New Economic Cycle Requires New Investment Strategies

According to Blackrock, the key factor in their investment strategy is the amount of economic damage that has been accounted for in market prices. As such, their first investment theme for 2023 is damage pricing. They believe that current equity valuations do not fully reflect the potential damage and will become more positive on equities when they think the damage has been priced in or when their view of market risk changes. However, Blackrock does not expect this to mark the beginning of another long bull market in stocks and bonds like the one we had in the last decade.

To succeed in the new economic cycle, investors will need to update their investment strategy. This will involve making more frequent changes to their portfolios by carefully considering their risk appetite and their estimates of how markets are accounting for economic damage. It will also involve taking a more detailed, granular approach to investment, focusing on specific sectors, regions, and sub-asset classes rather than broad exposures.

In the short term, Blackrock believes that treasury bonds and U.S. agency mortgage-backed securities (MBS) offer good opportunities. They will keep a lot of inflation-linked bonds because they expect inflation to last longer than market prices suggest. In the long term, Blackrock will remain underweight as long as long-term government bonds continue to face challenges. In terms of stocks, Blackrock believes that the potential recession is not fully reflected in corporate profits estimates or values, and does not agree with market expectations that central banks will eventually become supportive by cutting interest rates.

To add more detail while staying underweight overall, Blackrock is focusing on sectoral opportunities resulting from structural changes, such as healthcare for aging populations. They also like cyclical in the energy and banking sectors. Earnings in the energy sector are stable even as they decline from historically high levels due to limited energy supply. Higher interest rates are good for bank profits.