2024 Outlook
Global outlook
Investor perspectives
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
BlackRock Investment Institute
Harnessing mega forcesMega forces are another way to steer portfolios – and think about portfolio building blocks that transcend traditional asset classes, in our view.
Steering portfolio outcomesWe think investors need to grab the investment wheel and take a more dynamic approach to their portfolios while staying selective with allocations.
Managing macro riskWhat matters in the new regime: Structurally higher interest rates and tougher financial conditions. Markets are still adjusting to this environment – and that’s why context is key in managing macro risk.
Key macro questions +
Building resilient portfolios +
Equities opportunities +
Navigating fixed income +
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What are the implications of an aging population?
What does history teach us about investing at the top of the rate cycle?
What are the key geopolitical risks in 2024?
What are the signs that may lead the U.S. Federal Reserve to cut rates?
Explore the latest themes from the BlackRock Investment Institute
Perspectives from our most senior investors on the pertinent questions our clients are asking
Views from BlackRock's experts
The fall in inflation in 2023 has eased pressure on the U.S. Federal Reserve (Fed) to hike rates further, but it is still too high to contemplate cuts soon, in our view. Even more important than the date of the first cut – we believe – is the broader outlook for monetary policy.
Jean Boivin Head of BlackRock Investment Institute
Deeper insight on this topic >
Grabbing the wheel:putting money to work
Explore the outlook >
2024 Global outlook
How do I capture income in a higher-rate environment?
How do I optimise my alternatives allocation?
How will portfolio construction be different in the future?
How do I maintain diversification in a more divergent macroeconomic environment?
What asset allocation trends will continue in 2024?
Do I only need cash?
What’s driving interest in Japan, and will it continue?
How do I get infrastructure exposure through equities?
Can earnings weather prolonged high interest rates?
Are investors expecting too much from Generative AI?
How do I find quality, resilience and opportunity in today’s equity markets?
How can alternative data be used to assess public and private equities?
Filling the void: private credit steps up as banks step back
What’s the outlook for long-term interest rates?
What does an optimal fixed income portfolio look like for 2024?
Where might I take/avoid risk within fixed income?
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What challenges are you facing...
Higher economic and inflation uncertainty creates larger dispersion in both country and company winners and losers, fueling increased alpha opportunities. Global quantitative tightening and ballooning fiscal deficits against the backdrop of high short-term yields and potential for Fed cuts makes where investors hold their duration a key portfolio consideration.
Jeffrey Rosenberg Senior Portfolio Manager, Systematic Fixed Income
Innovative uses of alternative data reshaped alpha opportunities in public markets. Investors are now applying the same approach to private markets.
How can alternative data be used to assess public and private equites?
Raffaele Savi Global Head of BlackRock Systematic
The geopolitical landscape in 2024 will be characterized by heightened competition between the major powers, a more volatile world order and a rewiring of globalization, in our view.
Catherine Kress Head of Geopolitical Research & Strategy
While conventional wisdom embraces a rate cut to boost market performance, historical data suggests the opposite: the top of a rate cycle is where investors could be rewarded most.
Gargi Pal Chaudhuri Head of iShares Investment Strategy, U.S.
Alex Shingler, Justin Christofel Co-Heads of Income Investing for BlackRock's Multi-Asset Strategies & Solutions group
We see stock selection becoming more important as individual companies adapt to a higher-rate world with varying degrees of success – and focus on three areas when looking for winners in the new era.
Helen Jewell Fundamental Equities EMEA CIO
‘Bonds are back’ has been the investment story of 2023, with a significant increase in allocations to government bonds. In equities, technology and other ‘quality’ companies have been in favor amid the AI euphoria and volatile market backdrop.
Karim Chedid Head of iShares Investment Strategy, EMEA
Generative artificial intelligence (AI) is arguably the most transformational technology seen in years. We see it creating disruption and dispersion across sectors and businesses and believe active selection is critical to capitalizing on the opportunities and avoiding risks.
Tony Kim Head of the Fundamental Equities Global Technology Team
Aging populations in developed market economies mean the labor force will grow more slowly over the next few decades. That presents challenges for both monetary and fiscal policy.
Alex Brazier Deputy Head of the Blackrock Investment Institute
We believe we are in an environment where the macro outlook will no longer consistently bolster stock and bond returns across multiple decades and so, when constructing portfolios, ‘coasting' could prove costly – investors should be more dynamic with their asset allocation.
Vivek Paul Head of Portfolio Research, BlackRock Investment Institute
In private markets, individual deals often take the spotlight. However, portfolio construction plays a critical role, especially during periods of economic stress. While we expect the macro backdrop to evolve, we see elevated volatility persisting. As such, we encourage investors to stay focused on risk management and portfolio construction.
How do I optimize my alternatives allocation?
Del Stafford Head of Alternative Portfolio Solutions Vidy Vairavamurthy Chief Investment Officer for the Alternative Portfolio Solutions
A stable, albeit slowing, growth backdrop and moderating inflation lay the groundwork for an exciting year ahead for income investors. Covered calls, dividend stocks and AAA Collateralized Loan Obligations (CLOs) are our top investment opportunities. We caution against over allocating to cash.
The new regime of higher rates and volatility has caught up with multi-asset portfolio builders as they've started to dynamically adjust allocations. However, their conviction around what long-term portfolio exposures should look like in 2024 and beyond might not be very high: putting cash to work selectively will be key.
Ursula Marchioni Head of Markets and Portfolio Solutions, EMEA
Listed Infrastructure equity markets provides daily liquidity by investing in the shares of companies that own, operate and develop physical infrastructure assets.
Alastair Gillespie Global CIO, Real Asset Securities
We believe 2024 can be another positive year for Japanese equities, led by those companies that can outsource their expertise – developed in response to domestic challenges – to the rest of the world.
Belinda Boa Head of Active Investments for Asia Pacific
Equities are a critical building block in a well-rounded portfolio, historically powering growth across time. In a late-cycle environment characterized by economic uncertainty, we believe a focus on quality can offer both a measure of resilience and potential for outperformance as central banks end rate hikes.
Tony DeSpirito Fundamental Equities Global CIO
Economic conditions, alongside evolving Fed policy, place fixed income assets in a position to perform after a challenging period for bonds. In that context, we like high-quality, front-end assets for portfolio ballast, but now seek to take more (belly) duration and spread risk to capture upside potential.
Rick Rieder Chief Investment Officer of Global Fixed Income
There remains significant and growing dispersion between sectors which means investors who get micro in their decision making can reap rewards, without relying on top-down beta bets to deliver alpha.
Michael Krautzberger Head of Fundamental Fixed Income, EMEA
Long-term interest rates are at attractive levels and, in most scenarios, we believe investors can earn good returns in government bonds in 2024. The key risks are related to government finances and inflation.
James Sweeney, Ronald van Loon Fundamental Fixed Income Portfolio Management Group
After the Global Financial Crisis (GFC), private debt managers claimed market share from banks predominantly in middle-market corporate lending. Ahead, we expect private lenders to further expand their share of asset-based lending and the real estate debt market and find more partnership opportunities with banks.
