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Global Weekly Commentary: Our latest equity views
Key points
Regional and factor views
We update our equity views ahead of the U.S. election, including upgrading emerging market equities and introducing an overweight in the size style factor.
Covid resurgence
A resurgence of Covid-19 cases may weigh on mobility and activity in the near term. We still see this wave of infections as shallower than the spring one.
U.S. election
Democratic nominee and former Vice President Joe Biden retains his lead in national polls as the U.S. nears Election Day.
Polls are suggesting a greater likelihood of a Democratic sweep in this week’s U.S. election. We are starting to incorporate themes we believe would outperform in that event, moving toward a more pro-risk stance overall despite last week’s market pullback. We debut an overweight in the U.S. size style factor, and upgrade broad emerging market (EM) and Asia ex-Japan equities to overweight.
Chart of the week
Relative sector weight of MSCI USA Low Size Index, 2020
Sources: BlackRock Investment Institute and MSCI, data as of Sept. 30, 2020. Notes: The bars show the weights of sectors on the MSCI USA Low Size Index minus those on the parent MSCI USA Index.
Large-cap technology stocks have driven U.S. equity market performance this year. We believe a repeat is unlikely in 2021, and see potential for smaller companies to outperform, especially in the case of a Democratic sweep that would result in significant fiscal stimulus. This electoral outcome also would likely lead to a new global minimum tax and more strenuous anti-trust review – which could weigh on large-cap tech and pharmaceutical companies. A boost in infrastructure spending could lend support to companies in industrials and materials – many of them small in size. We introduce an overweight in the size style factor in the U.S. market to capture our preference for smaller, high-growth companies. The chart above illustrates what underpins our view: The MSCI USA Low Size Index has a much higher share of industrials – and much lower exposure to information technology and communication services – than the parent MSCI USA Index. Meanwhile we downgrade minimum volatility to underweight, as we expect a cyclical upswing over the next six to 12 months – an environment where min vol typically lags in performance. This comes as U.S. earnings reports for the third quarter have beaten expectations.
We are also updating some of our regional equity market views. This includes upgrading broad EM equities to overweight. Positive spillovers to global growth from increased fiscal stimulus, more predictable U.S. trade and foreign policy and the prospect of a weaker dollar amid negative U.S. real rates in the event of a Democratic sweep would all bode well for EM assets, we believe. We also downgrade Japanese equities to underweight. That said, we are not outright negative on this market. We just expect Japanese stocks to benefit less than other Asian markets and EM in general from a recovery in global trade: A weaker dollar could send the Japanese yen up, putting pressure on the country’s export sector.
The evolving virus dynamics are another key factor. We are upgrading Asia ex-Japan equities and Asia fixed income to overweight, as China and other Asian economies have done a better job of containing Covid – and are further ahead in the economic restart. We expect this dynamic to continue over the months ahead. We are downgrading European equities to neutral. A resurgence in Covid cases has triggered lockdowns on local and national levels – albeit with more flexibility than earlier in the year – just as the economic restart shows signs of weakness. The renewed restrictions are already putting pressure on activity in the region. We still like euro area peripheral bonds due to the European Central Bank’s easing stance.
The bottom line: We are taking another step toward a pro-risk stance despite last week’s market pullback and the uncertainties just ahead. This follows our tactical move last week to downgrade U.S. Treasuries and upgrade their inflation-linked peers on a growing likelihood of significant fiscal expansion. A Democratic sweep outcome in the election would tip us to a more pro-risk stance overall, strengthening our conviction that a cyclical upswing will benefit risk assets over a 6-12 month horizon.
The key risk to our view: There is a material probability of an election outcome that would deliver much less fiscal stimulus. That’s why our moves to a pro-risk stance have been partial to date and granular in nature. There is also a chance of a contested election, but we believe there are mechanisms for resolving this. We prefer to look through any market volatility that a delayed result would likely bring and favor taking advantage of any selloffs in risk assets during this period of uncertainty to add to high-conviction positions. See our U.S. elections primer for key election scenarios and investment implications.
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