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MODERATOR:  Welcome, everyone.  Good afternoon.  This week’s Wall Street briefing is with BlackRock.  This is the final briefing in the series that has given you members of the U.S.-based foreign press exclusive access to Wall Street experts.

I’m delighted to introduce Dr. Jean Boivin, who is a managing director and the head of the BlackRock Investment Institute.  The institute leverages BlackRock’s expertise and produces proprietary research to provide insights on the global economy, markets, geopolitics, and long-term asset allocation, all to clients and portfolio managers to help them navigate financial markets.  He oversees the institute’s activities and responsible for economic and market research and for developing the core principles and intellectual property that underpin BlackRock’s approach to portfolio design, such as capital market assumptions and optimization tools.

This briefing is on the record.  The views expressed by briefers not affiliated with the department or the U.S. Government are their own and do not necessarily reflect those of the Department of State or the U.S. Government.  We ask that if you publish a story from this briefing that you share it with us.

Dr. Boivin will share his analysis and insights on the global economy and the 2021 outlook, and following his remarks, there will be a question-and-answer session.  After his presentation, I’ll open the floor for questions.  If you have a question, go to the participant field and raise your hand and wait for me to call on you.  Make sure that you identify yourself and your outlet when you do.  If you are experiencing audio issues, you may also go and put your question in the chat box and I will read it aloud.

And with that, let me pass it over to today’s briefer, Dr. Boivin.  Thank you so much for joining us.

MR BOIVIN:  Hi, good afternoon.  Thank you very much for having me, and happy to engage here in a discussion.  But I’ll start by giving a bit of a overview of how we’re thinking about global markets at this juncture and what it means for our investment views, and then I want to spend some time at the end to provide a bit more of a – like, a little deep dive on how we think about the impact of climate change and the climate transition in – for longer-term horizon investment, which is a big deal, and is something that we’ve been releasing new set of analyses and views around at this juncture.

So on the – starting with where we are now and the outlook for markets and what it means in our mind for investment, we’ve been thinking – we’ve been approaching 2021 framing the market outlook around three kind of broad themes.  The first one we call the new nominal, which is intimately related to the restart dynamic, which I’ll spend a minute discussing.  But that’s a central theme that govern the views we have on markets, a new nominal.

The second one is around – a bit longer-term in nature, but it’s around the globalization rewired theme and the implication that this is having.

And the third one is on the turbo-charged transformation that have been – that has been implied by the COVID dynamic of 2020, and that has a couple of implications on the tech sectors, the health care sectors.  It’s more a sectoral story, but one aspect of it that is very powerful in our view is around sustainability and the implication of climate transition.

So I’ll unpack these three themes and in particular the first and the last one.

On the new nominal, which is really like a catch-all term to think about what we think is really the core dynamics between the market – the economic restart post-COVID, the central banks and fiscal authority policy response, which we think is different and has gone through a revolution, and what it means for inflation rates and markets on the back of this.

So starting with – underlying the new nominal, the restart is a key part of the story.  We think that the key thing to focus on is on the rollout of the vaccine globally.  This is moving along and maybe a bit faster than would have been anticipated only a few weeks ago, and as a result, increases our conviction on the fact that what’s going to matter in 2021 for market is ultimately this restart dynamics, which is real, and in fact we think is largely underappreciated still by markets.  It’s kind of maybe surprising to say that given that markets have performed well overall, despite the very dire economic implications that we’ve seen over the last few quarters.

But the reality is that we think that the power – the rebound that is happening, the restart, is still going to surprise on the upside.  And we deliberately used the word “restart” and not “recovery” because to us, one of the key insights is that this is not a business cycle.  We didn’t go through a recession.  We went through a stoppage of activity to deal with the virus.  And what’s coming next is a restart, not a recovery, and a restart by its nature will look a bit more – quite a bit more powerful than a typical recovery would be.