James Keenan Global Head of Private Debt
The geopolitical landscape in 2024 will be characterized by heightened competition between nations, a less predictable world and a rewiring of supply chains ramping due to national security concerns, in our view.
Gargi Pal Chaudhuri Head of iShares Investment Strategy
Del Stafford Head of Alternative Portfolio Solutions
Jeff Rosenberg Senior Portfolio Manager, Systematic Fixed Income
Disclaimer
Jean Boivin
Head of BlackRock Investment Institute
The fall in inflation in 2023 has eased pressure on the Fed to hike any further, but it is still too high to contemplate cuts soon, in our view. Even more important than the date of the first cut – we believe – is the broader outlook for monetary policy.
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We expect the Fed to keep rates on hold at least through the first half of 2024.
The easing of pandemic mismatches has driven core inflation lower, and that’s where we think the key risks lie for the next phase of Fed policy. Core inflation may remain sticky, with core services inflation in particular taking longer to come back to the 2% target. And the labor market may remain tight, with jobs creation outstripping labor force growth and wage inflation remaining elevated. In these circumstances, expectations of Fed rate cuts would likely be pushed back quite quickly, reflecting the heightened sensitivity of markets to data in this more volatile regime.
More important than the date of the first rate cut, we believe, is the broader outlook for monetary policy in a new regime of constraints on supply. We see mega forces such as geopolitical fragmentation and population aging amid demographic divergence raising inflationary pressures over the coming years. Monetary policy will need to hold tight to offset that. So, when the Fed does start to cut policy rates, we shouldn’t expect the speed and depth of cuts that we’ve seen before — even though economic activity will likely be well below trend over the next year.
The level of policy rates that keeps overall spending in line with potential (the ‘neutral rate’) has likely risen materially too — due to rising fiscal risks, higher investment needs stemming from the low-carbon transition and higher inflation.
Taking all this together, we expect the Fed funds rate to remain well above its pre-pandemic rate over the medium term, regardless of when the first cut comes in 2024.
Primary balance pre and post Covid
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U.S. average primary fiscal balance deficit
The fall in inflation in 2023 has eased pressure on the Fed to hike any further, but it is still too high to contemplate cuts soon, in our view.
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U.S. primary fiscal deficit, 1990-2053
Source: LSEG Datastream, IMF, BlackRock, as of November 2023
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CBO projection, 2023-2033
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Context is key. This is not about a hard or soft landing. The U.S. economy is not flying – it’s climbing out of a pandemic hole and adjusting to structural forces. That’s why macro uncertainty is high. Not even the Fed itself knows exactly how the next six months will play out and the signaling value of its communication is diminished.
The bigger issue is that rates will have to stay higher than before the pandemic, and for longer. We see rates at 4% in the future, compared to less than 3% over the past three decades. The level of policy rates that keeps overall spending in line with potential (the ‘neutral rate’) has likely risen materially — due to rising fiscal risks and higher investment needs stemming from the low-carbon transition. Monetary policy will need to hold tight to offset the higher inflationary pressures amid demographic divergence and geopolitical fragmentation in the new regime.
Inflation is cooling down, weakening the case for further hikes. CPI core inflation dropped to 4% in October 2023, down from 5.5% in April 2023, and the lowest reading in the past two years. We see this as mostly the result of pandemic-induced mismatches in goods and labor markets finally resolving.
expected, at 5.2%, this is not a typical expansion and gross domestic income (GDI) is much weaker. Consumer sentiment has been weakening, pandemic savings are close to being depleted, inventories are building up and credit conditions continue to tighten.
But we do not see cuts soon and expect the Fed to keep rates on hold through at least the first half of 2024. The fall in inflation this year has eased pressure on the Fed to hike any further, but the bar to cut is high, in our view.
If the Fed is to avoid a resurgence of inflation, growth has to be muted. Bringing inflation down will require (continued) weak growth amid a rundown of pandemic savings and looser fiscal policy that will keep rates persistently higher.
Growth is also expected to slow. While annualized, quarter-on-quarter growth in the third quarter of 2023 was stronger than
Catherine Kress
Head of Geopolitical Research & Strategy
Capital at risk
Meanwhile, we see the conflict between Ukraine and Russia extending into next year. A diplomatic solution remains far off. Western support has been critical to Ukraine's success, but the issue will become increasingly politicized in the U.S. and parts of Europe.
Geopolitics has become a persistent and structural market risk as a result. Market attention to geopolitics has hit its highest level this year, based on our BlackRock Geopolitical Risk Indicator. See the chart below. As of September, S&P 500 executives had used the word ‘geopolitics’ almost 12,000 times in 2023, nearly triple the amount from two years ago, according to Bloomberg1.
We see three themes characterizing the geopolitical landscape in 2024. First, we expect deeper fragmentation, heightened competition and less cooperation between the major powers. Second, next year will likely herald more volatility and a less predictable world. Third, we observe the rewiring of supply chains ramping up as national security and resilience concerns increasingly drive economic policy and business decision-making. How will current events contribute to these shifts?
Along with being a humanitarian crisis, we see war in the Middle East disrupting broader efforts to enhance cooperation between Israel and Arab States, including the U.S.-backed deal to normalize relations between Israel and Saudi Arabia. The war will also increase tensions with Iran and present a significant and ongoing risk of escalation in the region. A broader, regional conflict would have significant implications for individuals and markets.
We believe structural competition between the U.S. and China will persist. The meeting of Presidents Joe Biden and Xi Jinping in November and other talks between officials signal both nations are trying to stabilize relations. But the U.S. will continue seeking to preserve its lead in advanced technologies like artificial intelligence, semiconductors and quantum computing. And military tensions will mount.
2024 is set be the biggest election year in history, with more than half the world population voting. We see the U.S. and Taiwan elections as particularly significant.
Source: Bloomberg, as at 18 September 2023, The Global Economy Enters an Era of Upheaval
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U.S. announces withdrawal from Iran deal
U.S. presidential election
Russia invasion of Ukraine
U.S.-China Phase One trade agreement announced
WHO declares COVID-19 a global pandemic
U.S. announces steel tariffs
Major terror attack(s)
Emerging markets political crisis
Russia-NATO conflict
Gulf tensions
North Korea conflict
Climate policy gridlock
Market pricing
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U.S China strategic competition
Global Technology decoupling
Major cyberattack(s)
European fragmentation
Meanwhile, we see the stand-off between Ukraine and Russia extending into next year even as pressure mounts for a ceasefire or diplomatic solutions. Yet, as the stalemate goes on, Ukraine runs the risk of reduced support in the West.
Lastly, we see the 2024 U.S. presidential elections as a key test for U.S. democracy, with significant implications for the global economy and geopolitical landscape.
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BGRI Score
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signal both nations are trying to stabilize relations. But the U.S. will continue seeking to preserve its lead in advanced technologies like artificial intelligence, semiconductors and quantum computing. And military tensions will mount.
Source: BlackRock Investment Institute. November 2023. The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We assign a heavier weight to brokerage reports than other media sources since we want to measure the market's attention to any particular risk, not the public’s.
BlackRock Geopolitical Risk Dashboard, 2018-2023
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Gargi Pal Chaudhuri
Head of iShares Investment Strategy, U.S.
