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Blackstone Investment Strategy
Uneven Recovery AheadAPRIL 2021
Joseph ZidleChief Investment Strategist
Byron R. Wien Vice Chairman
To receive future market commentary publications, please email [email protected]
Blackstone |Blackstone Investment Strategy
INTRODUCTION
Note: As detailed in the “Disclaimers” section, the above and all subsequent commentary in this presentation reflect the personal views of Joseph Zidle, Managing Director and Byron Wien, Vice Chairman in the Private Wealth Solutions Group, and do not necessarily reflect the view of Blackstone.
1
The U.S. is gearing up for its strongest growth in decades. With record levels of coordinated fiscal and monetary policy, all segments of the U.S. economy—households, corporations, and government—are synchronized for growth in a manner that is unusual this early in an economic cycle. However, the global recovery will be uneven, as we discuss in the first section of this presentation. While aggregate global economic activity is likely to return to pre-COVID-19 highs this year, the economies of Japan, the U.K., and the Euro area are likely to remain below their pre-pandemic levels until at least 2022. Meanwhile, China is capitalizing on its highly efficient handling of the pandemic and its status as the sole major economy to have grown last year. In its 14th 5-Year Plan, it unveiled plans to double down on investments in R&D and technology, with major implications for its competitiveness on the world stage.
With vaccines, too, both access and distribution are proving to be unequal around the world. The U.K. and U.S. lead developed markets in vaccinating their populations, while Europe lags far behind. For emerging markets, access to vaccines will prove particularly difficult, as industrialized nations have swallowed up much of the early vaccine supply and initiatives such as COVAX face challenges in procuring the doses needed to ensure equitable distribution globally.
For businesses and investors, the ability to navigate this uneven recovery will also create winners and losers. As we highlight in the “Labor Market and Supply Chain Constraints” section, shortages of labor and limited supply-side capacity are already creating nascent price pressures. In our Ten Surprises of 2021, we posited a view—contrarian, at the time—that the 10-year Treasury yield would reach 2% this year. Indeed, it’s already surpassed 1.7% and shows no sign of having found a ceiling. In addition, four secular tailwinds for corporate profits during the last cycle—lower corporate taxes, lower regulation, lower rates, and higher globalization—are all in the process of reversing or have already done so. These dynamics will pressure the profit margins of many firms, but particularly those that cannot pass through price increases, cannot fill job openings, or have relied on low cost of capital for their survival.
In this uneven recovery, avoiding complacency will be critical. We think that active managers who engage in high-conviction, thematic investing will be better positioned for outperformance. This presentation lays out the ideas and themes we think investors should keep top of mind, and we hope it stretches your thinking.
Joseph ZidleChief Investment Strategist
Byron R. WienVice Chairman
Blackstone |
TABLE OF CONTENTS
Blackstone Investment Strategy 2
Global View of the Recovery 3I.
China’s 14th 5-Year Plan 9A.
Synchronized Start to the U.S. Recovery 14II.
Labor Market and Supply Chain Constraints 22III.
Short-Term Reflation and Rising Rates 28IV.
Outlook for Financial Markets 37V.
Long-Term Trends to Consider 43VI.
Blackstone |Blackstone Investment Strategy 3
I. Global View of the Recovery
Blackstone |Blackstone Investment Strategy 4
DEVELOPED MARKET VACCINATIONS
U.K. and U.S. lead developed markets in vaccinations, with>50% in each country estimated to have some immunity
Percent of Population Having Received at Least One Vaccine Dose(1)
Estimated Percent of Population Having Been Infected or Received a Vaccine(2)
Source: Our World in Data and Goldman Sachs Global Investment Research estimates, as of April 13, 2021 (LHS) and March 23, 2021 (RHS). (1) Note: Represents share of the total population that received at least one vaccine dose. This may not equal the share that are fully vaccinated if the vaccine requires two doses.(2) “Natural immunity” estimated using domestic antibody surveys and fatality data for the U.S. and the U.K. For other countries, estimates are based on data from comparable countries.
0%
10%
20%
30%
40%
50%
60%
U.S
.
U.K
.
Ital
y
Spai
n
Fran
ce
Ger
man
y
Cana
da
Aust
ralia
Japa
n
Prior Infection Vaccinated
0%
10%
20%
30%
40%
50%
Dec-20 Jan-21 Feb-21 Mar-21 Apr
Canada France Germany
Italy Japan Spain
U.K. U.S.
Blackstone |Blackstone Investment Strategy
0
100
200
300
400
500
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-210
20
40
60
80
100
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
5
GLOBAL COVID-19 CASES
COVID-19 status is unequal globally; many regions have yet to contain the current wave of new COVID-19 cases
New Confirmed COVID-19 Cases: World(per million, smoothed)
New Confirmed Cases: By Region(per million, smoothed)
Source: Our World in Data, as of March 23, 2021.
