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Blackrock anticipated both an increase in inflation and a more muted response in nominal yields. The reduction in real yields that we observe over the last year is consistent with their forecast. The expectation of a further reduction of real yields reinforces and broadens their overweight equity / underweight Government Bond position. 

23rd February 2021. The asset allocation of the 1OAK Multi-Asset Funds is guided by BlackRock, the largest asset manager in the world. The Blackrock asset allocation is based on their comprehensive analysis of expected risk and returns from different assets, economic trends, geopolitical developments and all the other factors that influence investment returns. 1OAK view from the rock aims to offer a brief synopsis of the latest thoughts and views from Blackrock. 

Government bonds downgraded  

One of Blackrocks’ main themes is that bond yields will not increase as much as they would normally do in response to higher inflation. This is turning out to be correct. Breakeven inflation rates have increased by 1.2% since last March, but yields are only 0.5% higher. A more normal increase would be for yields to be 1.1% higher. As a result real yields have dropped further into negative territory.

The US economy has restarted more quickly from the Covid shock than would be the case if the economy was recovering from a recession. This implies the possibility of a much higher than average growth rate as the vaccine-led re-opening progresses. The fresh US fiscal stimulus and pandemic relief payments are, according to Blackrock, turbocharging the restart. 

Blackrock expects Government Bond yield to increase, but less than would be expected given the increase in inflation. Central banks are expected to calm down fears about debt levels and keep rates low, for now. If they are unsuccessful, and market sentiment deteriorates there would be material implications across asset classes. 

As a result, Blackrock prefers equity over credit and have downgraded government bonds to underweight. The additional return of high yield means that it is attractive because of the income it generates. Equity valuations are in line with long term averages after adjusting for rates and the anticipated increase in earnings. 

The asset allocation of the 1OAK multi-asset funds reflects Blackrock’s positions. The non-equity sleeve includes significant exposure to Gold and inflation-linked bonds.