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BlackRock Reveals Investment Playbook for 2023

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After more than a decade of low interest rates, central banks in the U.S., Europe, and several other markets increased yields in 2022 primarily to combat inflation and reduce the overall money supply in the economy.

While the low cost of debt allowed growth stocks across sectors to deliver outsized gains, rate hikes led to the accelerated sell-off across equity markets. The double whammy of higher bond rates and elevated inflation levels may also result in an economic recession in the second half of 2023, driving stock valuations lower.

Additionally, the banking collapses witnessed in the past month might lead to widespread contagion effects for investors. So, how do you navigate a complex and challenging macro-environment?

Let’s look at the investment playbook of BlackRock for 2023, which is among the leading asset managers globally. With around $9 trillion in assets under management, BlackRock is a financial behemoth with decades of experience in the financial markets.

Supply chain issues likely to persist

The COVID-19 pandemic led to disruptions in the supply chain as borders were shut and lockdowns were imposed. Consumer spending also shifted from purchasing services to purchasing goods, resulting in bottlenecks and shortages across the value chain. An aging population further resulted in labor shortages, meaning manufacturers could not function optimally.

Now quantitative tightening measures will negatively impact demand which should resolve production constraints to a certain extent. But as consumer demand falls off a cliff, an economic recession will be inevitable.

According to BlackRock, supply chain issues may persist in 2023 due to labor shortages and geopolitical tensions if consumers can maintain demand. 

Avoid buying the dip

The investment manager has warned investors against buying the dip as further interest rate hikes may be on the horizon. You need to assess the economic damage central bank policies will likely cause in the next 12 months.

Rising mortgage rates have already resulted in a steep decline in home sales. Moreover, the fall in home prices in 2022 is much steeper than in past interest rate hikes cycles. 

Further, management teams across the board have delayed capital spending plans to fuel their expansion and are instead focusing on optimizing their cost structure and driving profit margins.

BlackRock explains while central banks will stabilize rate hikes by the end of 2023, corporate earnings will compress much further, leading to another round of sell-offs.

Fixed-income assets are attractive

After yields have surged at a remarkable pace, investors are now looking to invest in bonds and benefit from a predictable stream of recurring income. BlackRock advises investors to take a granular investment approach to capitalize on this recent trend as the case for investment-grade credit has improved.

Its detailed report states investors should also consider agency-based mortgage-backed securities and short-term government debt to diversify their fixed-income holdings this year.

There is a good chance for policy rates to remain elevated for a long duration than previously expected, sparking demand for fixed-income products after the asset class flew under the radar for the better part of the last decade.

Inflation will cool down

In 2022, inflation touched multi-decade highs as rising energy costs and higher commodity prices created a cost-of-living crisis. Yet, despite lower corporate spending and industry-wide layoffs, the labor market in the U.S. is quite strong and has kept consumer demand robust.

BlackRock believes inflation will cool down in 2023 as spending patterns normalize and energy prices move lower. However, inflation rates will remain persistent and higher than policy targets for a few more years.

So, where is BlackRock investing in 2023?

As per BlackRock’s new investment playbook, the company has relayed calls for a high level of granularity to seize opportunities arising from a volatile financial market. BlackRock confirmed it is “underweight” on equities part of developed markets (DMs) such as the United States, Europe, and the United Kingdom, while its neutral on Japan.

In terms of sectors, it is bullish on energy, financials, and healthcare compared to consumer staples, consumer discretionary, and healthcare.

BlackRock states, “On a strategic horizon, we are overweight equities with a preference for DM. We think DM equities are one way to get more granular and benefit from structural trends. We believe DM equity indexes are better positioned for the net-zero transition, for instance, with heavier weights in lower carbon-intensive sectors such as tech and healthcare.”

As mentioned earlier, BlackRock affirms certain bonds are attractive due to high yields and the return on income you can generate in 2023. However, it is also “underweight” on long-term nominal bonds as it expects term premiums to return due to persistent inflation, a decline in market liquidity, and higher debt loads. These factors don’t matter much when it comes to investments in short-term bonds.

Finally, BlackRock has a high conviction towards and remains overweight on investment-grade credit and is neutral on high-yield instruments. It also advised investors to consider inflation-linked bonds over nominal bonds this year.

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