the selloff, and they offered tools to rebuild strategic positions or access tactical opportunities throughout. They proved their worth to investors time and time again during the year.

Of course, the legacy 2020 will be with us for some time to come. That is the main theme of the 2021 Outlook from the BlackRock Investment Institute (BII), representing BlackRock’s best thinking on what the roadmap for 2021 looks like, and how to navigate it.

As BII notes, the COVID-19 pandemic has accelerated profound shifts in how economies and societies operate. These transformations run across four dimensions: sustainability, inequality, geopolitics and the joint fiscal-monetary policy revolution.

Three of BII’s new investment themes — The new nominal, Globalization rewired and Turbocharged transformations — reflect these shifts. Taken together, they call for a fundamental and immediate rethink of portfolio allocations.

The pandemic has put a spotlight on underappreciated environmental, social and governance (ESG) factors such as employee safety, while support for climate change mitigation has swelled amid extreme weather events. Rising income, wealth and racial inequalities are fueling populism, with possible tax increases for the wealthy, higher minimum wages and threats to central bank independence. COVID has accelerated geopolitical trends such as a bipolar U.S. China world order and a rewiring of global supply chains.

The pandemic has also sparked a policy revolution by bringing unprecedented cooperation between fiscal and monetary authorities. The BII sees no appetite for fiscal austerity, unlike in the aftermath of the Global Financial Crisis. Rather, the politics of inequality will likely drive continued government spending and bigger debt loads. Expect pressure on central banks to maintain low interest rates, given the surge in debt to deal with the economic fallout of pandemic.

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1. The new nominal

What to know: We see stronger growth and lower real yields ahead as the vaccine led restart accelerates and central banks limit the rise of nominal yields even as inflation expectations climb. Inflation will have different implications to the past.

What to consider: From a long-term investment perspective, we underweight government bonds and see equities supported by falling real rates. In the short run, our low rate outlook keeps us pro-risk. The BII likes U.S. equities and prefers high yield for income.

2. Globalization rewired

What to know: COVID-19 has accelerated geopolitical transformations such as a bipolar U.S.–China world order and a remaking of global supply chains, placing greater weight on resilience — even at the expense of efficiency.

What to consider: The BII favors deliberate country diversification and above-benchmark China exposures on a strategic, twelve-month time horizon. In a six to twelve-month time horizon, we like emerging market equities, especially Asia excluding Japan, and are underweight Europe and Japan.

3. Turbocharged transformations

What to know: The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality within and across nations, and the dominance of e-commerce at the expense of traditional retail.

What to consider: In the long run, we prefer sustainable assets amid growing investor attention to sustainability-related issues. We take a barbell approach in the near term, favoring quality and big tech plus selected cyclical exposures. We see the tech and healthcare sectors offering exposure to structural growth trends, and U.S. small caps geared to an expected cyclical upswing in 2021.

Armando Senra
Head of iShares Americas at BlackRock
Contributors: Jasmine Fan, David Kurapka
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