BlackRock’s 2020 Midyear Investment Outlook

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  • 52 mins 52 secs
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BlackRock Investment Institute 2020 Midyear Outlook

The future is running at us. The pervasive impact of COVID-19 has exacerbated entrenched inequality, accelerated geopolitical fragmentation and heightened global supply chain vulnerabilities. Join the BlackRock Investment Institute’s Midyear Investment Outlook for a discussion about why these structural changes warrant a reassessment of investment portfolios and an increased focus on resiliency during this period of economic, geopolitical, and social shock.

Topics include:
  • U.S.–China trade tensions, deglobalization, and the upcoming U.S. election cycle.
  • Tactical asset allocation in the next stage of the COVID-19 economic shock.
  • Long-term growth opportunities linked to investment trends accelerated by the pandemic.

Speakers:
  • Mike Pyle (host): Global Chief Investment Strategist, BlackRock Investment Institute
  • Tom Donilon: Chairman of the BlackRock Investment Institute
  • Jeff Shen: Co-CIO of Active Equity and Co-Head of Systematic Active Equity
  • Bob Miller: Head of Americas Fundamental Fixed Income

Channel

BlackRock

MIKE PYLE:  Hello, everyone, and welcome. I’m Mike Pyle, the Global Chief Investment Strategist at the BlackRock Investment Institute. Thank you for joining today’s webcast. We recently convened our senior most investors from around the world, across asset classes, public and private markets, scientific and fundamental investors, to discuss our outlook as a firm for the second half of the year, to really grapple with the historic set of circumstances that we faced in the first half of the year as investors and how to think about the second half of the year in the historic circumstances that continue to confront us. Today I have three fantastic guests with me to help unpack some of what we discussed and some of how they’re thinking about the world from here: Tom Donilon, Chairman of the BlackRock Investment Institute and the former National Security Advisor to President Barack Obama. He will join me in discussing the outlook for the second half of the year as well as in particular the geopolitical environment. Jeff Shen, the Co-CIO of Active Equity and the Co-Head of Systematic Active Equity; and Bob Miller, Head of America’s Fundamental Fixed Income. The two of them will be with me in Q&A to dig deeper into how the current market environment is impacting the outlook for each of their assets classes and broadly as investors. Before we dive in, just a couple of quick programming details. If you have any questions during this session, please submit them to us via the pop-up on the screen. Second, we’d like to foster a two-way dialogue, so we will also you a few questions during the broadcast which will appear on the side of your screen. We will share those results with you also on the side of your screen. Lastly, the BII 2020 Midyear Investment Outlook will be published next week on the 29th, and we will share it along with the replay of this webcast. We are also excited to announce that registration will soon be available for the BlackRock Future Forum, our flagship virtual institutional client conference where industry-leading voices will discuss today’s most pressing questions and explore tomorrow’s most promising themes and answers. Please be on the lookout for an invitation or reach out to your BlackRock relationship manager for more information. Alright, with that housekeeping out of the way, let’s get to it. So I’m going to go ahead and kick off for a couple of minutes and talk about some of the key things that in my own kind of listening and observation, I thought emerged from the outlook forum that we hosted two weeks ago. I think obviously the word that most leaps to my own mind when I think about this moment is “history,” so much history playing out before our eyes just in a matter of weeks in the past handful of months: the pandemic that’s emerged on the back of the coronavirus; the economic shock that we faced as a result of that, nothing like anything we’ve seen in the post-war environment; the policy response that policymakers around the world, including very importantly here in the United States, mustered in response to the coronavirus; and recently, of course, what we’re seeing play out around protests and demands for racial equality in the United States in ways that call to mind some of the past historic movements that have driven so much social change in the United States across its history. As an investor, a few things I think have leapt front of mind, and I think they have both long-term dimensions and shorter-term dimensions, both of which are highly consequential for thinking about building portfolios that are going to stand up to the environment that we face in the period ahead. The first is to say over the longer term, we have been keeping an eye on I think across the firm on a set of slower-moving tectonic forces that we thought were going to be a significant part of the investment landscape over periods measured in years or decades, things like the rise of sustainability, things like growing coordination between fiscal and monetary policymakers that would need to be brought to bear to confront the next downturn, things like what Tom will describe around the growing risks to the deglobalization that we see at play as well as the geopolitical fragmentation that's often a part of the current landscape, most particularly around the United States and China. You know, each of those themes are giving rise to what we thought were going to be tectonic years in the making investment themes but that are really fast-forwarding those to today, question marks like what is the role of nominal bonds going to be in portfolios over the decade or two ahead. 

