Global Outlook Testing limits

Axel ChristensenChief Investment Strategist, Latin America

March 2020

The vision at the beginning of 2020

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Growthedges up

Policypause

Rethinkingresilience

ADMASTER-STAMP!BIIM0120E-1053222-3/14

Sources: BlackRock Investment Institute, March 2020. Note: For illustrative purposes only.

INTERNAL USE ONLY

Our 2020 investment themes – Updated

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Growth recovery delayed – The recent virus outbreak leads us to reconsider our initial view that global growth would edge higher in 2020. We see interest rate-sensitive sectors such as housing firming, but the broader growth pickup may be delayed, with the virus impact likely concentrated in the first half.

Policy pause in question – We see geopolitical issues driving markets again in 2020 (coronavirus, U.S. elections), with monetary easing possibilities increasing and likelihood of fiscal stimulus also on the rise. The tension between the two could see yield curve steepening.

Reinforcing resilience – The increase of uncertainty reemphasizes the need of sources of resilience, were equity factor-based strategies can add value. A focus on sustainability can also help add resilience to portfolios as markets wake up to environmental, social and governance (ESG) risks.

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Easy financial conditions had translated into growth pickup…

Fo rward-looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from Thomson Reuters, 31 January 2020. Notes: The BlackRock Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months’ time. The BlackRock Growth GPS aims to give a read on the growth outlook for G7 economies and China. It combines new sources of information – including internet searches and text mining of corporate calls – as well as a daily nowcast of traditional economic data. EMU4 refers to Germany, France, Italy, and Spain. BlackRock financial conditions indicators (FCI) give a forward view of where the Growth GPS may head and are expressed in GDP terms. The FCI inputs include policy rates, government bond yields, corporate bond spreads, equity market valuations and exchange rates.

BlackRock Financial Conditions Indicator (“FCI”) and Growth GPS

BlackRock Growth GPS: US, Eurozone, Japan , China

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BlackRock EMU4 Growth GPS BlackRock Japan Growth GPS

BlackRock US Growth GPS BlackRock China Growth GPS

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…although a dip is likely in Q1/Q2 due to COVID-19, based on historical trends during the 2003 SARS outbreak

Source: BlackRock Investment Institute, with data from Bloomberg, JP Morgan and Markit, as of 31 January 2020. The chart rep resents the level of Purchasing Manager Index from January 2002 until December 2003.

Global (EM + DM) Manufacturing and Services PMI – SARS outbreak focus. 20020-2003

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Exports to and imports from China as a share of local GDP

Fallout from China disruptions can play out via two channelsBoth demand (exports to China) and supply (availability of intermediate components for making final goods) are likely to be disrupted as China slowly gets its economy back up and running.

Sources: BlackRock Investment Institute and the Organisation for Economic Co-operation and Development, February 2020. Notes: The left chart shows the goods and services that each country or area exports to China as a percentage of local GDP, using trade in added value data from the OECD, as of 2016. Theright chart shows intermediate goods and services imported from China as a share of local GDP.

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Market attention to global disease outbreaks, 2003-2020

Market attention to a major disease outbreak never higherMarket attention to the coronavirus, measured by mentions in broker reports and financial media, is far higher than it was for other diseases – and even SARS.

Sources: BlackRock Investment Institute, with data from Refinitiv, February 2020. Notes: We identify specific words related to major disease outbreaks since 2003, then use text analysis to calculate the frequency of their appearance in the Refinitiv Broker Report and Dow Jones Global Newswire databases as well as onTwitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average level over its history from 2003 up to that point in time. A score of one means the attention level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average.

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SARS H1N1 flu MERS Zika Coronavirus

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Central banks’ dovish pivot might be back…Markets have started to price in further rate cuts in the wake of the coronavirus outbreak.

Central bank policy rates and 1-year/1-year forwards, 2018-2020

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2020. Data as of 2 March 2020. Notes: The solid lines show the market pricing of policy rates in overnight index swaps on a one-year horizon starting in one year’s time. Dotted lines show policy rates for each region; we use the midpoint of the fed funds target range for the U.S.

Fed funds midpoint

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…while fiscal policy likely to turn out more expansionary than currently expected

Global fiscal impulse from G3 and China, 2002-2020

T here is no guarantee that any forecasts made will come to pass. Source: BlackRock Investment Institute, IMF, OECD and the European Commission, with data from Bloomberg, December 2019. The chart shows the annual change in the cyclically adjusted government primary balance weighted by GDP in purchasing power parity terms. The bars show the fiscal impulse from each regio n relative to the size of the global economy. 2020’s estimated path implies mild fiscal stimulus consistent with views from the IMF, OECD and brokers. The impact of monetary easing in China is not included to calculate the fiscal impulse due to its limited influence on growth and the lack of a consistent estimate for the neutral rate.

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Latin America – Main channels of transmission from shock to China activity, by country

Latin America – Consumption and investment shocks in China, effects by sectors/countries

Review on Latin America

Coronavirus/China effects and Transmission Channels

Source: BlackRock. As of July 2019Note: Green color represents a positive outlook, gray neutral and red negative. For information purposes onlySubject to change. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regard ing the funds or any security in particular.

Source: Goldman Sachs Investment Research, as of February 2020.

Review on Latin America

Views over a six-month time horizon

Source: BlackRock. As of July 2019Note: Green color represents a positive outlook, gray neutral and red negative. For information purposes onlySubject to change. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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Country GDP InflationMonetary

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DebtReforms

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Political Risk

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Chile

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Argentina

Venezuela

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Source: BlackRock Investment Institute, as of February 2020.Note: Green color represents a positive outlook, gray neutral and red negative. Question mark indicates under review. For information purposes only Subject to change. This material represents an assessment of the market environment at a specific time and is not intended tobe a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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Sustainability is a tectonic shift in investingWe believe sustainable investing does not mean sacrificing returns. Far from it. Sustained flows into sustainable assets may help them outperform through a long transition that is just beginning.

BlackRock framework for sustainability-aware portfolios

Sustainability effects and changing societal

preferences

New return expectations

for all assets

Sustainability-aware strategic

asset allocations

Rising capital flows into

sustainable assets

Macro variables affected

(GDP)

Traditional risk premia

change

Sustainability premia arises

Portfolio design

Heightened uncertainty through a long transition period

Source: BlackRock Investment Institute, February 2020. Notes: For illustrative purposes only. Subject to change without notice.

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Wealth transfer – just one factor driving ESG adoptionAn ongoing transfer of wealth to a younger generation with greater awareness of sustainability is just one of the structural factors that will drive a sustainability wave in coming years and decades.

Estimates of financial asset holdings by U.S. generations and extrapolating trends, 2015-2045

Sources: BlackRock Investment Institute, with data from Deloitte Center for Financial Services, February 2020. Notes: The chart on the left shows the distribution of investable financial assets across different generational cohorts as defined by Deloitte in this paper. The chart on the right shows a hypothetical rate of change in wealth applying the rate of increase between 2015-2030 of Gen X to millennials in 2030-2045 and applying the rate of change of the silent generation to baby boomers over the same period. Forward-looking estimates may not come to pass.

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