Africa Asia EuropeNorth America Oceania South America
Blackstone |Blackstone Investment Strategy 6
EUROPE’S VACCINATION ROLLOUT
E.U. vaccine rollout severely lags that of U.K. and U.S., with significant implications for ability to reopen
Total Vaccine Doses Administered:U.K., U.S., and E.U.(total vaccine doses per hundred people)
Total Vaccine Doses Administered:U.K., U.S., and Select European Countries(total vaccine doses per hundred people)
Source: Our World in Data, as of March 23, 2021. Note: Represents total vaccine doses administered, not the number of people vaccinated, given multi-dose vaccines.
0
10
20
30
40
50
Dec-20 Jan-21 Feb-21 Mar-21
E.U. U.K. U.S.
0
10
20
30
40
50
Dec-20 Jan-21 Feb-21 Mar-21
France Germany ItalySpain U.K. U.S.
Blackstone |Blackstone Investment Strategy 7
GLOBAL GDP GROWTH
Global GDP growth estimates have been revised upward for 2021, led by growth in India, China, and the U.S.
World GDP Growth Path Estimates(indexed to 100 as of 4Q19)
2020 and 2021 Real GDP Growth(1)
YoY Change
Source: OECD estimates, as of March 9, 2021.(1) World growth uses nominal GDP weights at purchasing power parities. India estimates based on fiscal years, starting in April.
-9.9%
-7.0% -6.8%
-4.8%-3.5% -3.4%
2.3%
7.1%
10.9%
5.1%
2.8%
7.2% 6.8%8.5%
U.K. India E.U. Japan U.S. World China
2020 2021
Blackstone |Blackstone Investment Strategy 8
GLOBAL CENTRAL BANKS
Central bank assets have swelled to record levels, with the Fed’s balance sheet growing 83% since Feb 2020
Central Bank Balance Sheet Assets(percent of respective country’s GDP)
Central Bank Balance Sheet Assets ChangeFeb 2020 to Feb 2021
Source: Haver Analytics, as of December 31, 2020 (percent of GDP) and February 28, 2021 (change in balance sheet assets).
83%
52%
22%
U.S. Euro Area Japan0%
20%
40%
60%
80%
100%
120%
140%
0%
10%
20%
30%
40%
50%
60%
70%
2006 2008 2010 2012 2014 2016 2018 2020
E.U. U.S. Japan (RHS)
Blackstone |Blackstone Investment Strategy 9
A. China’s 14th 5-Year Plan
Blackstone |Blackstone Investment Strategy 10
CHINA’S RECOVERY
China returned to growth in 2020, with both GDP and industrial production now above pre-COVID-19 trends
China Industrial Production(indexed to 100 as of 12/31/19)
China Real GDP(indexed to 100 as of 12/31/19)
Source: National Bureau of Statistics and Haver Analytics, as of December 31, 2020 (GDP) and February 28, 2021 (industrial production). Gross domestic product data are quarterly, excluding stats discrepancy, seasonally adjusted. “Pre-COVID-19 path” represents the average growth rate of the last five years, projected through the end of 2020.
70
80
90
100
110
120
2015 2016 2017 2018 2019 2020
Actual Pre-COVID-19 Path
70
80
90
100
110
120
2015 2016 2017 2018 2019 2020 2021
Actual Pre-COVID-19 Path
Blackstone |Blackstone Investment Strategy
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2000 2005 2010 2015 2020 2025
U.S. China
11
CHINA’S 5-YEAR R&D PLAN
China’s 14th 5-Year Plan (5YP) unveiled a target for R&D expenditure growth of 7%+ per year, with no GDP target
Gross Domestic Spending on R&D(purchasing power parity in constant 2010 US$)
Gross Domestic Spending on R&D(percent of 2019 GDP)
Source: OECD, China National Bureau of Statistics, and Blackstone Investment Strategy calculations. Actual data for U.S. as of 2019; preliminary actual data for China as of 2020.(1) “Illustrative Growth” for the U.S. represents the historical (2000-2019) CAGR in gross domestic spending on R&D, projected forward through 2025.
Estimated Growth Based on 7% CAGRas Outlined in 5YP
Illustrative Growth Based on Historical
2.8% CAGR(1)
2.2%
3.1%
China U.S.
2023
Blackstone |Blackstone Investment Strategy 12
GLOBAL VACCINE DONATIONS
While developed markets have declined to share COVID-19 vaccine doses, China is donating 12M doses
Significant Vaccine Donations by Country(1)
(number of doses, in millions)
Of Countries China Has Donated to, 98% Participate in the Belt & Road Initiative
Source: Think Global Health and Council on Foreign Relations, as of March 25, 2021. (1) Note: Represents the four countries that have donated vaccines to at least ten countries on three continents or more, as categorized by Think Global Health.