We have come to rely on things like nominal treasuries as just sure-fire sources of resilience in multi-asset portfolios. It may be the case that that's less true over the next decade, and how do we find resilience otherwise than just through those typical tools? That is where questions like sustainability and getting sustainable exposures in portfolios comes into play. That's where questions around in the face of deglobalization and geopolitical fragmentation, how do we think in a more considered way around geographic or country diversification comes into play? And that's in a world where growth is scarce, where rates are low, but where the demand for return and income remains kind of ever present, how do we source that in new and different ways across the fixed income landscape, across the equity landscape, across public and private markets alike? These are the important themes over the longer term that have been presented to us squarely by this moment, and that investors are navigating today in ways that we thought were going to be able to be dealt with only slowly over time. On the shorter-term horizon, it’s also been a very consequential and extraordinarily challenging set of circumstances to navigate for investors. I dial the clock back to January when we released our 2020 Look Ahead, and at that stage our themes were we expected growth to edge higher, we expected policy to be on pause, and we expected on the back of that to look for a set of cyclical exposures and a basic pro-risk orientation to lead the way with investment performance in 2020. Well, by the time February rolled around and it was clear how significant the coronavirus was going to be on the global economic and financial stage, all of that was out the door, and all of a sudden we were having to bring in a new set of anchors and analytics to think about the environment. We cut risk pretty substantially from the BII perspective at the end of February, and when we re-risked our portfolios at the start of April, some key themes emerged. We wanted to be pro-risk but we wanted to be up the capital structure, we wanted to be pro-risk but we wanted to be up in quality, and however we were situating our asset allocation, we wanted it to be backed by strong policy backstops. That led us to tilt into risk in credit, that led us across the spectrum both in credit and equities to seek out high quality exposures, whether it was in the quality factor, something like a regional exposure in the U.S. versus other regional exposures, and places like investment grade credit in fixed income. Now having arrived at the midyear point, as those themes have played out, as to a significant extent they have worked, it’s also a moment for reconsideration, and I think that's what we’re looking to explore here with Tom and with Bob and with Jeff. So with that, let’s maybe get into the conversation. Tom, I’d first like to bring you in. We talked about the rising tensions around the U.S. and China, the deglobalization that's playing out on the back of that and more broadly, and more just generally a kind of sense of greater fragmentation on the geopolitical stage, as I said, that feels like a growing theme that's of import over the coming decade but also an important theme right in the here and now, and I’m curious if you could explore that with us.  

TOM DONILON:  Thanks, Mike, happy to, and it’s good to be with you today and with all of you, and thanks very much to our clients and partners for joining us today in the discussion. Mike, in answer to your questions, let me just take a few minutes to look at the key themes that are emerging from the COVID crisis in the geopolitical realm, and I think a point that you made is very important, and is that what we’ve seen is that existing trends that we have been tracking over time were exacerbated and accelerated pretty dramatically by the COVID crisis, so let me look at three or four elements that we see, and you mentioned a couple of them that have been accelerated. First, it’s our judgment that the post-COVID world order, if you will, is looking to be a bifurcated world order with the United States and China at opposite poles. The United States/China relationship has been on an extraordinarily fast trajectory over the last three years, from a 40-year policy of strategic cooperation and engagement over the course of the trade war, the two-year trade war to strategic competition, and now I think in my judgment it’s moving to a phase of much more intense rivalry between China and the United States. 