Opportunities under the hood
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Mind the valuation gap
U.S and Europe equity market valuations, 2013-2023
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Historic Asset Class returns
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2023 has been a year of resilient growth, falling inflation and rising term premiums.
We believe 2024 will continue to bring forth higher term premiums in the bond market and continued focus on ‘quality’ equities and intermediate duration fixed income as economic activity begins to cool. We think the Fed is likely done hiking, given the trajectory of cooler inflation prints; the focus will likely shift from ‘how high’ to ‘how long’ when it comes to the path of rates.
More notably, investors who opt to stay in cash during and after the pause period could significantly underperform both bond and equity markets during this period. During 2023, global investors have added a record US$1tn into money market funds. Assets in money market funds are now at 8% of total investible assets in U.S. equity and bond markets – the highest since the COVID pandemic .
Source: BlackRock, Bloomberg, as of 14 November 2023. Charts by iShares Investment Strategy. Calculations based on the 1995, 1997, 2000, 2006, and 2018 hiking cycles, market returns as represented by the S&P 100 index, Russell 2000 index, MSCI World Index, MSCI EM index, Bloomberg US Aggregate Index, Bloomberg US Treasury Bill 1-3M. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Source: 1 Bloomberg, as at 18 September 2023, The Global Economy Enters an Era of Upheaval
While conventional wisdom embraces a rate cut to boost market performance, historical data suggests the opposite: the top of a rate cycle is where investors could be rewarded the most. In the previous five hiking cycles since 1990, the Fed paused for an average of 10 months between its last hike and its first cut,
However, selectivity matters when it comes to putting cash to work. In fixed income we are most constructive on bonds maturing in 3-7 years or the ‘belly’ of the curve. We expect to see an upwardly sloping yield curve between the 2 and 10-year curve over the course of 2024 as investors poise for rate cuts in the second half of the year. In equities, slower growth, which investors widely anticipate during a pause period, calls for a quality tilt. On average, the higher quality S&P 100 companies have delivered almost twice as much return compared to the lower quality Russell 2000 companies during a pause period. Geographic selectivity matters, too – on average, developed markets consistently outperformed their emerging market counterparties over the past five pause periods by double digits.
holding rates in restrictive territory while monitoring the development of the economy and inflation . As seen in the chart below, investors on average saw the highest returns across fixed income and equities during the pause period, not in the months following the first rate cut.
Average Total Return (Annualized)
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Sources: Bloomberg, as of 8 November 2023. Calculation based on the 1995, 1997, 2000, 2006, and 2018 hiking cycles ICI Investment Company Institute, as of November 8, 2023
However, selectivity matters when it comes to putting cash to work. In fixed income we are most constructive on bonds maturing in 3-7 years or the ‘belly’ of the curve.
We expect to see an upwardly sloping yield curve between the 2 and 10-year curve over the course of 2024 as investors poise for rate cuts in the second half of the year. In equities, slower growth, which investors widely anticipate during a pause period, calls for a quality tilt. On average, the higher quality S&P 100 companies have delivered almost twice as much return compared to the lower quality Russell 2000 companies during a pause period. Geographic selectivity matters, too – on average, developed markets consistently outperformed their emerging market counterparties over the past five pause periods by double digits.
S&P 100
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While conventional wisdom embraces a rate cut to boost market performance, historical data suggests the opposite: the top of a rate cycle is where investors could be rewarded the most. In the previous five hiking cycles since 1990, the Fed paused for an average of 10 months between its last hike and its first cut, holding rates in restrictive territory while monitoring the development of the economy and inflation .
Alex Brazier
Deputy Head of the Blackrock Investment Institute
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Japan
Change in working age population over next 15 years
China
High-income nations
India
Low & middle income nations
Based on current projections, the working-age population across Developed Markets (DMs) is set to shrink in coming years, as people get older and a greater share hit retirement age.
We think central banks will keep policy rates high to avoid economies overheating and stoking inflation. They will face a trade-off between tackling higher inflation and protecting growth — exactly what they’ve had to grapple with following the pandemic. We expect them to keep growth muted with higher rates but to live with inflation above pre-pandemic averages.
Population aging will also raise pressure on fiscal policy. Governments will spend more on healthcare, social security and other demographic-related needs, adding to already widening deficits and further challenging fiscal sustainability. Markets will likely demand more compensation for holding the
Countries and companies might choose to adapt to population aging in different ways, such as by trying to raise the participation of women in the workforce, or by raising employment rates for older workers. That dispersion creates investment opportunities as there are different choices policy makers and corporate leaders can make which lead to successful and less successful adaptations.
Slower labor force growth likely means weaker GDP growth, in our view because economies won’t be able to produce as much. But because older populations continue to consume and spend after they stop working, total demand is unlikely to fall in line with what’s being produced. The result: higher inflation, unless central banks keep rates high to squeeze spending and investment.
Cascading crises have accelerated global fragmentation and the emergence of competing defence and economic blocs, in our view. There are an unusually large number of volatile situations in the world today.
Geopolitics has become a persistent and structural market risk as a result. Market attention to geopolitics has hit its highest level this year, based on our BlackRock Geopolitical Risk Indicator. See the chart below. As of September, S&P 500 executives had used the word ‘geopolitics’ almost 12,000 times in 2023, nearly triple the amount from two years ago, according to Bloomberg.1
This won’t affect all countries equally – as the chart below shows. But all else equal it means the labor force — the pool of people able and willing to work — will be smaller in many DM economies especially, compared to past growth rates.
We think central banks will need to keep policy rates high to avoid economies overheating and stoking inflation. They will face a trade-off between tackling higher inflation and protecting growth — exactly what they’ve had to grapple with following the pandemic. Even if that brings inflation back to 2% targets, on average it will linger above that – and above the pre-pandemic average.
Population aging will also raise pressure on fiscal policy. Governments will spend more on healthcare, social security and other demographic-related needs, adding to already widening deficits and further challenging fiscal sustainability. Markets will likely demand more compensation for holding the debt of affected countries, reflecting greater risks around inflation and rates.
Based on current projections, workforces across major economies are set to grow more slowly – or even shrink – as a greater share of populations hits retirement age. This won’t affect all countries equally - see the chart.
Projected change in working-age population, 2020-2035
Source: BlackRock, US, with data from Haver Analytics, as of November 2023
debt of affected countries, reflecting greater risks around inflation and rates.
Jeffrey Rosenberg
Senior Portfolio Manager, Systematic Fixed Income
Adding uncorrelated and defensive alpha strategies can reduce the reliance on beta for fueling portfolio returns.
For more than a decade following the Great Financial Crisis (“GFC”), below-target inflation and interest rate suppression both compressed dispersion of returns dampening alpha return opportunities while supporting a consistently negative stock-bond correlation. This made bonds a reliable source of equity diversification in portfolios and favored beta sources of returns over alpha. Post-COVID, higher inflation uncertainty undermined bonds efficacy as stock hedges as stock and bonds both moved in tandem. During the March 2023 banking crisis, bonds rallied as stocks sold off, restoring some of that diversification property. But a closer look reveals that shorter term bonds behaved as a better diversifier than long term bonds (see the chart below). This may be an important implication of today’s higher short term interest rates and the potential for future Fed
As investors look to maintain effective portfolio balance, the higher diversification and risk-adjusted return potential found in shorter maturities makes where you hold your duration a key portfolio consideration. At the same time, continued divergent macroeconomic uncertainty raises the ability of uncorrelated and defensive alpha strategies to complement bond allocations in providing equity diversification.