Part of the reason why we think that restart dynamics are stronger is because a key part of it is around the consumers and the fact that, contrary to what would happen in a typical cycle at this stage after a recession, the balance sheets of households and companies would have deteriorated during that period and would be a headwind as they rebuild their balance sheets.  There would typically be a headwind which would lead to tempering the recovery.

We think the opposite is happening here.  We’ve seen accumulation of savings.  We see quite a bit of excess savings in fact, in particular in the U.S. economy, and the deployment of that savings will feel, in our view, much more powerful in terms of the consumption swing that we expect to see.

The other element that I think is important to appreciate for the power to restart is the fact that in a typical – in a typical recession, it’s really the part of the population that is more credit constrained that see the swing in consumption.  That’s where you see a reduction of consumption in the recession; and as the relief from the recovery is coming, this is where you see the upswing in consumption.  And it tends to be concentrated in where there’s credit constrained or a more tight balance sheet.

In this situation it’s very different, because the activity is deliberately stopped.  It’s really on the service side, and it’s more across the board.  It’s all income levels that are affected by the restrictions on activity.  And as a result, I think the consumption boost that’s going to come from the excess saving is going to be much more broad-based than in a typical recovery.

So we think that these things are not fully appreciated.  I mean, more and more so now, but I think they still have room to surprise on the upside.  And that’s why we’ve been and we continue to be pro-risk overall on markets in 202 because of this constructive dynamic.

Now, there’s a couple of – that’s – the restart is only one piece of the new nominal, and you’ll see where I end up with this new nominal team.  But the other piece is that we think we’re in a world where we’re seeing inflation now coming through over next few years.  This is something that’s going to feel very different to markets and investors, because it’s been a long time since we’ve seen inflation or we’ve been – have seen surprise – upside surprise to inflation.  And that is – that’s going to be a materially different environment.  We’re not talking, in our view, of inflation getting out of hand in any way, but over the next five years inflation being around 3 seems reasonable to us, and 3 will feel very different than what we’ve seen over the last 10 years.

But the important point is that we see that happening in the context where central banks will be a lot more relaxed about inflation globally than they have been over the last 30, 40 years.  So we’re saying more inflation but not translating as much into higher interest rates or higher yields.  And that’s what we call the new nominal:  So a powerful restart leading some inflation, but that inflation not translating into the same way in higher rates and nominal rates in particular.  And that’s a backdrop that we think is going to be constructive not only this year but over the next five years towards risk asset.  And in fact, we see this environment as being one where the inflation story plus the fact that rates are so low anyway means that government bonds and fixed income will be playing a more challenged role than portfolio, and on the other hand we see this environment as being supportive of allocation to risk assets and equities.

That’s what the new nominal is about.  I think there is some risk that I would point to, however, beyond the 2021 and I think should be in the minds of investors, and it’s around the fact that the fiscal impulse that is coming globally, that has come in 2020 and that will – that continues to be deployed in 2021 is very material.  To put things in perspective, in our view, we are seeing the size of the shock of the COVID shock in terms of economic loss – activity loss; let’s put it more precisely in terms of activity loss – is about a quarter of what the global financial crisis was.  It might be surprising, but the global financial crisis was less intense in the first year but, like, was there for 10 years after and led to the weakest recovery on record.  The COVID shock was a lot more intense in the first year, but the restart is much more – much more powerful.  And as a result, the cumulative impact of the COVID shock is a quarter of what the global financial crisis loss was.

So again, I want to emphasize a quarter as being the number, and yet the fiscal impulse we’re seeing globally and in the U.S. in particular is four times the fiscal impulse we’ve seen in the global financial crisis.  Admittedly, the – ex post now we see that the fiscal response in the global financial crisis was too little, but again, the scale is important.  We’re seeing that as being four times the response now.

