by Michael Fredericks, Head of Income Investing, Multi-Asset Strategies, Blackrock
Markets are facing choppier waters, but the backdrop for risk assets remains positive.
After a record run from their March lows, risk assets retreated in September. Market-leading segments, like mega-cap tech stocks, fell back during the month as investors sought to take profits on highly valued names and sectors. Defensive assets, like Treasury bonds, failed to provide much cushion against the market’s risk-averse tone, underscoring the difficulty of finding effective hedges in this environment. The broad market weakness can be attributed to ongoing political uncertainty in the United States, escalating geopolitical risks, an uptick in virus cases, and marginally softer economic data.
President Trump contracting the coronavirus and an unexpected nominee for Supreme Court Justice have further complicated an already noisy political backdrop. We expect the election season to bring about a choppier near-term market environment with potentially significant implications for some sectors. However, regardless of the election outcome, we believe the backdrop will remain broadly favorable for risk assets over the medium term.
While September brought another wave of virus cases, notably in Europe, death and hospitalization rates have not spiked, and there is increasing optimism for an approved vaccine by early 2021. Economic activity in developed markets has continued to improve, albeit the pace has begun to moderate. In contrast, the recovery in China showed further signs of accelerating. Ultimately, we expect the global recovery to persist alongside massive stimulus, but its path and speed will vary by region.
Overall, we maintain a cautious but optimistic view on markets for the medium term while continuing to be mindful of near-term risks. We continue to favor select credit markets given ample liquidity and strong demand for income-generating assets globally.
In the BlackRock Multi-Asset Income Fund, we recently reduced allocations to highly valued, lower-yielding fixed income sectors including short-term investment grade bonds, higher-quality collateralized loan obligations and non-agency mortgages. Conversely, we increased exposure to high yield bonds and Asian credit where valuations look relatively attractive. While we’ve modestly added risk with medium-term opportunities, we’ve also increased our cash allocation. We expect higher volatility in the near term to provide more attractive opportunities to tactically put cash back to work.
Michael Fredericks, Head of Income Investing for BlackRock Multi-Asset Strategies Team
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