Balanced ETF portfolios Q4 2019 commentary

Market overview

Unlike the negative market experience of 2018, 2019 proved to be a year of positive returns for most asset classes. This was despite several patches of turbulent markets, particularly in the summer, which was a challenging time for risky assets. While global economic data continued to disappoint and geopolitical tensions remained at elevated levels throughout 2019, positive sentiment mostly on the back of supportive central banks helped asset performance. 

The fourth quarter was a particularly strong one and characterised by a risk-on sentiment. BlackRock believes that this was the result of supportive central banks but also because the year ended with some positive geopolitical news: a Phase One trade agreement between the US and China, and subsiding risk of a no-deal Brexit.

Looking at the equity side, emerging market equity was clearly leading the fourth quarter in terms of performance. Political tensions eased when the US decided not to increase tariffs in December. Global emerging market equity and Asia ex-Japan equity both returned robust numbers. Equities in the developed market also experienced a substantial rally. Several factors supported their performance including the above-mentioned easing tensions, as well as improving service and manufacturing data in the US and the Eurozone. At the bottom of the performance list were UK equities, which were lifted by the election outcome in December. 

Performance of fixed income was in line with market observations. The risk-on market sentiment in the fourth quarter drove yields for riskier fixed income assets lower, and sovereign debt higher. US high yield performance came in first, closely followed by emerging market debt and Euro high yield. On the losing side we saw developed market treasuries, which have given up some of their previous gains.

Portfolio performance

The Multi Asset portfolios ended the fourth quarter with positive returns. 

Broadly speaking, on the equity side, all allocations contributed positively to portfolio performance. Our overweight to US equity was certainly of help given its strong performance. While US equity was the largest single contributor and our overweight was certainly additive, the minimum volatility share of it was detrimental. 

Looking at the fixed income side, absolute contribution over the fourth quarter was positive for credit but negative for government bonds. 

Outlook

The 2020 macro environment marks a big shift from the dynamics of 2019, when an unusual late-cycle dovish turn by central banks helped offset the negative effect of rising trade tensions. The US dovish pivot looks to be over for now. Any meaningful support in the Euro area will have to come from fiscal policy, and BlackRock does not see this in 2020. Emerging markets (EMs), however, still have room to provide monetary stimulus. 

This makes growth the key support of risk assets. BlackRock’s base case is for a mild pickup supported by easy financial conditions, with a slight rise in US inflation pressures. BlackRock see China’s economy stabilising, but little appetite for replays of the large-scale stimulus of the past. We see the growth uptick taking root in the first half of the year, led by global manufacturing activity and rate-sensitive sectors such as housing. 

The main risk to our outlook is a gradual change in the macro regime. One such risk: growth flatlines as inflation rises. This might pressure the negative correlation between stock and bond returns over time, reducing the diversification properties of bonds.

A deeper economic slowdown is another risk to consider. There has been a pause in the US-China trade conflict, but any material escalation of global trade disputes could undermine market sentiment and cut short the expected manufacturing and capex recovery that underlies our tactical views. 

BlackRock remains modestly overweight equity and credit, due to the firming growth outlook and pricing that still looks reasonable against the macro backdrop. Yet we have made meaningful changes to our granular views. BlackRock sees potential for a bounce in cyclical assets in our base case: BlackRock prefers Japanese and EM equities, as well as EM debt and high yield. We are cautious on US equities amid 2020 election uncertainties.

BlackRock believes growth should edge higher in 2020, limiting recession risks. This is a favorable backdrop for risk assets. But the dovish central bank pivot that drove markets in 2019 is largely behind us. Inflation risks look underappreciated, and the lull in US-China trade tensions could end. This leaves us with a modestly pro-risk stance for 2020.