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BlackRock says throw away your old investing handbook, we’re moving towards a ‘new regime with greater macro and market volatility’


BlackRock’s top minds seem nervous. Investment strategists at the world’s largest asset manager have warned of a coming recession, persistent inflation and a new era that won’t bode well for investors in the sector. their area of ​​business. Global Outlook 2023 released this week.

Vice President Philipp Hildebrand and a group of top executives wrote: “The Great Moderation, four decades of steady performance and inflation is largely behind us. “The new regime of macro volatility and larger markets is underway. A recession has been heralded.”

Hildebrand and his team argue that the Great Regulatory Age—a period of low inflation and steady economic growth—allowed stocks and bonds to grow in ways that would not have been possible in the future.

For investors, this new economic era will require a fresh, flexible strategy involving selective stock selection and more active portfolio management.

“We have not seen sustained bull markets in the past. That is why a new investment guide is needed,” they wrote. “What worked in the past won’t work now.”

A new era

According to BlackRock, three main “mode drivers” are set to keep inflation well above central banks’ targets, stunt economic growth and make it harder for investors to earn profits in the future. many years to come.

The first day, old population will shrink the workforce and force governments to spend more care for the elderly, causing labor shortages and reduced production.

Second, tensions between global powers signal that we have entered a “new world order” where globalized supply chains that once helped keep commodity prices down may be disrupted.

“In our view, this is the riskiest global environment since World War II,” Hildebrand and his team wrote. “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs. That comes at the expense of economic efficiency.”

Ultimately, a faster transition to clean energy will eventually lead to inflation unless a new influx of investment flows into carbon-neutral solutions.

“If high-carbon production declines faster than phased low-carbon alternatives, shortages could occur, driving prices up and disrupting economic activity,” they wrote. economic. “The faster the transition, the more out of sync it can be — meaning inflation and economic activity are more volatile.”

Damage valuation

BlackRock also breaks down three themes to help investors prepare for the new normal in their 2023 forecast.

First, wealth management experts argue that it will be important to factor in the “damage” of central bank rate hikes and recession risk when evaluating stocks next year.

“In our view, stock valuations do not yet reflect damage ahead,” they wrote. “We find that earnings expectations are undervalued even in a mild recession.”

BlackRock doesn’t like developed market stocks, at least in the near term, as Hildebrand and his team believe the Fed won’t save the market by cutting rates in a recession like they once did. done in the past. That’s the end of the so-called Fed set.

“Central banks will not come to the rescue when growth slows in this new regime, contrary to what investors expect,” they argue. “That’s why secondhand books simply ‘buy at discount’ don’t apply in this mode.”

Hildebrand and his team even go as far as to argue that central banks are “deliberately causing a recession” by aggressively raising interest rates to combat inflation.

“The new book calls for a constant re-evaluation of the extent to which the economic damage central banks have caused to prices,” they wrote. “That damage is building.”

Rethinking Bonds

After many years ineffective Compared to stocks, maybe it’s time to look to the bond market for steady income as a recession looms.

Hildebrand and his team wrote: “Fixed income eventually provides ‘income’ after output increases globally. “This has boosted the appeal of bonds after investors craved yields for years.”

They recommend investors look to investment-grade credit and short-term government bonds, but warn against long-term government bonds due to rising debt levels and higher inflation.

“In the old playbook, long-term government bonds would be part of the package because they previously protected portfolios from recessions. Not now, we think,” they wrote.

Living with inflation

Annual inflation, measured in consumer price index (CPI), which is likely to peak in June at 9.1%. And some CEO and money management argues that it is set to go down rapidly.

But BlackRock has a different view.

Hildebrand and his team wrote: “Even with a recession looming, we think we will have to live with inflation. “We see inflation cooling as spending patterns normalize and energy prices fall—but we see it remaining above policy targets in the years to come.”

In this higher inflation environment, they recommend inflation-protected bonds and avoid stocks – at least in the near term.

“We think more persistent and volatile inflation has yet to be priced in by the market,” they warned.

This story was originally featured on Fortune.com

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