Now, I don't want to say that this is a replica of the Cold War, and you hear a lot of that. Are China and the United States in a new Cold War? This is not a replica of the Cold War. The economic relationship between China and the United States is much too large for that. The kind of intertwining between our two economies and peoples is too complex for that. Rather what we see I think is a world where the United States and China have a series of intense rivalries across most of the dimensions of their relationship, with a small set of areas where they cooperate, all the while, by the way, pressing third countries and indeed companies to choose sides. Now, you’d think a health crisis, Mike, would have incentivized cooperation between the United States and China on the health issues. I thought back on even the United States and the Soviet Union worked together to help eradicate, famously eradicate smallpox as you do to look at the technology decoupling for winners and losers. Second, deglobalization. Mike, I think the post-COVID world is going to be more deglobalized. The coronavirus brought nationalist and protectionist trends into sharp relief. Globalization was already slowing coming out of the 2008-2009 financial crisis but the pandemic has added momentum to this, and globalization is for the first time since World War II in retreat, and you see this in the trade numbers. COVID triggered a wave of export and travel restrictions, and I think perhaps most important, it put a lot of pressure on supply chains, and that was already underway to some extent. You had pressure from the financial crisis, the trade wars, and now business leaders and policymakers are focused tightly on the need for greater supply chain resilience, diversity, and redundancy even if it’s at the expense of efficiency. You see national security and reliability concerns coming into play. That, by the way, is going to I think focus tightly not just on tech but also on pharmaceuticals and medical equipment, looking for more domestic production, again an important element for investors. The drive towards localization is enabled by technologies like 3D manufacturing, and I think that's going to add to strain just as a larger government presence is going to bring increased focus for protecting domestic industries. Bottom line, I think we’re going to look back on this moment coming out of COVID as an inflection point in the history of globalization, something I think most of us as investors thought was going to be inexorable and would continue as a long-term trend. I don't think that's going to be the case. Third, global inequality and the emerging markets, the pandemic has badly damaged frontier and emerging markets, and again I say this broadly. Countries that came in in better shape will go out in better shape, and I think it’s especially the case in the Asian emerging markets, but more generally particularly in Latin America, South Asia, and Africa. These emerging markets face a brutal set of pressures, including weak healthcare infrastructure, limited institutional capacity, poor governance in some cases, and they don't have a lot of policy space to maneuver. [INDISCERNIBLE 00:17:04] the United States and the developed countries engage in trillions of dollars of policy initiatives [INDISCERNIBLE 00:17:10], but that's not available to a lot of these countries. The epicenter of this crisis is now in the southern hemisphere. They have suffered a tremendous amount of income and capital loss and capital flight as revenues from commodities with the oil prices, tourism, remittances are down 20% the World Bank estimates, and they’re economically, as I said, constrained in their ability to provide relief. A comment on this is that emerging markets have been really important beneficiaries of globalization over the last 20 years, with dramatic reductions in poverty and the building of middle class households. I think the COVID crisis is now going to trigger the first increase in global poverty since the 1990s and will lead to even greater inequality between countries. Mike, the last thing I’d talk about in terms of looking to the next half year, as you said, is the U.S. elections, and unfortunately, if you will, we face the most far-reaching global crisis faced by the United States since World War II in the midst of a Presidential election. You can’t predict at this point with any precision the outcome of the election, given the uncertainty that COVID has put into U.S. politics. Vice President Biden in the polls that came out this morning, both nationally and in the battleground states, had a significant lead, but you can’t make a prediction now, but what you can do is this, I think I can make three or four observations about the election context. First, one thing we can say is that the parties are as far apart on policy as they have ever been, so the outcome of the election is going to be tremendously consequential. The Democrats are pushing a progressive posture on their policies since the 1960s. So the outcome here will really matter, and I think it really behooves us as investors to really think through the various scenarios quite carefully because the differences will be significant at the outcome of the election, number one. Number two, the election is taking place against a tumultuous backdrop, multiple crises, a health crisis, a financial crisis, a crisis over racial issues and police conduct, and it’s probably the most tumultuous backdrop we’ve had since 1968, I think in many ways maybe more tumultuous. There will be challenges around the conduct of the elections, given the COVID crisis and also disputes about different ways of voting, including mail ballots, extended voting times, etcetera. Bottom line, the election is going to take place against a really tumultuous backdrop, we also could see obviously foreign interference, and the consequence will be hugely consequential, so we at BlackRock are taking it on ourselves to really think through in a very careful way the potential lineups as a result of the election and what the policy implications are. So Mike, U.S./China relations deteriorating, deglobalization, emerging markets facing really a perfect storm in some cases given COVID and increased inequality, and a tumultuous election backdrop, that's what I think we see coming through COVID for the next half year and into the beginning of next year. 