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Correlation to S&P 500 Index
30y US Treasury
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Shorter maturity bonds have exhibited the most diversification to stocks
Source: BlackRock, Aladdin, as of September 2023.
For more than a decade following the Global Financial Crisis (GFC), below-target inflation and interest rate suppression supported a consistently negative stock-bond correlation. We expect the Fed to keep rates on hold at least through the first half of 2024.
This made bonds a reliable source of equity diversification in portfolios, with the highest degree of hedging efficacy found in longer maturity bonds.Stock-bond correlation moved significantly more positive as post-COVID inflation emerged, undermining the role of bonds as a portfolio diversifier. The chart below shows that the diversification properties of bonds were somewhat restored during the March 2023 banking crisis as bonds rallied when stocks sold off. But a closer look reveals an important implication of today’s inverted yield curve: long-term bonds are not rallying nearly as much when stocks sell off. Rather, its shorter-maturity bonds that exhibit the most hedging efficacy versus stocks.
So why is this? Throughout the post-GFC period, the potential for short-term yields to decline (rally) and offset equity losses was limited with the front end of the curve anchored by zero interest rate policy (ZIRP). Now, the improved ballast in shorter maturities marks a return to pre-ZIRP bond market dynamics where ‘flight-to-quality’ is a yield curve steepener, sending short-term yields lower.
In addition to longer maturities providing less diversification, the effects of global quantitative tightening at a time of ballooning fiscal deficits could put pressure on long-term bond returns as yields are pushed higher.
Stock-bond correlation by bond maturity
So why is this? Throughout the post-GFC period, the potential for short-term yields to decline (rally) and offset equity losses was limited with the front end of the curve anchored by zero interest rate policy (ZIRP). With the higher rates in the front end and potential tailwinds from future Fed normalization, the improved ballast in shorter maturities marks a return to pre-ZIRP bond market dynamics. Then, “flight-to-quality” sent short-term yields lower more than longer dated yields and the yield curve steepened. In addition, the effects of global quantitative tightening at a time of ballooning fiscal deficits could further pressure relative long-term bond returns.
Date
policy normalization benefiting shorter dated bond yield declines over long dated ones.
Vivek Paul
Head of Portfolio Research, BlackRock Investment Institute
We believe this new regime has direct implications for investors over all horizons. For strategic investors, we believe simple and static approaches to asset allocation, such as a traditional 60-40 portfolio, will not serve investors as well as they have in the past. This is because we are in an environment where the macro outlook will no longer consistently bolster stock and bond returns across multiple decades. We see the new regime presenting tougher trade-offs between risk and return and an environment where central banks will not be able to stabilize macroeconomic volatility in the same way as before. A new approach is needed, in our view.
We are seeing the new regime of higher macro and market volatility unfold.
A core tenant of this new approach to portfolio construction is that coasting could prove costly as what worked well in the past won’t necessarily work in the future. As such, we believe investors should be more granular and dynamic with their
In the chart below, we build portfolios under the simplifying assumption that we have perfect foresight. We then test the impact of more frequent decision-making. We find that in the new regime, the buy-and-hold approach results in lower overall portfolio returns when compared to the old. However, the good news is there is something investors can do to offset this. We find reallocating your portfolio more frequently adds value – assuming you are able to skilfully forecast markets. Markets are trickier to navigate, but good insights, acted on in a timely manner, are likely to be better rewarded than before – while the old approach of set and forget is not.
asset allocation. Below we illustrate the merits of dynamism using a hypothetical asset allocation focusing entirely on the different sectors of the MSCI U.S. Equity Index.
The logical extension of portfolio dynamism is active management. As before, an ability to find skilled managers remains critical to the outcome. But we believe this new regime will on average be a more fruitful environment for skilled managers adopting strategies seeking to outperform through idiosyncratic risk-taking. In 2018 we established a framework by which investors could blend alpha-seeking, factor and indexed exposure when building portfolios – to help investors use their risk budget more efficiently and objectively. In an environment that is much harder to navigate, this is another example of how investment expertise could be more useful than ever.
We believe this new regime has direct implications for investors over all horizons. For strategic investors, we believe simple and static approaches to asset allocation, such as a the traditional 60-40 portfolio, will not serve investors as well as they have in the past. This is because we are in an environment where the macro outlook will no longer consistently bolster stock and bond returns across multiple decades. We see the new regime presenting tougher trade-offs between risk and return and an environment where central banks will not be able to stabilize macroeconomic volatility in the same way as before. A new approach is needed, in our view.
A core tenant of this new approach to portfolio construction is that coasting could prove costly as what worked well in the past won’t necessarily work in the future. As such, we believe investors should be more granular and dynamic with their asset allocation.
Below we illustrate the merits of dynamism using a hypothetical asset allocation focusing entirely on the different sectors of the MSCI U.S. Equity Index.
Hypothetical performance is not a reliable indicator of future performance. You cannot invest directly in an index. Indexes are unmanaged and performance does not account for fees.
buy and hold
rebalance semi-annually
rebalance every year
old regime (2017-2019)
new regime (2020-2023)
0 %
1.0%
1.5%
2.0%
2.5%
3.0%
4.0%
Estimated portfolio return of a buy-and-hold versus a dynamic asset allocation strategy
Portfolio Return (%)
The hypothetical performance returns are provided for illustrative purposes only and are not meant to be representative of actual performance returns of, or to project or predict returns for, any account, portfolio, strategy or asset allocation. The displayed hypothetical returns are subject to a number of significant limitations. They are illustrative of a product or strategy that does not exist, and therefore do not reflect the deduction of any fees or expenses, including advisory, management and performance fees, as well as brokerage fees, commissions and other expenses that might normally apply. In addition, the allocation decisions reflected in the hypothetical returns were not made under actual market conditions and cannot completely account for the impact of financial risk in actual portfolio management.
Source: BlackRock Investment Institute, MSCI with data from Bloomberg, November 2023. Notes: The chart shows hypothetical returns for portfolios invested in U.S. equities. It shows how portfolio returns for a strategy where the portfolio stayed the same throughout the entire period (Buy-and-hold) vs. if the portfolio rebalanced more frequently (every year of semi-annually) by allocating to the best-performing equity sectors. We assume full knowledge of what future returns would be at each rebalance. The index proxy used is MSCI US Equity Index.
Vidy Vairavamurthy
Chief Investment Officer for the Alternative Portfolio Solutions
Head of Alternative Portfolio Solutions
Del Stafford
Recent developments in capital markets have defied investor expectations.
