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Blackrock's 2023 investment outlook

Feb 27, 2023

Blackrock is the world’s largest asset manager with $9.6tn under management. In this blog, we summarize their 2023 outlook and aim to present you with a digestible article of what to expect in the year to come.

Blackrock’s investment playbook for 2023 suggests that the current macro and market volatility is expected to continue, with a recession forecasted. Central banks are expected to over-tighten policy to control inflation, which will cause economic damage. The playbook suggests that investors should focus on pricing the damage, rethinking their fixed income portfolio, and living with inflation. It also suggests that frequent portfolio changes and granular views of sectors, regions, and sub-asset classes should be taken, rather than broad exposures.

A new regime is playing out

The new regime is shaped by supply issues that involve trade-offs. Inflation surprises has caused bond yields soaring, crushing equities and fixed income. This type of volatility is very different from the steady returns experience over the last 40 years. 

Inflation pressures are high due to production constraints caused by the pandemic shift in consumer spending, worker shortages, and aging populations. Central banks have a brutal trade-off to make between controlling inflation to 2% targets and causing a recession or living with more inflation. They have chosen the former, which means a recession is foretold. The bottom line, what has worked in the past will not work in the future. 

Pricing the damage

The investment strategy for 2023 suggests that a recession is foretold as central banks try to tame inflation. The old strategy of "buying the dip" does not apply in this new regime of sharper trade-offs and greater macro volatility. The strategy focuses on continuously reassessing how much of the economic damage caused by central banks is reflected in the prices, especially in equity earnings expectations and valuations. 

It's expected that central banks will stop hiking, activity will stabilize in 2023, and earnings expectations don't yet price in even a mild recession. As a result, the strategy suggests being underweight in developed market equities for now, but ready to turn more positive as valuations closer to reflecting the economic damage. It also suggests that the strategy is not only about pricing the damage but also about market risk sentiment improvement.

Living with inflation

High inflation has sparked cost-of-living crises and put pressure on central banks to tame inflation. However, there has been little debate about the damage to growth and jobs. Inflation is expected to cool as spending patterns normalize and energy prices relent, but it will persist above policy targets in the coming years. 

Aging workforces

The new investment regime is being driven by long-term production constraints, one of which is aging populations. This is causing a shrinking workforce, as an increasing share of the population is aged 65 or older, and most of them leave the workforce. This is causing a shortage of labor supply, which is contributing to inflation. Additionally, this trend is bad news for future economic growth, as the available workforce will expand much more slowly in the coming years than in the past, resulting in reduced production capacity, and continued inflation pressure. 

A new strategic approach

The new investment regime calls for a nimbler strategic portfolio than in the past, as the Great Moderation allowed for relatively stable strategic portfolios. The new regime does not see a return to conditions that will sustain a joint bull market in stocks and bonds, getting the mix wrong could be as much as four times as costly as the Great Moderation. 

A new world order

The new world order is a break from the post-Cold War era and is characterized by geopolitical cooperation and globalization evolving into a fragmented world with competing blocs. This will result in economic inefficiency, sourcing locally being costlier for firms, and mismatches in supply and demand. Strategic competition between the US and China has intensified, and the US is trying to restrict China's access to high-end technology. China will de-emphasize economic growth as it pursues self-sufficiency in energy, food, and technology. Geopolitical fragmentation will foster a permanent risk premium across asset classes, resulting in greater macro and market volatility, and persistently higher inflation.

Faster transition to Net Zero 

The global transition to net-zero carbon emissions is likely to accelerate and will have implications for financial risks and returns. Europe and the US are intensifying their efforts to build clean energy infrastructure and shift towards cleaner energy sources. The transition is set to add to production constraints as it involves a huge reallocation of resources. This could lead to shortages, driving up prices and disrupting economic activity, resulting in more volatile inflation and economic activity.