Participate 97.9%
Do Not Participate
2.1%
12.0
8.7
0.70.1
China India Russia Israel
Blackstone |Blackstone Investment Strategy 13
CHINA’S CHALLENGES
China’s future growth will be challenged by itssignificant demographic headwinds
China Labor Force GrowthYoY Change in Working Age Population
Comparison of Labor Force Growth20-year CAGRs in Working Age Population
Source: UN World Population Prospects 2019 and Haver Analytics. Working age population is represented by all persons aged 15-64.
Of this group, only India, U.S. and U.K. projected to
have positive growth
China 20-year CAGR = -0.6%
-2%
-1%
0%
1%
2%
3%
1980-2000 2000-2020 2020-2040
India U.S. China Euro Area Japan
-2%
-1%
0%
1%
2%
3%
4%
1980 2000 2020 2040
Blackstone |Blackstone Investment Strategy 14
II. Synchronized Start to the U.S. Recovery
Blackstone |Blackstone Investment Strategy
45
55
65
75
85
95
105
115
1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
15
LEADING ECONOMIC INDICATORS
U.S. LEI index on track to have its fastest recovery ever, reflecting rapid recovery in economic activity
U.S. Leading Economic Indicator Index(indexed to 100 as of Jan 2016)
Source: Bloomberg and Conference Board, as of February 28, 2021. Credit for chart concept to Evercore ISI.
75 months
50 months
46 months
136 months
Blackstone |Blackstone Investment Strategy 16
FISCAL RELIEF HAS OUTPACED ECONOMIC LOSS
Fiscal relief totals about $5.3T as of March 2021, compared to $2.2T GDP shortfall in 2020
U.S. GDP Contraction in 2020 and Federal Aid Response(US$ in trillions)
Source: Bureau of Economic Analysis, Committee for a Responsible Federal Budget, and Strategas Research Partners estimates, as of March 31, 2021. (1) Represents amount committed / disbursed, except for the American Rescue Plan, whose value represents the total spending allowed by the bill.(2) Represents estimates for additional proposed spending under the American Jobs Plan. Note: Spending likely to be distributed over 5-10 years.
($0.2)
($2.0)
$2.0 $0.4$0.5
$0.5
$1.9
$2.0
1Q20 2Q20 CARES Act (March 2020)
PPP and Health Care
Enhancement Act
(April 2020)
Response and Relief Act (December
2020)
Administrative Spending
American Rescue Plan (March 2021)
Infrastructure Plan
2020 GDP Contraction
ActualFederal Aid(1)
Potential Additional Spending(2)
Blackstone |Blackstone Investment Strategy 17
OUTSIZED U.S. STIMULUS
Fiscal stimulus efforts vary globally, with the U.S. far outpacing advanced economies like the Euro area, Japan
Cumulative Fiscal Stimulus (percent of GDP)
Source: OECD, as of March 9, 2021. Fiscal support is measured as the change in net government lending as a share of GDP. Data reflects December 2020 OECD Economic Outlook projections and has been updated to reflect fiscal measures announced until February 2021.
0
2
4
6
8
10
12
14
U.S. Euro Area Japan2020 2021 YTD
Blackstone |Blackstone Investment Strategy
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21
Personal Income Without Transfers Transfer Receipts
18
PERSONAL INCOME AND TRANSFERS
Personal income has topped its pre-COVID level in every month since April 2020 due to government transfers
Personal Income and Transfer Receipts(US$ in billions, seasonally adjusted, non-annualized)
Source: Bureau of Economic Analysis and Blackstone Investment Strategy, actual data as of February 28, 2021. “Personal Income Without Transfers” is the sum of employee compensation, proprietors’ income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustment, and personal income receipts on assets less government social insurance. “Transfer Receipts” is the sum of government social benefits and net current transfer receipts from businesses.(1) March 2021 estimate assumes personal income without transfers equals its February 2020 level and incorporates Morgan Stanley estimates for total income, as of March 26, 2021.
February 2020 Personal Income
(1)
March 2021 income expected to move higher due to $1400 stimulus checks and
$300 supplemental UI benefits
Blackstone |Blackstone Investment Strategy 19
LIQUID FINANCIAL ASSETS
Nonfinancial corporate cash balances have skyrocketed to record highs as liquidity flooded markets in 2020
U.S. Nonfinancial Corporate Liquid Financial Assets(quarterly)
Source: Federal Reserve, Bureau of Economic Analysis, and National Bureau of Economic Research, as of December 31, 2020. “Liquid financial assets” includes checkable deposits and currency, total time and savings deposits, private foreign deposits, and money market fund shares. “Gross value added” is gross output minus intermediate inputs and represents a company’s contribution to GDP.