MIKE PYLE:  Tom, thank you so much. Well, I think that segues very well into the next section of this event, which is the Q&A with two of our really fantastic senior investors, Jeff Shen of the Scientific Equity Platform and Bob Miller of the Fundamental Fixed Income Platform. To perhaps start a bit where Tom left off, he described the back half of the year that's being shaped by a pretty significant and eye-opening set of geopolitical challenges. On top of that, we face really unprecedented economic conditions as well, and that's where I want to zero in first. Developed and emerging economies around the world are now at different stages of grappling with the pandemic and are working now to restart their economies, some with significant success, others a little more fits and starts. Obviously, we’re seeing some challenges reemerge in the United States and we seek to open up. Jeff, I’d like to begin with you. This seems to me puts a real premium on even how we’re tracking these questions, the type of data that you need to get a window into what is happening in these economies is just different than how we typically digest incoming information about the economy. How are you thinking in kind of innovate ways about the toolkit to approach this moment and then how are you putting that to work in portfolios? 

JEFF SHEN:  Thanks very much, Mike. I think that's a very good question. I’ll say that traditionally I think how we have gotten the data and information I think is typically from two sources, either from the government, GDP or unemployment, or they could be coming from companies themselves, conference calls and meetings that company management actually hold. I think because of COVID, it’s certainly accelerating a big trend which is I’ll say that alternative data is becoming mainstream. So if you will, historically, if some of this satellite image information or credit card transaction information, foot traffic information was considered to be alternative, fast-forward today especially through the COVID crisis, we have certainly seen this type of data becoming mainstream. I think digging a little bit deeper, you can think about there are essentially two worlds from an economic and world perspective. One is the things that actually are happening in the physical world. You can measure those through foot traffic or GPS tracking or pollution numbers or how many lights there are on overnight to figure out what’s happening in the physical world, and that has a huge implication to where the economy is. The second set of data I will say is actually really measuring things that are happening in the virtual world, so you and I typing a Google search, or there is job posting, or there is electronic invoicing, or somebody download a Zoom app, or credit card transaction, these are things that are actually happening in the digital world and that type of information can certainly be tracked as well. So these types of information turn out to give you a much more timely view of the world and also give you a tremendous amount of breadth, but it’s actually quite additive to the traditional source of data that's coming either from the companies or coming from the government. I mean just one simple statistic, if you look at sales [INDISCERNIBLE 00:24:06] for also historically being a pretty conduit of the traditional source of information, their estimates in the U.S. have actually gone down about 70% in April and May this year, so the traditional source of information certainly has been problematic, and when we look at this alternative data, it’s a rich set of information and what you see is also a set of sensible results in the sense that the big picture here is that there is certainly an acceleration of the world into a more digital and virtual world, and that's certainly when COVID-19 first happened. A lot of physical activities for the obvious reasons stopped, and a lot of things actually that can be done in a virtual digital world actually moved there, so to the extent you can track that, that's actually a huge advantage for you to get a sense of what’s going on in the world and where the economic activity drop has been. As we move into the reopening phase, in the U.S. and in Europe are certainly a bit ahead in Asia, you have certainly seen that there is a bit of a coming back into the physical activity, so things are coming back a bit more, even though that being said, I think Mike, you talked about dispersion around different countries and Tom talks about deglobalization, what we are seeing from the bottom-up data perspective is that depending on which country you are in, depending on which sector you are in, depending on how adaptive the company management has been, there has actually been a huge dispersion among different dimensionalities. The one specific example that I want to give is that we tracked job postings around the globe, so any company that actually posts a job online, we actually track that information, and when you look at job postings, you actually get a pretty good picture on the intentionality of the health of a particular company, and that turned out to be quite different across countries, across sectors, across companies as companies think about reopening and how they position for 2020. The big picture over there is that there is certainly, to Tom’s point before around the fragility of the emerging markets, from the job posting data itself, we are seeing a much more healthy picture in a relative sense for developed market over emerging market, and also technology as a sector, but also there are a lot more tech-heavy companies in different sectors, those companies have actually shown much stronger strengths, so I think this is, if you will, sort of from the alternative data, we certainly have a pretty interesting view of the world. I’ll pause at that, Mike. 