The volatility in public markets in 2023, and the more dramatic downturn in 2022, has highlighted the importance of diversification through, and within, private market portfolios. Diversification properties have been exhibited in the outperformance of inflation-mitigating real asset investments, like infrastructure, as well as private credit, which has benefitted from the passthrough of higher rates. We continue to emphasize the need for diversification and dynamism, as we look out at a new market regime characterized by stubbornly high inflation, elevated interest rates and increased economic uncertainty.
Making the most of a private markets allocation in this environment requires an unwavering commitment to risk management. Given the siloed investment lens investors typically apply to private market asset classes, many end up with a collection of high conviction exposures that were assembled in portfolios without deliberate consideration of the optimal sizing, pacing and interplay of the underlying investments. This challenge highlights the importance of a flexible and holistic approach to private markets, where portfolios can be opportunistic and capitalize on investments in areas less affected by macro headwinds and where deal flow is readily available. In our view, risk should be considered at the total portfolio level, which includes projecting portfolio implications for potential allocations and scenario-based stress-testing the whole portfolio.
For investors who are under allocated to private markets and are taking a ‘wait-and-see’ approach to building up exposure, heightened market volatility can create investment opportunities through valuation dislocations. We illustrate this concept of relative attractiveness in the historical valuation chart below, which currently reflects favorable valuation dynamics for many private market segments. This relative view is one lens we consider when building and managing client portfolios and can also be a consideration for those on the sidelines.
1.3
Private Equity
Real Estate
Infrastructure
Private Debt
Debt
Equity
0.9
0.7
0.3
0.0
-0.3
-1.2
-1.8
-0.9
-1.0
-0.7
-0.4
-0.1
0.1
-1.1
1.8
2.3
1.4
1.6
-1.3
-1.5
3.0
2.6
'14
'15
'16
'17
'18
'19
'20
'21
'22
Q3 '23
For illustrative purposes only. Not meant to be a recommendation of any asset class or to buy or sell any security. Shading indicates relative attractiveness of valuations, with darker green meaning more attractive and darker red meaning less attractive.
Private Market Entry Valuations (10yr z-scores)
Higher z-scores indicate more attractive valuations
Chart Source: Equity Sources: Private Equity - US EV to EBITDA Multiples (LCD Comps); Real Estate Equity - US Commercial Cap Rates (RCA); Infrastructure Equity - Americas Infrastructure Expected IRR (EDHEC).
Debt Sources: Private Debt - US Middle Market Yields (LCD Comps); Real Estate Debt - US Commercial Mortgage Rates (RCA); Infrastructure Debt - Americas Infrastructure Cost of Debt (EDHEC).
Valuations across most private market asset classes are at or near decade lows
Jessica Tan
Lorem Ipsum
Co-Heads of Income Investing for BlackRock's Multi-Asset Strategies & Solutions group
Alex Shingler, Justin Christofel
-2%
1%
3%
7%
Multi-Asset income index starting yield
Today's yield 6.04%
Next 3Y Return Ann (%)
Starting yields have been a useful predictor of returns for multi-asset income portfolios
Initial yield vs subsequent 3Y return since 2010
Chart Source: Index performance is for illustrative purpose only. Investors cannot directly invest into an index. Source: BlackRock, Bloomberg as of 9/30/2023. Multi-Asset Income Index Blend is comprised of 33.34% MSCI World High Dividend Index, 33.33% Bloomberg US Corporate Bond Index, and 33.33% Bloomberg US High Yield Bond Index. Yield reflects yield-to-worst (%) for fixed income and dividend yield (%) for equity.
However, selectivity will be key as certain pockets of the market are rich while others carry underappreciated risks. Monetizing uncertainty via covered calls. While we see potential for gains across equities in 2024, tight monetary policy, reasonably low economic slack and continued macro uncertainty make widespread upside moves in stocks less likely, in our view. Combined with an elevated volatility regime, this is precisely the environment where covered calls canbe most valuable.Don’t miss the boat on dividend stocks. Last year’s equity rally was concentrated in mega-cap tech stocks while dividend stocks lagged, leading to far more reasonable valuations. Looking ahead, we believe there is a lower bar for higher dividend-yielders to beat expectations and they should benefit in a soft-landing scenario.Balancing equity risk with low duration, high quality fixed income. While government bonds have historically provided ballast in portfolios, the past two years have exposed the pitfalls of owning too much duration in a rising rate regime. Conversely, AAA-rated CLOs have no duration and have exhibited the highest risk-adjusted returns over the past decade versus a wide swath of fixed income markets.1Avoiding the cash trap. Today’s higher yields have tempted many investors to pile into cash investments. Should market expectations for rate cuts later this year prove true, cash returns could quickly erode as investors are forced to reinvest at lower yields. Conversely, a multi-asset blend of fixed-rate investment grade and high yield bonds allows investors to ‘lock-in’ higher starting yields for a longer period and befar less sensitive to short-term rate policy.This, when combined with greater upside potential of dividend equities and covered calls, can be a powerful return driver.
However, selectivity will be key as certain pockets of the market are rich while others carry underappreciated risks.
Monetizing uncertainty via covered calls. While we see potential for gains across equities in 2024, tight monetary policy, reasonably low economic slack and continued macro uncertainty make widespread upside moves in stocks less likely, in our view. Combined with an elevated volatility regime, this is precisely the environment where covered calls canbe most valuable.
Don’t miss the boat on dividend stocks. Last year’s equity rally was concentrated in mega-cap tech stocks while dividend stocks lagged, leading to far more reasonable valuations. Looking ahead, we believe there is a lower bar for higher dividend-yielders to beat expectations and they should benefit in a soft-landing scenario.
For income investors, the outlook for 2024 is bright.
A stable, albeit slowing, growth backdrop and moderating inflation lay the groundwork for positive risk asset performance driven by a combination of elevated yields and potential price appreciation. However, selectivity will be key as certain pockets of the market are rich while others carry underappreciated risks.
Don’t miss the boat on dividend stocks. 2023's equity rally was concentrated in mega-cap tech stocks while dividend stocks lagged, leading to far more reasonable valuations. Looking ahead, we believe there is a lower bar for higher dividend-yielders to beat expectations and they should benefit in a soft-landing scenario.
Monetizing uncertainty via covered calls. While we see potential for gains across equities in 2024, tight monetary policy, reasonably low economic slack and continued macro uncertainty make widespread upside moves in stocks less likely, in our view. Combined with an elevated volatility regime, this is precisely the environment where covered calls can be most valuable.
Balancing equity risk with low duration, high quality fixed income. While government bonds have historically provided ballast in portfolios, the past two years have exposed the pitfalls of owning too much duration in a rising rate regime. Conversely, AAA-rated CLOs have no duration and have exhibited the highest risk-adjusted returns over the past decade versus a wide swath of fixed income markets1.
Avoiding the cash trap. Today’s higher yields have tempted many investors to pile into cash investments. Should market expectations for rate cuts in 2024 prove true, cash returns could quickly erode as investors are forced to reinvest at lower yields. Conversely, a multi-asset blend of fixed-rate investment grade and high yield bonds allows investors to ‘lock-in’ higher starting yields for a longer period and be far less sensitive to short-term rate policy. This, when combined with greater upside potential of dividend equities and covered calls, can be a powerful return driver.