0%
5%
10%
15%
20%
25%
30%
35%
40%
1960 1970 1980 1990 2000 2010 2020
Recession Liquid Financial Assets: Share of Gross Value Added
Blackstone |Blackstone Investment Strategy 20
EQUITY MARKET RECOVERY
2020 was the second-fastest recovery for equity total returns after a recession since 1970
Months to Recovery for S&P 500 Total Returns
Source: Bloomberg, as of March 26, 2021. “Equity Total Returns” is the total return gross of dividends for the S&P 500 index. “Months to recovery” represents the number of months before total returns regained their previous high after a recession. Recession periods are defined by the National Bureau of Economic Research.
27
5
15
8
43
53
6
1976 1980 1982 1991 2006 2012 2020Recovery Year
Blackstone |Blackstone Investment Strategy 21
STATE AND LOCAL GOVERNMENTS
In 2020, state and local governments produced their first budget surplus since 1978
State and Local Government Budget Surplus (Deficit) Including Federal Aid(percent of GDP)
Source: Strategas Research Partners and Bureau of Economic Analysis, as of December 31, 2020.
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1978 1985 1992 1999 2006 2013 2020
Blackstone |Blackstone Investment Strategy 22
III. Labor Market and Supply Chain Constraints
Blackstone |Blackstone Investment Strategy 23
LABOR MARKET DYNAMICS
Job openings and small businesses saying “jobs hardto fill” are both soaring, despite millions out of work
Nonfarm Employees(2)
(indexed to 100 as of Feb 2020, seasonally adjusted)
Job Openings and “Hard to Fill” Index(1)
(monthly, millions of job openings)
(1) Source: Bureau of Labor Statistics and National Federation of Independent Business, as of February 28, 2021. Total nonfarm job openings are seasonally adjusted.(2) Source: Bureau of Labor Statistics, as of February 28, 2021.
50
60
70
80
90
100
Feb-20 May-20 Aug-20 Nov-20 Feb-21Total NonfarmLeisure and HospitalityRetail Trade
10
15
20
25
30
35
40
45
0
1
2
3
4
5
6
7
8
2011 2013 2015 2017 2019 2021
Total Nonfarm Job Openings (LHS)
“Jobs Hard to Fill” Index (RHS)
Blackstone |Blackstone Investment Strategy
94
95
96
97
98
99
100
Mothers Fathers
Non-parent Women Non-parent Men
24
LABOR FORCE PARTICIPATION
Labor force participation has dropped significantly; worst for mothers, will be helped by schools’ reopening
Labor Force Participation Rates(1)
(indexed to 100 as of Feb 2020, seasonally adjusted)
U.S. School Closures by State Order(2)
(number of states; 50 states plus Washington, D.C.)
(1) Source: Lofton, Olivia, Nicolas Petrosky-Nadeau, Lily Seitelman. “Parents in a Pandemic Labor Market,” Federal Reserve Bank of San Francisco Working Paper 2021-04. https://doi.org/10.24148/wp2021-04. Authors’ calculations using data from the Current Population Survey. Parental status indicates the presence of a child under the age of 17 years old in the household. Participation rates are 3-month moving averages on seasonally adjusted data.
(2) Source: Education Week, as of March 19, 2021. Observations shown are the earliest and latest available, respectively.
0
10
20
30
40
50
August 19, 2020 March 19, 2021
No state-wide order Full closure
Partial closure All schools required open
Blackstone |Blackstone Investment Strategy 25
CAPACITY CONSTRAINTS
Persistent small business closures and constrained supply chains could dent capacity, push up prices
Number of Open Small Businesses(1)
(percent change from Jan 2020)
Shipping Dynamics(2)
(freight index indexed to 100 as of Jan 2020)
(1) Source: Opportunity Insights Economic Tracker, as of March 31, 2021.(2) Source: Freightos, as of March 19, 2021; Port of Los Angeles and Port of Long Beach, as of February 26, 2021. “Global Container Freight Index” represents the Freightos Baltic Index, which tracks
global FEU ocean freight based on real-time business data from freight carriers and shippers. “Loaded Imports” are measured in TEUs.
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0
50
100
150
200
250
300
350
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Millions
Global Container Freight Index (LHS)
Total Loaded Imports: Ports of Los Angeles and LongBeach (RHS)
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
TotalLeisure and HospitalityProfessional & Business Services
Blackstone |Blackstone Investment Strategy
35
40
45
50
55
60
65
70
2014 2015 2016 2017 2018 2019 2020 2021
253035404550556065
2014 2015 2016 2017 2018 2019 2020 202130
40
50
60
70
80
90
2014 2015 2016 2017 2018 2019 2020 2021
45
50
55
60
65
70
75
80
2014 2015 2016 2017 2018 2019 2020 2021
“PERFECT STORM” FOR MANUFACTURING
Source: Institute for Supply Management (ISM), Bloomberg, and Blackstone Investment Strategy, as of March 31, 2021.
