BlackRock, the world’s largest investment firm based in New York, has spoken out on global investment in 2023. Specifically, as noted on Bitcoin Magazine’s Twitter account, it said:
JUST IN: BlackRock says get ready for a recession unlike any other and 'what worked in the past won't work now'
— Bitcoin Magazine (@BitcoinMagazine) December 8, 2022
The BlackRock company manages total assets of about $10 trillion, a third of which are in Europe. It is listed on the New York Stock Exchange and offers investment solutions in fixed income, equity and money market segments, alternative investments and real estate.
It is also a leader in ETFs and ETCs in America and is present in the Milan financial center with its iShares product range, listed on the ETF Plus index of the Italian Stock Exchange. Because of the size and scope of its financial activities, it exerts a strong influence worldwide.
BlackRock: three investment stocks
On BlackRock’s official Twitter profile in recent hours one can read:
Inflation should cool as pandemic spending patterns normalize and energy prices relent – but as the “politics of recession” takes over, we think central banks will stop hiking before inflation is on track to get all the way back down to 2% ➡️https://t.co/Ejj37WDIDW pic.twitter.com/h3uNGxnfBQ
— BlackRock (@BlackRock) December 8, 2022
Proceeding in order, we know that BlackRock has drafted a new global investment handbook for 2023. It claims that the regime of greater economic and market volatility is coming to an end, not going away.
Indeed, central banks will not rush to the rescue in recessions, contrary to what investors expect. But this regime requires a new investment playbook and implies more frequent portfolio changes and more granular views that go beyond general asset classes.
The first step, according to BlackRock, is to assess the damage. This means that since central banks are deliberately causing recession by tightening policy to tame inflation, this points to recession.
Thus, there are implications for investment as investors remain underweight in German market equities. However, BlackRock expects to make more positive judgments regarding this in 2023.
Second, a rethinking of bonds. That is: considering higher yields as a gift to investors long starved for income in bonds. And investors don’t have to go up much in the fixed income risk spectrum to receive it.
So, short-term government bonds, investment grade credit and agency mortgage-backed securities for income. Investors continue to underweight long-term government bonds.
Finally, according to BlackRock, it is necessary to live with inflation. This is because an aging workforce and geopolitical fragmentation will keep inflation consistently above pre-pandemic levels.
New regime: economic volatility in contrast to the era of the Great Moderation
According to BlackRock, the Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. In fact, the new regime of greater economic and market volatility is winding down and will not disappear according to the firm.
Central banks are deliberately causing recessions by over-tightening policies to try to curb inflation. This foreshadows recession. The prediction is this: central banks will eventually pull back from rate increases when the economic damage becomes apparent.
Inflation will cool but will remain consistently above the central bank’s targets of 2%. Repeated inflationary surprises have sent bond yields soaring, crushing equities and fixed income. Such volatility is in stark contrast to the era of the Great Moderation.
In fact, a key feature of the new regime according to BlackRock is that we are in a world shaped by production constraints. This is for several reasons: point one, the shift in consumer spending from services to goods caused by the pandemic has caused shortages and bottlenecks.
Point two, the ageing population has led to a shortage of workers. This means that DMs cannot produce as much as before without creating inflationary pressure. That is why inflation is so high now, even though activity is below its pre-Covid trend.
Specifics on output constraints according to BlackRock
According to BlackRock, some output constraints may be loosening as spending normalizes. Specifically, there are three long-term trends that keep production capacity constrained and cement the new regime.
First, the aging population means a continuing shortage of workers in many major economies. Next, persistent geopolitical tensions are rewiring globalization and supply chains.
Finally, the transition to zero net carbon emissions is causing misalignments between energy supply and demand. So what is clear according to BlackRock is that what worked in the past will not work now.
So these production constraints are fueling inflation and economic volatility, and there is nothing central banks can do to fix them. This leaves them raising rates and engineering recessions to fight inflation.
Some graphs shared on BlackRock’s official website, first show the forecast of a 2% drop in GDP for central banks to reduce inflation to what the economy can comfortably produce now.
Instead, a second chart shows that home sales this year are already steeper than in previous Fed mega-rise cycles, such as in the 1970s and early 1980s, as well as the end of the US housing boom of the mid-2000s.
Thus, BlackRock does not believe that stocks are fully priced for recessions, but is prepared to become more positive about them.