- BlackRock said in a blog post on Tuesday that now is the time to sell government bonds and buy risky assets like stocks and emerging-market debt.
- The asset manager said policy actions in response to the coronavirus pandemic should cushion the impact of the virus shock and help mitigate permanent damage to growth fundamentals.
- BlackRock said that despite the substantial rally in equities in recent weeks, the price declines still imply significant expected returns compared with US government debt.
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BlackRock said in a blog post on Tuesday that now is the time for long-term investors to sell government bonds and buy risky assets like stocks and emerging-market debt.
The world's largest asset manager, which had $6.5 trillion in assets under management as of March 31, thinks the policy actions in response to the coronavirus pandemic should cushion the impact of the virus shock and help mitigate permanent damage to growth fundamentals.
"Given successful policy execution throughout the shock, the cumulative impact would be well below that seen after the 2008 global financial crisis," it said.
The rally in bonds and the sell-off in stocks since the coronavirus pandemic hit has created an opportune time to strategically rebalance portfolios by selling bonds and buying equities, according to BlackRock.
This echoed one of six reasons JPMorgan is bullish on stocks right now.
As investors traditionally view bonds in their portfolio as a ballast to help limit drawdowns in times of heightened market volatility, that defensive quality of US government debt is not as strong as it used to be, BlackRock said.
"Falling yields have lowered their expected returns and reduced their ballast properties ... their ability to act as portfolio ballasts during risk-off events is less than in the past," it said.
The firm updated its estimated change in five-year price returns for various asset classes following the coronavirus-induced market sell-off.
At the top of the list was emerging-market debt and equities, followed by developed-market equities. US Treasuries and US TIPS rounded out the bottom of the list.
"All else equal, a selloff in an asset class makes it more attractive through a valuation lens, mechanically increasing our expected returns for it in the coming five years," BlackRock said.
Despite BlackRock's bullish outlook on risky assets, the firm does see reason for caution in the near term.
"Risks such as higher defaults, particularly in the high yield market, cannot be ignored," the firm said. "Over the next six to 12 months, we favor credit over equities given bondholders' preferential claim on corporate cash flows and prefer an up-in-quality stance in equities."
On a tactical basis, BlackRock is neutral on government bonds, as it sees risks of providing less downside protection in future risk-off environments and thinks a snapback in yields is likely from historically low levels.