26
ISM Manufacturing: Delivery Days(above 50 = delivery times slowing)
ISM Manufacturing: Backlog of Orders(above 50 = greater backlog)
ISM Manufacturing: Customer Inventories(above 50 = contracting inventories)
ISM Manufacturing Prices (prices above 50 = rising)
Blackstone |Blackstone Investment Strategy 27
IV. Short-Term Reflation and Rising Rates
Blackstone |Blackstone Investment Strategy 28
HISTORICAL TREASURY YIELD SPREADS
In the last three recoveries, Treasuries steepened by 180bps from recession start through two years of recovery
10-Year–2-Year U.S. Treasury Yield Spread(daily nominal yields)
Source: Bloomberg, as of March 31, 2021. Recessions are defined by the National Bureau of Economic Research; recoveries are defined as the two years following the preceding recession’s end.The illustrative increase represents the average rise in the 10-year / 2-year spread from recession start to 24 months after recession end over the last three recessions.
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
Recession Recovery Spread (Actual) Spread (Illustrative)
Blackstone |Blackstone Investment Strategy 29
U.S. TIPS YIELDS
Negative U.S. real rates remain historical anomaly; TIPS yields have increased along with nominal yields
10-Year U.S. TIPS Yields(monthly)
Source: Bloomberg, as of March 31, 2021. TIPS are Treasury Inflation-Protected Securities.
-2%
-1%
0%
1%
2%
3%
4%
5%
1997 2001 2005 2009 2013 2017 2021
Negative TIPS Yields 10-Year TIPS Yields
Blackstone |Blackstone Investment Strategy 30
RATES AND HOUSING
Given historically low levels, higher mortgage rates are likely to slow, not stop, the U.S. housing market
Mortgage Debt Service(percent of disposable income, monthly)
30-Year Fixed-Rate Mortgage Contract Rate(weekly)
Source: Mortgage Bankers’ Association, Federal Reserve, and Bloomberg, as of March 31, 2021 (mortgage rates) and December 31, 2020 (mortgage interest).
2000-2019 avg.
2000-2019 avg.
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2000 2003 2006 2009 2012 2015 2018 20212.0%
3.5%
5.0%
6.5%
8.0%
9.5%
2000 2003 2006 2009 2012 2015 2018 2021
Blackstone |Blackstone Investment Strategy 31
DIVERGENCE IN PRICE PRESSURES
Prices are elevated in “lockdown” categories but remain depressed in “outside the home” categories
Source: Haver Analytics and Bureau of Labor Statistics, as of February 28, 2021.
“Outside the Home” Categories:CPI for Lodging, Airlines, ApparelYoY Change (3M rolling average)
“Lockdown” Categories:CPI for Food, Medical, Hospital ServicesYoY Change (3M rolling average)
0.0%
1.5%
3.0%
4.5%
6.0%
2018 2019 2020 2021
Food at Home
Medical Care Services
Hospital and Related Services
-30%
-20%
-10%
0%
10%
2017 2018 2019 2020 2021
Lodging Away from Home
Airline Fare
Apparel
Blackstone |Blackstone Investment Strategy
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2016 2017 2018 2019 2020 2021
32
ENERGY PRICES
Oil soared above $65/bbl in March, while CPI growth for gasoline is positive for first time since pre-COVID-19
WTI Crude Spot Price CPI: Gasoline PricesYoY Growth
Source: Bloomberg and Bureau of Labor Statistics, as of March 31, 2021.
$30
$35
$40
$45
$50
$55
$60
$65
$70
2016 2017 2018 2019 2020 2021
Blackstone |Blackstone Investment Strategy 33
INFLATION EXPECTATIONS
Global market expectations for inflation have recovered to pre-COVID-19 levels, have soared in the U.S.
U.S. Treasury Yield Breakevens(1)
(daily)
Global Sovereign Bond 5-Year Breakevens(daily)
Source: Bloomberg, as of March 23, 2021. Breakevens are calculated by subtracting the real yield of the inflation-linked maturity curve from the yield of the closest nominal Treasury maturity. The result is the implied inflation rate for the term of the stated maturity.(1) “5-Year, 5-Year Forward Breakevens” are estimates of inflation expectations for the five-year period that begins five years from the present.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2016 2017 2018 2019 2020 2021
5-Year Breakevens
5-Year, 5-Year Forward Breakevens
-1%
0%
1%
2%
3%
4%
2018 2019 2020 2021
U.K. U.S.
