The global economic environment has shifted significantly from the decade following the global financial crisis. Previously, ever-expanding production capacity allowed central banks to stabilize economies and support growth through loose monetary policy, suppressing macroeconomic and market volatility. However, production constraints are now abundant due to factors like shrinking workforces. Central banks face tougher trade-offs in fighting inflation and supporting growth. This new regime is characterized by higher macro and market volatility.
Context is key
Markets have been fluctuating between hopes for a soft economic landing and fears of higher interest rates causing recession. However, focusing only on the business cycle view misses important structural drivers shaping the economy, like demographic changes. The resulting disconnect between the cyclical narrative and underlying structural reality is exacerbating volatility. While U.S. growth has been robust, the economy is still climbing out of the pandemic downturn and following a weaker long-term growth path. The key implication is that persistently higher interest rates and tighter financial conditions will define the new regime. Financial markets are adjusting to this change, making context vital for managing macroeconomic risks.
Investment expertise will be rewarded
Greater volatility and dispersion of returns create opportunities for investment skills and insights to generate above-benchmark returns. A static approach to broad asset allocations is unlikely to deliver the risk-adjusted returns seen previously. Alpha strategies and more dynamic portfolio management, including factor and security selection, will play a bigger role. Good macro insights acted upon promptly have yielded outsized rewards compared to buy-and-hold since 2020. Dispersion of analyst earnings estimates and security returns has also increased, showing the outlook is harder to read—benefiting investors with differentiated views.
Harness mega forces
Five structural “mega forces” are seen as important portfolio building blocks: digital disruption/AI, the low-carbon transition, a fragmenting geopolitical world, aging demographics, and the future of finance. These forces are already reshaping markets and will be key drivers of long-term growth, inflation, and profitability shifts. They present new investment opportunities, as their effects may be underappreciated or slow to be priced in. For example, climate resilience solutions like adaptation and rebuilding infrastructure are seen as an emerging theme within the energy transition. Harnessing mega forces can help drive portfolio outcomes.
Views emphasize dynamism and selectivity
Tactically, a neutral stance is taken on U.S. equities balancing the macro view with opportunities in sectors like technology. Japan and selective emerging markets are favored. In fixed income, inflation-linked bonds are a strategic overweight, while short-term government debt is tactically preferred. Real assets like real estate investment trusts are seen as more attractively valued than private real estate. The new regime calls for nimbleness, factoring in alpha potential, and selectivity across regions, sectors, and asset classes—rather than relying on static exposures. Overall, an active approach emphasizing insights over auto-pilot is recommended.
In summary, the BlackRock Investment Institute sees the global investment environment as undergoing a structural shift requiring more dynamic portfolio management. Contextual macroeconomic views, harnessing long-term structural forces, and selectivity are emphasized as ways to potentially generate above-benchmark returns in this new regime of higher volatility. A static approach is unlikely to succeed, calling for nimble portfolio positioning tailored to the opportunities and risks presented.