Bloomberg. January 31, 2012-October 31, 2023. Fixed income markets include Bloomberg US Aggregate Bond Index, Bloomberg US Corporate Bond Index, Bloomberg US High Yield Index, Morningstar LSTA US Leveraged Loan Index, J.P. Morgan CLO Post-Crisis Index
Source: 1.
Karim Chedid
Head of iShares Investment Strategy, EMEA
With developed market central banks embarking on their fastest rate hiking cycles since the 1980s to tackle high inflation, bond yields have risen to decade highs.
Despite the drawdown in bond prices, the ‘bonds are back’ message has played out loud and clear in 2023, with income-seeking investors adding US$174.6bn to rates exchange-traded products (ETPs) globally this year. Under the surface, with investors hanging on every key data release and central bank meeting, expectations for policy paths have flip-flopped between pricing imminent rate cuts and pricing further hikes, impacting preferences for short- versus long-term exposures. While we acknowledge the volatility in macro data that has played out this year, spurring volatility in yields and rate path expectations, we believe developed market
central banks are at or near peak rates –creating opportunities to step into duration in 2024, in our view, particularly in European government bonds.
In equities, the story of the year has been the euphoria around generative AI and strong sentiment towards tech stocks: US$44bn has been added to tech sector ETPs globally – far ahead of the next most popular sector, industrials (US$1.6bn). We continue to see tailwinds, given AI’s potential to improve productivity and efficiency across a range of industries.
We see the strongest opportunities today at the foundational level of the AI tech stack, particularly semiconductors. It’s not all about AI, though: investors have also been looking to tech and other quality-tilted sectors – where firms are able to demonstrate strength in earnings and other fundamental measures – for their perceived resilience amid challenging economic conditions. Quality factor ETPs have gained US$32.6bn of inflows globally this year – more than double the previous record set in 2022. We expect this environment will continue to support selectivity in equities in 2024, through sectors such as tech and factors such as quality.
Tech flows trump all sector buying
Net flows (USD billions)
Cumulative flows into select sector ETPs, 2023 YTD
$ 30B
$ 0B
$ 40B
$ -20B
$ 10B
$50B
$ 20B
$ -10B
Jan-23
Source: Bloomberg, BlackRock and Markit, as of 15 September 2023. Past flows into global ETPs are not a guide to current or future flows and should not be the sole factor of consideration when selecting a product.
Mar-23
Apr-23
May-23
Jun-23
Jul-23
Aug-23
Feb-23
Technology
Financials
Healthcare
Energy
For income investors, the outlook for 2024 is bright. A stable, albeit slowing, growth backdrop and moderating inflation lay the groundwork for positive risk asset performance driven by a combination of elevated yields and potential price appreciation.
Despite the drawdown in bond prices, the ‘bonds are back’ message has played out loud and clear in 2023, with income-seeking investors adding US$XXbn to rates exchange-traded products (ETPs) globally this year. Under the surface, with investors hanging on every key data release and central bank meeting, expectations for policy paths have flip-flopped between pricing imminent rate cuts and pricing further hikes, impacting preferences for short- versus long-term exposures. While we acknowledge the volatility in macro data that has played out this year, spurring volatility in yields and rate path expectations, we believe developed market central banks are at or near peak rates – creating opportunities to step into duration in 2024, in our view, particularly in European government bonds.
In equities, the story of the year has been the euphoria around generative AI and strong sentiment towards tech stocks: US$XXbn has been added to tech sector ETPs globally – far ahead of the next most popular sector, industrials (US$XXbn). We continue to see tailwinds, given AI’s potential to improve productivity and efficiency across a range of industries. We see the strongest opportunities today at the foundational level of the AI tech stack, particularly semiconductors.
Sep-23
Oct-23
Nov-23
Industrials
Ursula Marchioni
Head of Markets and Portfolio Solutions, EMEA
Greater volatility, higher inflation, higher rates and the regular flip in the sign of correlations between stocks and bonds have finally caught up with the average multi-asset portfolio we saw in 2023.
In contrast to previous years, we've seen investors becoming much more dynamic in their asset allocation in 2023 (see chart).
In fixed income particularly, average allocations dropped, hinting at the challenge of traditional portfolio diversification usually found in the asset class. We saw a general risk-off approach. Riskier allocations in high yield and emerging market debt gave way to euro and U.S. rates and developed market investment grade credit, in an attempt to limit portfolio downside, we believe.
Additionally, one fixture of the traditional approach to portfolio construction - using aggregate or broad allocations to listed equities and bonds - seemed to give way to a selective approach through more granular regional and sector building blocks. We believe this was reflective of investors’ attempts to actively tweak strategic views and consider a wider set of exposures as tools to build resilient portfolios in the new regime.
allocation has been cash. We've seen average money market allocations in EMEA portfolios at 8% this year, surging as high as 10% in Q4 20231. We believe this is a hurdle investors should consider going forward. While risk and income levels might seem attractive in short-term debt and money markets now, we believe investors can’t afford to coast in cash for too long without sacrificing on portfolio returns. There is no one-size-fits-all approach to portfolio construction, but properly sizing cash allocations, while remaining selective and dynamic, can make up for the harsher trade-off between risk and return going forward.
Overall, despite the dynamism in equities and fixed income, the apparent leader in asset
Fixed income
Multi-asset
Hedge Funds and Commodities
2023 Asset Allocation Evolution in EMEA Multi-Asset Portfolios
Longer maturity bonds have exhibited the most diversification to stocks. Stock-bond correlation by bond maturity
Source: BlackRock Portfolio Consulting EMEA, BlackRock Aladdin®. Based on estimated on 3362 portfolios collected in the period 31/12/2019 to 31/10/2023. Currency: EUR. For Illustrative purposes only.
30%
40%
50%
60%
70%
80%
90%
100%
19
21
2022 H1
2022 H2
2023 Q1
2023 Q2
2023 Q3
2023 Q4
Asset Allocation (%)
Source: 1 Bloomberg. January 31, 2012-October 31, 2023. Fixed income markets include Bloomberg US Aggregate Bond Index, Bloomberg US Corporate Bond Index, Bloomberg US High Yield Index, Morningstar LSTA US Leveraged Loan Index, J.P. Morgan CLO Post-Crisis Index.
Raffaele Savi
Global Head of BlackRock Systematic
For decades, investment managers have sought non-traditional sources of data to gain an investment edge in markets.
Investors have gone to great lengths, such as manually measuring foot traffic outside retail stores or counting cars in parking lots, to get an indication of corporate health. Today, investors are relying on alternative data, such as satellite imagery, credit-card transactions or geolocation data, to achieve even greater levels of precision around the growth prospects of companies, sectors or themes across markets.
The data exhaust generated by everyday activities, such as internet searches, GPS networks, and online and in-person transactions has become immense; and similar information can be found for both private and public
companies. Consider for example Nike, the world’s largest publicly traded athletic apparel manufacturer, relative to a smaller private competitor, Vuori, a Southern California-based athletic and performance apparel company. Despite their differences, similar data exists on both companies. Ownership (public versus private) doesn’t influence buyer interest – consumers interested in buying apparel from either company are likely to do a quick internet search before purchase. Google records that search history in the same way for both firms, providing a powerful measure of consumer intent and purchase activity at both the product and company level (see chart below).