Germany Japan
Blackstone |Blackstone Investment Strategy 34
TREASURY BEAR MARKET
Treasury bear market began in March 2021 after 20% price drop in long-maturity bonds since August 2020
Source: Bloomberg, as of March 31, 2021. The Bloomberg Barclays U.S. Long Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with 10 years or moreto maturity. “Total Return” represents the index’s unhedged value. “Drawdown” represents the index’s peak-to-trough decrease in total returns on a daily basis.
Bloomberg Barclays US Long Treasury Total Return Index
Historical Long Treasury Total Return Drawdowns
-18.0%
-14.3%
-17.0%
-20.6%
Jul-12 –Aug-13
Jan-15 –Jun-15
Jul-16 –Dec-16
Aug-20 –Mar-21
-20.6% drawdown
0
1000
2000
3000
4000
5000
6000
1980 1990 2000 2010 2020
Blackstone |Blackstone Investment Strategy
0%
4%
8%
12%
16%
20%
Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21
White Black Asian Hispanic -3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%Black Hispanic Asian White
35
FED’S “MAXIMUM EMPLOYMENT” GOAL
Fed’s goal is “maximum employment”— seeking broad-based and inclusive job gains, not just at aggregate level
Source: Haver Analytics and Bureau of Labor Statistics, as of February 28, 2021.(1) Note: Difference shown is the maximum value less the minimum value.
Difference = 2.4%(1)
Difference = 4.8%(1)
Change in Labor Force Participation Rate by Race, Feb 2021 vs. Feb 2020(persons 16 years and older)
Unemployment Rate by Race(persons 16 years and older)
Blackstone |Blackstone Investment Strategy 36
V. Outlook for Financial Markets
Blackstone |Blackstone Investment Strategy
2,000
3,000
4,000
2019 2020 2021
37
INVESTOR SENTIMENT
Market sentiment at optimistic extreme in recent months
Source: Ned Davis Research, as of March 23, 2020. (1) Totals may not sum due to rounding.(2) Arrows represent extremes in optimism and pessimism. They do not represent buy and sell signals and can only be known for certain (and added to the chart) in hindsight. (3) Sentiment must reverse by 10 percentage points to signal an extreme, in addition to reaching the above extreme levels.
Extremes generated when sentiment reading:(3)
Rises above 61.5 = Extreme Optimism Declines below 55.5 = Extreme Pessimism
Historical average value of Crowd Sentiment Poll at:(2)
Optimistic extremes (down arrows) = 68.7 Pessimistic extremes (up arrows) = 46.9 Average spread between extremes = 21.5
S&P 500 Composite Index
NDR Crowd Sentiment Poll
NDR Crowd Sentiment Poll is: % Gain / Annum % of TimeAbove 66.0 -2.0 2657.0 – 66.0 from Above 1.9 1857.0 – 66.0 from Below 22.3 19Below 57.0 11.1 35Buy / Hold = 7.6% Gain / Annum
S&P 500 Index Performance(1)
Full History: 12/1/1995–3/23/2020
71.1
53.4
72.1
37.9
64.1
72.0 69.8
30
55
80
2019 2020 2021
Blackstone |Blackstone Investment Strategy 38
DIVIDEND DISCOUNT MODEL
Historically low rates distort the traditional relationship between interest rates and equities
S&P 500 Dividend Discount Model(1)
Source: Blackstone Investment Strategy, as of March 31, 2021.(1) Assumes starting S&P 500 Earnings Per Share of $144, and that EPS start the period increasing / decreasing to level indicated in first column, before increasing / decreasing linearly over 2 years to
a 4% nominal growth rate and remaining there in perpetuity. Further assumes dividend payout ratio remains at prior year’s level of 41% and equity risk premium is a constant 4%.
