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BlackRock: The AI rally has more room to run

18 June 2024

The manager is overweight technology, AI winners, US and Japanese equities.

By Emma Wallis,

News editor, Trustnet

BlackRock expects “a concentrated group of artificial intelligence (AI) winners” to continue driving returns for the next six to 12 months, leading it to remain overweight technology and AI.

The firm’s macro view is neutral overall for US equities but the AI theme and its potential to generate alpha have led to an overweight position in the US, according to Wei Li, global chief investment strategist at the BlackRock Investment Institute.

“The AI rally is supported by earnings and has more room to run, in our view. We don’t see an AI bubble and the profitability of mega-cap tech companies stands in contrast to the unprofitable companies driving the dot-com bubble. Healthy corporate balance sheets and earnings momentum support our pro-risk view,” Li explained.

BlackRock believes that AI will be inflationary in the short term – even though productivity gains resulting from AI might eventually be deflationary, much further down the line.

“Our portfolio managers increasingly think the initial AI capex buildout required to unlock the benefits could be inflationary,” Li said.

“Capital spending on AI data centres has boomed since last year’s ChatGPT moment. A lot more is coming in the years ahead. This capex boom and draw on resources could create bottlenecks, meaning AI will likely be inflationary in the near term before unlocking any of the long-run benefits that could ease inflationary pressures. This nuance is not appreciated by markets or central banks.”

With inflation remaining elevated, the BlackRock Investment Institute expects central banks to keep interest rates at higher levels than before the Covid pandemic.

“The new macro regime is marked by higher inflation, higher rates and lower growth due to supply constraints. We see this unprecedented macro cocktail persisting. Population ageing, the rewiring of global supply chains and the low-carbon transition are constraining production and driving capital investment as economies try to adapt,” Li noted.

As a result, the firm prefers inflation-linked bonds as it expects inflation to hover closer to 3% on a strategic horizon, Li said. BlackRock is using short-term government bonds for income but believes that “the UK stands out for long-term bonds”, she added.

Given its risk-on stance, BlackRock prefers equities to bonds. The firm favours emerging over developed market equities but is being selective in both. “Within emerging markets, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich,” Li said.

In developed markets, Japan is BlackRock’s largest overweight and is benefitting from shareholder-friendly corporate reforms and the return of mild inflation.

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