“Granular” investment opportunities can still be found despite a challenging economic backdrop marked by recessions in both the US and Europe, BlackRock strategists argue, although counting on broad market moves “won’t do now”. 
At the fund giant’s recent Outlook Forum, around 100 BlackRock portfolio managers, executives and investment strategists agreed that a new regime of heightened volatility is playing out, as supply constraints underpin higher inflation and make it difficult for developed market central banks to cut interest rates in the near term.
“The new regime presents central banks with a sharp trade-off between living with some inflation and crushing activity. That shift is in sharp contrast with the four-decade period of steady activity before 2020 known as the Great Moderation,” the firm said.
“Today’s environment offers new opportunities, in our view, thanks to market divergences and structural changes playing a bigger role.”
Range of individual stock returns vs. Russell 1000 index, 2009-2023
Source: BlackRock Investment Institute with data from Refinitiv, Jun 2023
The chart above reflects some of this. Since 2020, the average dispersion (or range of individual stock returns versus broad index returns) has increased by around 10 percentage points from the average over 2009 to 2019.
BlackRock said this is indicative of the new macro regime and structural changes influencing returns. The consensus was that this new regime demands a more selective and dynamic approach to investment decisions.
Assessing the extent of economic damage from rate hikes priced into assets is a crucial first step, followed by an examination of relative pricing divergences across sectors and regions.
“A case in point: we think emerging market stocks better price in the damage we expect than developed market peers,” BlackRock said. “Emerging market stocks and local currency debt also benefit from China’s economic restart, emerging market hiking cycles nearing an end and a broadly weaker US dollar.”
The role of megaforces, or structural changes that shape returns in the present and the long term, were another point of discussion at the Outlook Forum. Investment decisions need to reflect these forces, even within a cautious macro outlook, the firm concluded.
Some megaforces are already apparent, such as the growing disconnect between bond and stock pricing of the macro environment, partly driven by expectations for artificial intelligence adoption.
“Just a few technology firms valued over $200bn are carrying the US equities rally so far this year and upbeat tech earnings expectations are reinforcing the gains,” the firm explained.
Other megaforces include ageing populations, geopolitical fragmentation leading to supply chain restructuring and the transition to a lower carbon economy. Over time, these forces are expected to be largely inflationary, although productivity gains from AI could eventually help reduce inflationary pressure, BlackRock said.
With a tough macro outlook pushing BlackRock to a more cautious positioning, the firm’s investment strategists also discussed alternative methods for generating returns.
Core inflation, though falling from its highs, still exceeds the 2% policy targets of the Fed and ECB. Tight labour markets are driving wage gains and making core inflation persistently high, even as recessions loom in the US and Europe. The labour market dynamics may squeeze corporate profit margins or compel companies to reduce workforces to maintain profits.
“These dynamics mean broad asset class exposure may not generate the same level of returns as in the past,” they added.
Forum attendees agreed that the new regime, marked by the commencement of central banks' rate hikes, continues to unfold. However, the extent of the economic damage it will cause remains to be seen.
“We think the new macro regime still offers abundant, if different, investment opportunities relative to the past with the right approach,” BlackRock finished.