Twice a year we gather BlackRock’s senior decision makers for a two-day forum on the market outlook and its investment implications. We debated many topics at our meeting last week in London, including what could spark a change in the macro backdrop and how to prepare portfolios for a wider range of possible outcomes. The implications will be reflected in our updated tactical asset allocation views, to be published in our midyear outlook on July 8. Below we give a glimpse of our debates.
The majority of midyear forum attendees saw the current benign environment for risk assets as having room to run. Most felt it could persist for at least 12 more months, given easy monetary policies and few signs of financial imbalances. Yet we saw a wider range of outcomes the current macro regime could eventually break into. A recession was just one of the possibilities debated. One risk scenario: a reversal of the globalization trend of past decades. This could disrupt global corporate supply chains, sap potential growth and lead to sticky inflation. Forum attendees generally agreed that worsening trade relations have heightened macro uncertainty and widened the range of potential scenarios. In a pre-forum poll of meeting attendees, nearly half of respondents said they see geopolitics as the dominant market driver in 2019, taking the reins from policy. See the highest 2019 line in the chart above.
A changing backdrop
Our conviction in a slowing expansion with more room to run has become stronger over the last six months. In the pre-forum poll, more than 60% of respondents said they expect a moderate growth slowdown and low inflation over the coming 12 months, versus just 40% foreseeing that scenario last November. We entered 2019 with a consensus expectation of a modest global growth slowdown with little near-term risk of a U.S. recession, though rising risks – including escalating trade tensions and fears of a recession – called for carefully balancing risk and reward via building portfolio resilience, in our view. (See our 2019 outlook). At the end of the first quarter, these risks remained, yet a Fed on hold; a slowing but still growing global economy; and a perceived reduction in geopolitical risks informed our expectation of a positive near-term backdrop for risk assets. (See our Q2 outlook). Since then, the risk of a trade war has intensified.
Escalating trade tensions and the uncertain knock-on effects on global supply chains are making many of us ponder the possible consequences. We now see this rising geopolitical confrontation as the greatest risk to the global expansion rather than traditional late-cycle concerns such as building financial imbalances. The sharp rise in trade and strategic tensions between the U.S. and many countries – including China and Mexico more recently – tilts growth risks to the downside, in the near term as well as the long term, according to many forum attendees. We debated exactly how it could play out; some saw a risk of weaker growth with higher inflation, and others expected weaker growth to remain disinflationary. Some BlackRock investors now expect G7 growth to slow more sharply in 2019 than we had anticipated coming into the year. Also creating uncertainty and adding to the range of possible outcomes: markets are currently pricing in significant interest rate cuts by the Fed – pricing that we see as aggressive.
To refresh our market outlook, the conversations among the 100 BlackRock investors and decision makers gathering in London centered on certain crucial topics: the outlook for the Chinese economy; central banks’ likely path forward and their policy toolkit to face the next downturn; the future trajectory of inflation; and how to build resilient portfolios. The latter remains a key focus: A majority of BlackRock investors said they see portfolio resilience as more important than usual now. We will publish our midyear outlook on July 8.