MIKE PYLE:  Thank you, Jeff. I think one of the cool things about getting to sit where I sit in BlackRock is, you know, have conversations like the one you and I were just having and then be able to turn and talk to Bob Miller because I know within fundamental fixed income, there’s been a tremendous amount of work leveraging all of the extraordinary kind of bottom-level sector level analysis that happens on the credit side of the fixed income platform, and more broadly to develop their own way of thinking about how the restart is proceeding and where it’s stronger and where it’s weaker, and then knowing that these two conversations come together to create collaborations and insight between them, but with exactly that mind, we’d like to turn to Bob now to talk a little bit about what they’re seeing from their own perspective as they model this bottom-up on a sector-by-sector fundamental basis. 

BOB MILLER:  Yeah, thank you, Mike, and I’d also like to echo the thanks to all of our clients who are participating today. We greatly appreciate the partnership. So yeah, we’ve poured a tremendous amount of resources into a project in an attempt to thoroughly understand the extraordinary complexity of reopening the economy. We literally have an army of people who are monitoring state-wide communications from the governors’ offices in all fifty states, in collaboration with our investment grade and high yield analyst researchers who are tracking company communications in all of theirs sectors, and we have done this with the following motivation, right, that the fiscal policy response in March and April was nothing short of monumental and well-targeted and occasionally refined when the policymakers realized there was an optimization available to them, a way to improve the potential efficacy of any of the policies that were being delivered, and you’ve seen this over and over from both Treasury and the Fed as things have been tweaked and refined and renewed throughout the past three months in an attempt to bridge what was effectively a massive income shock. Yes, unemployment has soared, but the proximate issue for economic activity was the income shock, the small business income, the household income, large business income, etcetera. So what we’ve been trying to do in our project is really thoroughly understand the transition from an economy that was humming in February, that experienced an extraordinarily unusual shock, specifically an income shock, followed by a policy attempt, a thorough policy attempt to fill that gap for a period of time, and then how quickly or how long does it take to bring the income support from the government down because the labor markets are recovering sufficiently quickly that it’s offsetting, that the household income repair is happening organically and not due to government policy. We’re in that really tricky transition phase now, and what I’d say is you’ve got some really good developments going on. We’ve dissected all of the employment data into the sub-industry codes and we’re monitoring it by state, so we have a reasonably good handle on what should be the improvement in employment as states roll through phases 1, 2, 3, and 4, which is happening at different speeds in different regions, and a couple of conclusions so far. One is clearly the reopening started a bit faster and went a bit better than most in the market anticipated, and we had a pretty aggressive response in markets from the middle of May to the early parts of June because of that, and now you’re starting to see a bit more back-and-forth, not so much back-and-forth but some accelerations in reopening. For example, the really good news is that the tri-state area of New York-New Jersey-Connecticut is starting to reopen, and that will have positive consequences for economic recovery. At the same time, some large relevant states on the West coast and throughout the Southwest are starting to slow down the reopening for fairly obvious reasons, and so we’re in that phase where our conclusion is that we don't think any state... it’s going to be a very high bar for any state to go backwards, but I would caution against a linear interpolation of... the early success of reopening is unlikely to be repeated holistically across the country as the various regions come back online. I think it’s going to be more of not so much two steps forward, one step back, but two steps forward, pause, pause a little longer perhaps, institute greater precautionary requirements with respect to masks or social distancing, then move to the next phase, perhaps pause again, then move to the next phase. I think markets have correctly anticipated that, safety nets were put in place, and the true left-tail economic outcome was kind of taken off the table, but from here I think the economic recovery is actually going to come a bit more in fits and starts than a straight line that may have been assumed perhaps as early as a month ago. Why don't I stop there, Mike, and we’ll go whichever way you’d like to go from here. 