So that is a pretty powerful response.  Again, that is leading to our view that inflation is going to be on the way up.  But the combination of how this increased fiscal spending together with central banks having to deal with this environment in the constraints in their ability to raise rates materially could create the reappearance or question, the perception of safety that there is around government bonds in particular.  So over the last 10 years, we’ve seen government bonds playing more and more of a role of perceived safety in a portfolio.  This was a safe asset to go to.  That might be questioned more going forward, given the environment we’re describing.

In the interest of time, I’ll leave these observations on the markets and maybe just conclude that overall, we’re pro-risk in the short-term.  We tend to be pro-risk in particular in U.S. equities and EM equities.  But we’ve upgraded European equities to neutral in that context.  So we see the next few months as being supportive more broadly than the U.S. now, and in particular, Europe being a beneficiary.  And then more strategically, we think this is going to be an environment that’s going to favor equities and bonds.  And government bonds, in particular would play a more challenging role in portfolio, which is why we are underweight government bonds on a strategic basis.

Let me conclude here in the next two minutes or so, maybe three, on what climate transition means in our thinking and on the medium-term asset allocation perspective.  We – over the last 18 months, I think the narrative around what climate and sustainability means for investment has changed very fundamentally, and I would even call that a 180-degree turn.  The conversation used to be framed as sustainability and climate are important, but we need to think about them in terms of a trade-off, in the context of a trade-off between achieving financial returns, right, objectives versus sustainability and climate objectives.  So it was put as a trade-off or giving up some financial returns to achieve our objectives, and that’s where we believe that there’s been 180-degree turns, and we certainly think that this turn is justified.  And in fact, we believe that on a longer-term investment basis, sustainability and the climate transition are in fact a driver of return.  So this is an investment thesis; this is not just a separate objective.

And the reason for that are a couple of – or three folds, I guess, or three channels by which we think the climate transition in particular is going to be driving returns and present an investment opportunity.  The first one is the macro backdrop.  We think that this framing that you need to save the environment at the expense of the economy, or vice versa, we think is the wrong framing.  The moment that we admit that climate change is a reality, it implies that the relevant scenarios in front of us are one of a business-a-usual scenario, where we don’t do anything, and the other where we try to take measures to transition towards a more sustainable climate scenario.  And based on our work and analysis, the difference between these two scenarios is material.  Over the next 20 years, it could represent as much as 25 percent of global GDP cumulative in terms of better or gains, if we are able to embark in a successful transition.  So the macro backdrop in a climate transition is actually more supportive of assets.

The only way that you can see the climate transition as being bad from a macro perspective is if you think that the options of climate change not existing being a possibility.  Then, of course, we would be better off without climate change if we could just avoid it.  But from the moment that we admit that it exists, then it’s a choice between a transition or business as usual.  And the transition provides a better macro backdrop to growth, and as a result to return expectation.  That’s the first reason.

The second channel, second reason is the fact that this is in motion.  It hasn’t really happened yet. It means that we expect a restructuring of the economy with capital moving away from some sectors towards other sectors.  And that has not yet been reflected in the price of assets.  It’s starting.  We’re seeing some flows.  It’s been accelerated in 2020.  But we haven’t seen – it’s only the tip of the iceberg.  And as these flows are adjusting, and again, this capital reallocation is happening, we think that’s going to be providing a sustained driver of returns on a five-year basis.

And finally, the last channel is that the transition creates as implications for the profit profitability of sectors and companies.  So there’s going to be winners and losers.  There’s companies that are better aligned with the transition than others.  And being able to allocate and position your portfolio in line with the winners and losers is another way to generate returns based on this climate change topic.

At the end of the day, that means that for us, it affects how we think about returns expectations for asset class on a five to ten-year basis, and these returns expectations are the bedrock of how we build portfolios.  And now, with the new work we’ve done, which we released a couple of weeks ago, we now – we are now reflecting these three channels of how climate change affects returns expectation explicitly into our return expectations, and in the strategic asset allocations that are coming out of it.

So these are the key points I was planning to put on the table to start, and maybe I should – maybe I’ve already abused my time, and I’ll stop here and be happy to take questions.

U.S. Department of State

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