We believe alternative data represents the next evolution in investing – and can be applied equally to public or private investments. As the investment landscape has evolved to recognize the increased role private companies play in innovation, value creation, and growth across industries, private equity allocations in modern portfolios have shifted to follow suit. As systematic investors, we have applied a data-driven investment approach to uncover alpha opportunities in public markets for decades. We believe that ability, to refine alternative data and continuously innovate, will be a baseline necessity for a successful approach to equity investing (both public and private) in this new era.
40
60
80
100
120
Nike (United States)
Vuori (United States)
Vuori vs. Nike (Google weekly search interest)
The data exhaust generated by everyday activities, such as internet searches, GPS networks, and online and in-person transactions has become immense; and similar information can be found for both private and public companies. Consider for example Nike, the world’s largest publicly traded athletic apparel manufacturer, relative to a smaller private competitor, Vuori, a Southern California-based athletic and performance apparel company. Despite their differences, similar data exists on both companies. Ownership (public versus private) doesn’t influence buyer interest – consumers interested in buying apparel from either company are likely to do a quick internet search before purchase. Google records that search history in the same way for both firms, providing a powerful measure of consumer intent and purchase activity at both the product and company level (see chart below).
Chart Source: BlackRock. Google US Trends as of September 2023. Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.
The company names and data strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
Search Interest
Tony DeSpirito
Fundamental Equities Global CIO
The environment for stocks is likely to start 2024 much like it ended 2023 — with economic uncertainty and central banks intent on inflation control.
Strong 2023 performance, particularly in the U.S., was led by a handful of mega-cap stocks ― many with quality characteristics such as solid balance sheets, ample free cash flow, high profitability and low leverage. We expect these attributes will continue to be valued by investors and retain our focus on quality as the economic cycle evolves.
Three reasons to like quality
Fundamentals: Company fundamentals are always important, but even more so when times are
stocks are still priced at a discount to the market and to their own history since 1978. Our analysis finds the first quartile of quality in the Russell 1000 Index was priced at a 4% discount to the full index as of November 9th 2023.
equities in the one to three years after the Fed stops hiking rates, as shown in the chart. All indications are that developed market central banks are nearing the end of their tightening cycles, a typically positive time for quality equities.
26%
17%
1 year
49%
24%
33%
2 years
83%
32%
57%
3 years
Quality stocks
All equities
Source: BlackRock Fundamental Equities, with data from the Board of Governors of the Federal Reserve System and Bloomberg, calculated from Aug. 31, 1984-Dec. 31, 2021. Returns are calculated from the month when the Fed stops raising rates for peak rates periods in 1984, 1989, 1995, 2000, 2006 and 2018. All equities represented by the Russell 1000 Index and bonds by the Bloomberg U.S. Aggregate Index. “Quality” is defined as the top quintile of stocks ranked in the Russell 1000 Index using a proprietary research screen that assesses companies on 13 “quality” metrics. Past performance is not indicative of current or future results. Indexes are unmanaged. It is not possible to invest directly in an index.
Prime time for quality in equities?
Fundamentals: Company fundamentals are always important, but even more so when times are uncertain ― as fundamental strength can offer relative resilience in the context of what might be a more volatile market. Quality traits such as profitability, earnings stability, free cash flow generation and judicious capital allocation suggest strong corporate underpinnings, in our view. We expect market breadth to broaden as investors place greater emphasis on fundamentals and look beyond the high-flying mega-caps for attractively priced quality.
Valuations: Investors might expect to pay up for quality. But despite having outperformed in 2023, we find quality stocks are still priced at a discount to the market and to their own history since 1978.
Average returns (%)
Average returns after Fed hiking cycle ends, 1984-2021
uncertain ― as fundamental strength can offer relative resilience in the context of what might be a more volatile market. Quality traits such as profitability, earnings stability, free cash flow generation and judicious capital allocation suggest strong corporate underpinnings, in our view. We expect market breadth to broaden as investors place greater emphasis on fundamentals and look beyond the high-flying mega-caps for attractively priced quality.
Valuations: Investors might expect to pay up for quality. But despite having outperformed in 2023, we find quality
Outperformance after peak rates: Historically, quality stocks have outperformed both bonds and broader
Valuations: Investors might expect to pay up for quality. But despite having outperformed in 2023, we find quality stocks are still priced at a discount to the market and to their own history since 1978. Our analysis finds the first quartile of quality in the Russell 1000 Index was priced at a 4% discount to the full index as of November 9th 20231.
Outperformance after peak rates: Historically, quality stocks have outperformed both bonds and broader equities in the one to three years after the Fed stops hiking rates, as shown in the chart. All indications are that developed market central banks are nearing the end of their tightening cycles, a typically positive time for quality equities.
Tony Kim
Head of the Fundamental Equities Global Technology Team
The new AI-led technology stack
Source: BlackRock Fundamental Equities, November 2023. For illustrative purposes and subject to change.
Apps
App software
Data infrastructure
Data
Foundation models
Computer infrastructure
Cloud infrastructure
Semis & hardware
Generative AI could be the most transformational technology in decades, with the potential to unlock substantial value across the global economy.
A defining moment While AI is not new, the landscape took a decisive turn in 2017 with the introduction of the ‘transformer’ model that paved the way for accelerated learning and advanced functionality in AI systems. The development of transformer-based large language models (LLMs) amplified the ability for machines to comprehend and generate human-like text. In the past year, the release of LLMs such as ChatGPT, Bard and LLaMa has drawn worldwide attention.
Its emergence marks the dawn of a new era in technology, similar to that seen with personal computers, the internet, smartphones and cloud computing.
A new technology framework An AI-driven future calls for an overhaul of current computing infrastructure and data handling methods. We envision a new technology framework to serve future demand for generative AI capabilities ― one with greater emphasis on specific types of semiconductors, super computers, increasingly advanced models, novel approaches for managing data and new applications for humans to leverage AI systems.
Investing in this AI landscape presents new opportunities and risks. We focus on companies poised to benefit from the AI evolution while identifying those at risk of disruption. The growing demand for AI development resources indicates a ripple effect across the industry, from hardware to software services and solutions. Understanding and adaptability are key as AI advances.
Overall, we see the tech sector continuing to drive the economy in the AI era, much like it did during previous technological breakthroughs.
Despite its advancements, generative AI remains an emerging theme with vast growth potential. As AI becomes more integrated into daily life, we see it poised to create significant value beyond just the tech giants providing the AI infrastructure.
Model infrastructure
Helen Jewell
Fundamental Equities EMEA CIO
Rock-bottom interest rates in the years that followed the Global Financial Crisis saw capital rush into stocks, along with attractive market returns.
with low leverage and stable cash flow. These kinds of companies may also return cash to shareholders via dividends and buybacks, which is attractive in a world of slower growth. Some of the European banks – which benefit from higher rates – say they may plan to buy back billions of euros worth of shares over the next few years.
as the U.S. is home to many quality companies. We favor certain European energy and healthcare companies that are cheaper than U.S. peers with similar fundamentals. And recession fears mean certain European cyclicals – within renewables or semiconductors, for example – may be underpriced for their relatively bright long-term prospects.
intelligence (AI) may be better positioned to ride out economic uncertainty. Governments are pouring money into the energy transition, aiding companies both at the top of supply chains, such as electric vehicle makers, and those at the bottom, such as providers of critical metals. Within AI, we seek to identify the next round of winners, such as companies with large stores of proprietary data.