MIKE PYLE:  Bob, that was fantastic. I think one of the things that jumped out to me is how important it is for your process to really identify and scale the policy impulse, including importantly, as you say, on the fiscal policy side, and really trace that through the economy really at the industry and state and local level. I wanted to bring Tom back in kind of exactly on that point, I mean we’ve heard Bob talk exactly how important the fiscal policy response is. I look forward between now and November, you talked about the tumultuousness that we’ll see over the election season over the next four-and-a-half months, but there’s some pretty significant fiscal policy deadlines as well. We have enhanced unemployment insurance expiring at the end of July, we have states [PH 00:34:16] motalities with significant-need small businesses, what have you. As you look forward, Tom, over the next kind four or four-and-a-half months, how do you assess the likelihood that we see this fiscal policy response through or to what extent do you see some risks around it? 

TOM DONILON:  Yeah, thanks, and I think Bob’s work is really just unprecedented and really important obviously for investors. One broad point that Bob made is that it is important to appreciate the scale of the fiscal and monetary response which we have never seen before in peace time, frankly. In the United States we’re implementing policy, fiscal and monetary combined as I said, at a scale we haven't seen since World War II. These interventions come with a lot of attributes, including conditions on them, and we’ll have to see how long those conditions last. We see I think a much bigger interest, Mike, you can talk about this, in industrial policy both in the United States and around the world, particularly in Europe, and we know one thing, that when governments get bigger and intervene, they typically don't recede for a long time, if ever, so it’s an important and an unusual moment. On the next six months, just a couple of points. One is we are likely to see another package, and you’ve seen discussions about that both from the President and the White House, and the House. The House Democrats, you heard Chairman Powell’s testimony, his last testimony on the Hill where he was pretty much calling for an additional package, so the Congress is set to debate the next round of support in July. The discussion is more politicized now than it had been in the first set of packages, which were really kind of extraordinary in their bipartisanship given the scale and importance, and the two sides are further apart now I think on their vision so it’s going to be more politicized I think. There are – Mike, as you were alluding to – a set of fiscal cliffs across a range of dimensions, right, including the extension of unemployment insurance, relief to state and local governments, and the reupping of the payroll protection plan, so the question I think on the table is this. There will be another set of steps taken by the federal government, that's at least our view at this point, taken in July. The question I think are, as Bob was getting to, how well are they targeted, and secondly, do we face a risk here of policy fatigue in the latter part of the year, where fiscal policy, unlike to date, undershoots the real economic need. I think that's the risk that we need to track. I don't know, Mike, you track these things fairly closely, what do you think?  

MIKE PYLE:  Yeah, I agree very much with that assessment. I think that as you say, the likelihood is that we will see another fiscal deal at the end of July, or at the latest early August, that handles some of these issues that we flagged. I think there are questions around how sizeable that deal is. I think that's the big question mark out there, and whether it begins this, as you say, risk of undershooting, but then as the July or August deal kind of gives way to the fall and gives way to the election season, I think you’re exactly right, that the risks go up pretty materially from there, that policy retrenches too soon like what we saw 12 years ago in the aftermath of the GFC, so very much aligned with everything that you just described, Tom. 

TOM DONILON:  But it’s been extraordinary to date, just 10 seconds, the contrast between what the fiscal authorities have been able to do in contrast with what the health authorities have been able to do. It does show the difference in terms of the national fiscal steps and the national monetary steps we’ve been able to take, which have not been repeated, unfortunately, on the health side, [PH 00:38:31] so I’ll retreat.  

MIKE PYLE:  Yeah, absolutely. I mean the one thing I’ve been saying, and I’m kind of curious if you identify with this, Tom, is I’ve said exactly this point, that the scale of response that we’ve seen calls to mind less a garden-variety recession, less even something like the GFC 12 years ago, and more like the year of the Second World War. This is something, Bob, that Jonathan Pingle on your team talks about regularly and a metaphor that he uses. Bob, maybe to bring you back in here, you talked a lot about fiscal policy and tracing that through to the economy, the importance of the restart, how do you think about that in your portfolios I guess on a shorter-term basis over the next six months, and then thinking longer-term, how do you think about these low rates with the potential for historic issuance out there for quite some time and the Fed taking extraordinarily innovate steps, how do you think over the longer-term about the role of bonds in portfolios as diversifiers? 