0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50%$186 15,228 10,152 7,614 6,091 5,076 4,351 3,807 3,384 3,046 2,769 2,538 2,343 2,175$188 15,392 10,261 7,696 6,157 5,131 4,398 3,848 3,420 3,078 2,799 2,565 2,368 2,199$190 15,556 10,370 7,778 6,222 5,185 4,444 3,889 3,457 3,111 2,828 2,593 2,393 2,222$192 15,719 10,480 7,860 6,288 5,240 4,491 3,930 3,493 3,144 2,858 2,620 2,418 2,246$194 15,883 10,589 7,942 6,353 5,294 4,538 3,971 3,530 3,177 2,888 2,647 2,444 2,269$196 16,047 10,698 8,023 6,419 5,349 4,585 4,012 3,566 3,209 2,918 2,674 2,469 2,292$198 16,211 10,807 8,105 6,484 5,404 4,632 4,053 3,602 3,242 2,947 2,702 2,494 2,316$200 16,374 10,916 8,187 6,550 5,458 4,678 4,094 3,639 3,275 2,977 2,729 2,519 2,339$202 16,538 11,025 8,269 6,615 5,513 4,725 4,135 3,675 3,308 3,007 2,756 2,544 2,363$204 16,702 11,135 8,351 6,681 5,567 4,772 4,175 3,712 3,340 3,037 2,784 2,570 2,386$206 16,866 11,244 8,433 6,746 5,622 4,819 4,216 3,748 3,373 3,066 2,811 2,595 2,409$208 17,029 11,353 8,515 6,812 5,676 4,866 4,257 3,784 3,406 3,096 2,838 2,620 2,433$210 17,193 11,462 8,597 6,877 5,731 4,912 4,298 3,821 3,439 3,126 2,866 2,645 2,456$212 17,357 11,571 8,678 6,943 5,786 4,959 4,339 3,857 3,471 3,156 2,893 2,670 2,480$214 17,521 11,680 8,760 7,008 5,840 5,006 4,380 3,893 3,504 3,186 2,920 2,695 2,503$216 17,684 11,790 8,842 7,074 5,895 5,053 4,421 3,930 3,537 3,215 2,947 2,721 2,526
10-Year Treasury Yield
Trai
ling
Twel
ve-M
onth
EPS
Blackstone |Blackstone Investment Strategy 39
INFLATION AND MULTIPLES
Inflation in 0%-2% range supports elevated valuations, buthigher inflation has historically led to P/E compression
Average S&P 500 P/E Ratio by CPI YoY Tranche, 1950 to Present(S&P 500 LTM P/E Ratio)
Source: Strategas Research Partners, as of February 28, 2021.
16.8x
18.5x
17.4x
14.7x
10.9x
9.5x
8.5x8.0x
-2%–0% 0%–2% 2%–4% 4%–6% 6%–8% 8%–10% 10%–12% 12%–14%
Inflation Tranche
Blackstone |Blackstone Investment Strategy 40
IPOS & SPECIAL ACQUISITION COMPANIES
Initial public offerings have soared, with IPOs by SPACs in 1Q21 alone already setting an annual record
U.S. IPO Deal Value(1)
(US$ in billions, 12-month moving average)
U.S. SPAC IPO Deal Value(2)
(US$ in billions)
(1) Source: Bloomberg, as of February 26, 2021. “IPO Deal Value” includes all announced U.S. initial public offerings, aggregated on a monthly basis by announcement date.(2) Source: Bloomberg, as of March 23, 2021. “SPAC IPO Deal Value” includes all announced U.S. SPAC initial public offerings, aggregated on an annual basis by announcement date. 2021 observation
is YTD.
0.00%
0.02%
0.04%
0.06%
0.08%
0.10%
$0
$5
$10
$15
$20
$25
1996 2001 2006 2011 2016 2021
IPO Deal Value (LHS)
IPO Deal Value: Share of S&P 500 Market Cap (RHS)
$4.4 $4.0$12.0 $9.9
$13.9
$98.0
$121.6
2015 2016 2017 2018 2019 2020 2021 YTD
Blackstone |Blackstone Investment Strategy 41
FIXED INCOME DURATION
Long duration in traditional fixed income could damage investor returns as the Treasury curve steepens
Projected Impact of Rising 10-Year U.S. Treasury Yield on Traditional Fixed Income(based on bond prices and Treasury yields as of 3/25/21) (loss to fixed income)
Source: Bloomberg and Blackstone Investment Strategy, as of March 25, 2021. Projections based on a linear model that decomposes the price of the Bloomberg Barclays U.S. Aggregate Bond Index on the index’s average duration of underlying securities and on the 10-year Treasury yield’s level and 30-day percentage change, based on daily data from January 3, 1989 to March 25, 2021.
$1,500
$1,700
$1,900
$2,100
$2,300
$2,500
2011 2013 2015 2017 2019 2021
Bond Index 10Y +10bps
10Y +50bps 10Y +100bps
-2.39%
-6.49%
-11.62%
10Y +10bps 10Y +50bps 10Y +100bps
A further 50-basis point increase in the 10-year yield could cost
traditional fixed income investors -6.5% in total returns
Blackstone |Blackstone Investment Strategy 42
VI. Long-Term Trends to Consider
Blackstone |Blackstone Investment Strategy
4.4
6.2
4.8
Public Private Average
4.8
3.5
2.5
4.8
<20% >80% 100% Average
IMPACTS OF REMOTE LEARNING
We’ve yet to grapple with the unequal impacts on students of a full year of remote instruction
Source: McKinsey Teacher Sentiment Survey, carried out October 28, 2020 to November 17, 2020. Report date as of March 21, 2021.
43
Remote Learning Effectiveness(10 = equivalent to in-person learning, 0 = least effective)
Estimated Amount of Learning Lost(in months, average of teacher responses)
2.8
2.4
2.4
1.9
1.9
1.7
1.4
0.9
1.9
U.K.
