BlackRock Investment Institute 2023 Global Outlook Summary
A new investment playbook
We laid out in our 2022 midyear outlook why we had entered a new regime – and are seeing it play out in persistent inflation and output volatility, central banks pushing policy rates up to levels that damage economic activity, rising bond yields and ongoing pressure on risk assets.
Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher than central bank targets of 2%.
What matters most, we think, is how much of the economic damage is already reflected in market pricing. This is why pricing the damage is our first 2023 investment theme. Case in point: Equity valuations don’t yet reflect the damage ahead, in our view. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. Yet we won’t see this as a prelude to another decade-long bull market in stocks and bonds.
This new regime calls for rethinking bonds, our second theme. Higher yields are a gift to investors who have long been starved for income. And investors don’t have to go far up the risk spectrum to receive it. We like short-term government bonds and mortgage securities for that reason. We favor high-grade credit as we see it compensating for recession risks. On the other hand, we think long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation. And we see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels.
Our third theme is living with inflation. We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels. We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.
Our bottom line: The new regime requires a new investment playbook. It involves more frequent portfolio changes by balancing views on risk appetite with estimates of how markets are pricing in economic damage. It also calls for taking more granular views by focusing on sectors, regions and sub-asset classes, rather than on broad exposures.
Key investment themes
Pricing the damage:
We don’t think equities are fully priced for recessions. But we stand ready to turn positive via our assessment of the market’s risk sentiment or how much economic damage is in the price.
The lure of fixed income is strong as surging yields mean bonds finally offer income. Yet long-dated bonds face challenges, we believe, making us prefer short-term bonds and high-grade credit.
Living with inflation
We see central banks pausing rate hike campaigns once the damage becomes clearer. Long-term drivers of the new regime will keep inflation persistently higher, in our view.
The full outlook can be read here.