BOB MILLER:  Thank you, Michael. 

MIKE PYLE:  Three easy questions for you, Bob.

BOB MILLER:  Teeing up, yeah, they’re easy lay-ups. So with respect to the near-term, I’m going to echo what you and Tom mentioned earlier, that the election is a big deal, and it’s a big deal because of what Tom highlighted with respect to the difference in the broad policy prescription, if you will, so not just fiscal and tax and redistribution policies and monetary policy, but importantly regulatory policy which often gets under-appreciated or under-noticed in the discussion of the government’s influence on the economy. Regulatory policy is a big deal, and it often doesn't require new legislation but simply reinterpretation by the new administration, and it can create headwinds or tailwinds for the domestic economy, and I think it’s a big deal because the outcome in November will either preserve a set of policies that have been relatively business friendly or likely introduce a set of policies that are going to be relatively less business friendly, if I could just highlight it at that very high level. So in the very near-term, let me say this, the easy money in the market has been made. If there is ever such a thing as easy money, it’s been made. I think the policy response, the market recovery, I don't think we’re going to do that again, so from here it’s going to be hard, and as you said, there’s a longer-term question about what the Fed has done in terms of monetary and fiscal cooperation, but the near-term implication is the Fed has rendered much of the high quality fixed income universe somewhat if not reasonably unattractive. Think about an investor that uses the Barclay’s Ag as kind of their benchmark. Well, the Fed is now directly intervening in all three buckets of consequential risk in the Ag – the treasury market, the agency mortgage market, and the investment grade corporate market. Yes, they’re only investing in the 0 to 5 year part, but nonetheless they’re applying their blunt risk premium hammer to important parts of the Ag-related universe in such a way that they’re kind of rendering, you know, the unintended consequence – this is not a negative interpretation of what they’re doing, I think they’re doing exactly the right thing – the unintended consequence is that they’re rendering this large group of assets relatively unattractive for most profit maximizing investors, so by definition you’re being forced out the risk curve and into other places that require skill in underwriting credit and skill in underwriting equity, and that skill is not as ubiquitous I think as a lot of people think it is, so therein I think lies the medium-term opportunity. I say this a lot internally, I hope the Fed doesn't get any more involved in the high yield market and I hope they stay away from the securitized market to the degree they have already – CLO, CMBS, non-agency mortgage, and ABS – because one of our edges as a firm is that we have this extraordinarily well-resourced fundamental fixed income platform with best-in-class credit research talent globally in all of the credit markets, and I hope the Fed stays away which creates the security selection alpha opportunities in those markets where I think we have an edge. We have significantly shifted our portfolios, initially investing in the asset classes that we thought the Fed would try to rescue, and they did, they actually had a longer list of rescue [INDISCERNIBLE 00:43:54] than we anticipated, but now we’re moving away from that because they have lowered rates to a level that they’re simply unattractive as a portfolio asset unless you think they’re going to negative rates, and we don't believe they will, or said differently, I do not think we’ll have negative rates in the U.S. until the Fed has tried everything else under the sun. The longer-term implications, really quickly, I expect the correlation of treasury prices to equity prices to remain negative, so I continue to think that the correlation will support the presumption that it’s a hedge, but the effectiveness of that hedge, the beta of that hedge is now all in the long [INDISCERNIBLE 00:44:42]. Five-year notes have nowhere to go at 36 basis points. Ten-year notes don't have that far to go at 66 basis points. I fear that you’re going to be forced, to the extent you want a treasury [PH 00:44:55] head in your portfolio, you’re going to be forced to take a long duration, much more volatile, lower sharp ratio expression, and perhaps even leverage it if you’re a pension in order to get sufficient coverage, and that's just not as attractive an asset as it has been for much of the last 40 years.  

MIKE PYLE:  Thank you, Bob, that was fascinating and helpful. Jeff, I’m going to give you the last question and then close out with thanks to everyone who joined and thanks to our fantastic panelists, but Jeff, we’ve talked about a couple of big themes. We’ve talked about deglobalization, we heard Tom talk about that at some length. We’ve been talking a lot about this policy revolution and how it’s playing out in fixed income markets and the treasury market in particular. On the equity side, when you see those kind of big themes that are generating dispersion like deglobalization, like the policy revolution, how are you positioning in your portfolios around them? 