Canada
U.S.
Australia
France
Germany
China
Japan
AverageBy Type of School
By Share of Students Below Poverty Line
Blackstone |Blackstone Investment Strategy
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
INFRASTRUCTURE SPENDING
Government spending on infrastructure programs has undershot the historical trend in each of last 7 years
Source: Bureau of Economic Analysis, as of December 31, 2019. “Government Expenditures on Public Infrastructure” represents total current expenditures across income security, education, recreation and culture, health, housing and community services, economic affairs, public order and safety, national defense, and general public service. “Historical Trend” is the linear trend of annual expenditures as a share of GDP from 1960 through 2019.
44
Deviation of Government Infrastructure Expenditures from Historical Trend(percent of GDP)
Blackstone |Blackstone Investment Strategy
20%
24%
28%
32%
36%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
OECD Average (ex-U.S.) U.S.
45
4 SECULAR TAILWINDS REVERSING
Corporate profits have benefited from lower taxes and deregulation, trends which may reverse in coming years
Statutory Corporate Income Tax Rate Number of Pages in U.S. Federal Register(1)
Source: OECD, Office of the Federal Register, and Haver Analytics, as of December 31, 2020. (1) This series is used to track the flow of new government regulations each year and as a proxy for the federal regulatory burden.
Reduced from 35% to 21% by the 2017 Tax Cuts and Jobs Act
0
20,000
40,000
60,000
80,000
100,000
1940 1960 1980 2000 2020
-36% in 2017
Blackstone |Blackstone Investment Strategy
15%
25%
35%
45%
55%
1959 1969 1979 1989 1999 2009 20190%
5%
10%
15%
20%
25%
1997 2001 2005 2009 2013 2017 2021
Investment Grade Bonds High Yield Bonds
46
4 SECULAR TAILWINDS REVERSING
Corporate profits have benefited from record-low borrowing costs and rising globalization
U.S. Corporate Bond Yields World Merchandise Trade(percent of GDP)
Source: Haver Analytics and World Bank, as of February 28, 2021 (bond yields) and December 31, 2019 (trade). “U.S. Corporate Bond Yields” represent the monthly average effective yield for the ICE/BofA Merrill Lynch U.S. Corporate Bond Indices.
Blackstone |Blackstone Investment Strategy
17%
29%
29%
31%
35%
38%
55%
59%
61%
28%
34%
49%
7%
40%
23%
29%
31%
31%
14%
10%
15%
34%
31%
19%
Slack
Amazon
Zoom
Microsoft
Apple
Tiktok
Local Government
State Government
Federal Government
Distrust Trust Net Distrust / Trust
47
PUBLIC VIEW OF BIG TECH
Public distrust in Big Tech’s collection of personal information may presage regulatory challenges
Trust in Organizations to Collect and Use Personal Information / Data
Source: The Center for Growth and Opportunity at Utah State University / YouGov Tech Poll University, as of November 2020. “Not sure” and neutral answers not shown.
Blackstone |Blackstone Investment Strategy
0%
10%
20%
30%
40%
50%
1975 1990 2005 2020
Households Foreigners Fed
15%
20%
25%
30%
35%
1975 1990 2005 2020
48
FEDERAL RESERVE AND TREASURY DEBT
Fed holds a record share of Treasury debt, and government debt as percent of total highest in 50 years
Holders of Treasury Debt(share of total Treasury debt outstanding)
Government Debt Share of Total Debt(percent of total U.S. debt outstanding)
Source: Federal Reserve and Haver Analytics, as of December 31, 2020.
Blackstone |Blackstone Investment Strategy 49
FEDERAL SPENDING PROJECTIONS
Debt service will be a rising share of deficit, and federal spending on healthcare to reach ≈10% of GDP by 2051
Federal Deficits and Net Interest(1)
(percent of GDP)
Federal Outlays on Health Care Programs(2)
(percent of GDP)
Source: Congressional Budget Office’s “The 2021 Long-Term Budget Outlook,” as of March 4, 2021.(1) “Primary deficit” is the total deficit less net spending for interest.(2) “CHIP” is the Children’s Health Insurance Program. “Marketplace Subsidies” refers to spending to subsidize health insurance purchased through the marketplaces established under the Affordable
Care Act and related spending. “Medicare” includes the effects of premiums and other offsetting receipts.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2006 2011 2016 2021 2026 2031 2036 2041 2046 2051
Medicaid, CHIP, and Marketplace Subsidies Medicare
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
2006 2011 2016 2021 2026 2031 2036 2041 2046 2051
Primary Deficit Net Interest Total Deficit
Blackstone |Blackstone Investment Strategy 50
DISCLAIMERS
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