BlackRock portfolio managers and executives recently met in London for a semi-annual forum to discuss the latest themes underpinning global markets in a bid to inform the group’s investment strategy in what it has described as the “new regime”.
Participants agreed continued volatility and the protracted fight to quell inflationary pressures warranted a “more selective and dynamic” investment strategy.
This new approach, BlackRock noted, would be shaped by market pricing of “economic damage” induced by aggressive monetary policy aimed at combating inflation.
This posture has informed BlackRock’s equities investment strategy, with the firm favouring emerging market (EM) stocks, claiming developed markets (DM) are “not pricing the recession we see ahead”.
“Forum participants agreed that the new regime keeps playing out as central banks’ rate hikes start to kick in, but they debated the extent of the economic damage,” BlackRock noted.
“We think the new macro regime still offers abundant, if different, investment opportunities relative to the past with the right approach.”
Three long-term constraints would underpin the new regime — “aging populations, geopolitical fragmentation and the transition to a lower carbon”.
“These forces are likely to be largely inflationary over time, though AI could eventually help lessen inflationary pressure as it delivers productivity gains,” BlackRock observed.
In the meantime, BlackRock does not expect rate relief from the world’s central banks.
“That’s why the old playbook of simply ‘buying the dip’ doesn’t apply in this regime of sharper trade-offs and greater macro volatility,” the global asset manager added.
“The new playbook calls for a continuous reassessment of how much of the economic damage being generated by central banks is in the price.”
Indeed, analysts are projecting further tightening from central banks over the coming months, with the Federal Open Market Committee (FOMC) tipped to hike at its next meeting this week.
According to ANZ Research, the resilience of recent activity data and “ongoing sticky inflation” suggests the FOMC should consider lifting the federal funds rate by 25 bp to 5.50 per cent.
“In the face of an exceptionally rapid rise in policy rates, regional banking upheaval and a potential fiscal crisis, the US economy has held up remarkably well,” ANZ Research noted.
“Much of this owes to a comparatively pro-cyclical fiscal stance, a strong labour market, well positioned household balance sheets, elevated corporate profits, and ongoing pent-up demand for services.
“Policymakers have also played their part in quickly addressing banking stress and averting a fiscal crisis.”
But the Fed’s own rhetoric suggests a pause to the tightening cycle is likely, with chair Jerome Powell hinting at a break to assess the flow on effect of previous hikes.
ING Economics’ chief international economist, James Knightley, has projected a hold from the Fed but added the central bank would leave the door open to future hikes.
“The Fed wants to see 0.2 per cent month-on-month or below CPI readings to be confident inflation will return to 2 per cent,” he said.
“We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow — July is clearly a risk.”