JEFF SHEN:  Absolutely, so I think from the deglobalization perspective, I think we have certainly been talking about think about country as a unit of analysis, which I think for anybody who has been investing in emerging markets, that clearly has been a very important driver of returns. Cross-sectional returns driven by country is a big deal in the emerging market. Historically, that was much less so in the developed market, but I think given some of the themes that Tom and Bob have actually laid out, I think it’s pretty clear that you’ve got to think about country as a unit of analysis also for developed market, so that's an important driver. Then in this concept of when you think about that country as a unit of analysis in developed market, I think the role of government is – my joked used to be that when people think about investing in China, there are three things you really need to think about, and that is government, government, and government – and I think that particular sort of line of thinking probably is applicable in more countries today, so I think it’s actually pretty important when you think about a sort of country as a unit of analysis in the development market, that's a bit of a change. I think also in the world that's becoming much more uncertain, much more volatile, especially what Tom has said earlier in terms of China and the U.S. are going to be on the two opposite ends of the global spectrum, I do think that to think about China as a strategic investment. Now, that doesn't necessarily mean you’re just going to invest passively or actively, to be more intentional to think about the exposure that you can get out of China in a world that is actually a bit more bifurcated, you know, we certainly don't work on domestic leaders in China. Also to think about some of the technology companies in China which can certainly offer interesting diversification to the overall portfolio. So I think the deglobalization, I think it’s certainly a pretty interesting backdrop that I think has quite a bit of interesting alpha opportunities. Very quickly, two other themes that I think are important to highlight in the equity market, I think one is certainly around the ESG and sustainability, and Mike to your point before, I think this is actually interesting in the sense that in the crisis, we have certainly seen that ESG-oriented themes have done much better than the market cap, so I think that's a big area to focus. Clearly flow has actually been quite positive in these types of products. We have certainly seen it in our own iShares franchise but it’s actually also true around the globe. There is just more fund flow into ESG-oriented products. I think when we dig a little bit deeper, we also realize that this is actually some of the secular themes that we have actually seen – whether it’s more adoption of technology, more adaptive business models, or more consideration of social purpose and social concerns – are essentially indicative of a potential more modern business model, and that actually has been rewarded quite handsomely in the market. So we do see that as a big theme, certainly it’s not that it’s going to outperform every day, but we do think about this as a secular theme that is going to be relevant in the equity market in the years to come. And last but not least, when we look at some machine learning and regime detection, when you think about how the returns have actually been shaping up, the machine learning algorithm essentially is telling us that we are living in a period not exactly but probably the most similar to the late 1990s where we have seen growth outperforming value, U.S. outperforming the rest of the world, technology doing quite well relative to all other sectors, and the developed market outperforming emerging market, so these big market trends are actually quite similar to the late 1990s. I mean clearly valuation for TMT slots went through the roof and a lot of money were lost after the bubble of 2000, and I think how this cycle would actually evolve I think is actually yet to be seen. I mean there are a lot of uncertainties, as we have actually just highlighted, at the same time I think there is actually probably further room to run on some of these secular themes, and also at the same time to be a bit more dynamic around these themes. I think given some of the cross-sectional variation we just talked about, I think there is a lot of high breadth timing oriented alpha to be made around some of these longer-horizon secular themes, so that's probably another thing that we are quite bullish on. With that, I’ll turn it back to you, Mike. 

MIKE PYLE:  Thank you, Jeff. Tom, Bob, Jeff, this conversation was a reminder to me of how fortunate I feel to get to draw upon each of your expertise and insights so regularly. Thank you for joining me with today’s webcast to share your thoughts and perspective and expertise, truly extraordinary as always. Even more perhaps, thank you to all of you who listened in. We appreciate you spending this time with BlackRock, we appreciate your ongoing partnership. Please let us know in the feedback survey your thoughts on today’s call. We always welcome that feedback and really look to incorporate it as we do future editions like this. You can also always reach out to your BlackRock relationship manager on today’s topic or with any other questions. With that, my thanks to my panelists, my thanks to all of you, and please be safe and be healthy. Take care.

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