Here are three areas of focus as we seek to identify potential winners in the new regime:
Source: LSEF Datastream, MSCI and BlackRock Investment Institute, as of Nov. 16, 2023. The chart shows each market’s current 12-month forward price-to-earnings (PE) ratio. The PE ratios are calculated using I/B/E/S earnings estimates for the next 12 months. MSCI indices are used for each region.
In this new era of higher rates, we expect more muted overall returns and a renewed focus on company fundamentals and earnings delivery. We expect to see greater dispersion in company performance, opening opportunities for active managers to target above-market returns.
Quality and capital return: Higher rates increase companies’ borrowing costs, so we favor quality businesses
Follow the money: Companies benefitting from long-term themes such as decarbonization and artificial
Starting points matter: Valuations overall are more compelling in Europe than the U.S., as the chart shows, even
P/E Ratio
Alastair Gillespie
Global CIO, Real Asset Securities
“Infrastructure” has increasingly become part of investor and political vocabulary over past 10-years.
However, gaining access to a liquid and diversified portfolio of critical infrastructure assets has been a challenge for investors. Listed infrastructure bridges that gap by giving investors access to companies that own, operate and develop these assets at cheaper valuations, lower leverage levels and with more liquidity than in the private markets. Listed infrastructure returns have historically correlated with illiquid infrastructure, at 0.7 over a two-year hold period , and we believe the listed sector will benefit from lower leverage in a higher interest rate environment.
Second, regardless of the interest rate trajectory from here, listed infrastructure returns are set to benefit from various secular tailwinds for decades come to by structural mega forces, in particular the low carbon transition, digital disruption, demographics and geopolitical dynamics. Furthermore, a significant amount of infrastructure spending has been pledged by governments around the world, including US$400bn for clean energy through the U.S. Inflation Reduction Act (IRA) alone. This funding will support sector growth and reduce funding costs. Nuance in local regulation, politics and asset-level factors will result in divergent outcomes for companies across the space, so active management will be key to generating outsized returns for investors.
a wide range of sub-sectors, including utilities, renewable energy, airports, toll roads, telecommunication towers, data centers and midstream pipelines. Many of these assets benefit from direct or indirect inflation linkage in their cash flows. As we navigate a potentially “higher for longer” inflationary environment, maintaining exposure to assets with inflation protection will be crucial for portfolio success. Given the sector’s low risk and long duration cash flow profile, the recent rise in interest rates has disproportionately impacted valuation. This de-rating has created a significant relative value opportunity for listed infrastructure assets versus broad equity markets, as shown in the chart below.
In our view, infrastructure looks to be an interesting opportunity in 2024, supported by two factors. First, infrastructure encompasses
Infrastructure is priced at historically low relative multiples versus equities
Bloomberg, FactSet as of October 31st, 2023. Infrastructure = FTSE Developed Core Infrastructure 50/50 Index - Equities = MSCI ACWI Index. 1yr forward EV/EBITDA. Expensive/Cheap = +/- 1 standard deviation from mean spread. For illustrative purposes only.
Listed infrastructure bridges that gap by giving investors access to companies that own, operate and develop these assets at cheaper valuations, lower leverage levels and with more liquidity than in the private markets. Listed infrastructure returns have historically correlated with illiquid infrastructure, at 0.7 over a two-year hold period, and we believe the listed sector will benefit from lower leverage in a higher interest rate environment.
In our view, infrastructure looks to be an interesting opportunity in 2024, supported by two factors. First, infrastructure encompasses a wide range of sub-sectors, including utilities, renewable energy, airports, toll roads, telecommunication towers, data centers and midstream pipelines. Many of these assets benefit from direct or indirect inflation linkage in their cash flows. As we navigate a potentially “higher for longer” inflationary environment, maintaining exposure to assets with inflation protection will be crucial for portfolio success. Given the sector’s low risk and long duration cash flow profile, the recent rise in interest rates has disproportionately impacted valuation. This de-rating has created a significant relative value opportunity for listed infrastructure assets versus broad equity markets, as shown in the chart below.
(based on EV/EBITDA)
Source: DJ Brookfield Global Infrastructure index, Cambridge Private Infrastructure Index as of December 31st, 2022 International Energy Agency, 26 April 2023
0.0x
-0.5x
1.0x
0.5x
1.5x
-2.0x
2.5x
3.0x
3.5x
2011
2012
2014
2015
2016
2017
Expensive: Listed infrastructure
Cheap: Listed infrastructure
EV/EBIDTA Spread: Listed Infrastructure - Equities
Mean: 1.3x
Current: 0.4x
Source: 1. Bloomberg, as at 18 September 2023, The Global Economy Enters an Era of Upheaval
Belinda Boa
Head of Active Investments for Asia Pacific
The return of inflation in Japan, alongside wage growth and signs of monetary policy tightening from ultra-easy levels, has put the focus on Japanese equities, which have outperformed all other regions in local currency terms in 2023 so far.
2023 returns year-to-date for major MSCI equities (local currency)
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Source: LSEG Datastream, MSCI and BlackRock Investment Institute, Nov. 14, 2023. The chart shows 2023 returns for major MSCI equity indices on local currency basis, as of Nov. 14, 2023.
MSCI UK
MSCI EM
MSCI EUROPE
MSCI WORLD
MSCI USA
MSCI JAPAN
25%
4.3%
8.5%
13.7%
15.1%
27.5%
Quality and capital return: Higher rates increase companies’ borrowing costs, so we favor quality businesses with low leverage and stable cash flow. These kinds of companies may also return cash to shareholders via dividends and buybacks, which is attractive in a world of slower growth. Some of the European banks – which benefit from higher rates – say they may plan to buy back billions of euros worth of shares over the next few years.
Companies with expertise in energy efficiency and electrification are attractive, including cutting-edge semiconductor and battery companies that are available at cheaper valuations than global peers.
Ageing societies. Japan’s labor force has been shrinking for decades and one result
Supply chain security. We believe Japan stands to benefit as global companies seek to diversify
Low-carbon transition. Japan is a net energy importer and aims to be carbon neutral by 2050.
After the 2023 rally, we favor a more selective approach within Japanese equities. Japan is home to many top-tier companies that provide solutions to important global challenges:
supply chains in the wake of the pandemic and to mitigate against geopolitical risk. Beneficiaries could include Japan’s leading factory automation and robotics companies and Japanese technology fabrication plants.
Can the strength continue? We see two supportive developments. First, a set of edicts from the Tokyo Stock Exchange to spur shareholder-friendly corporate behavior, resulting in greater return of cash to shareholders via dividends and buybacks.
is a set of companies that are world leaders in areas such as robotics, automation and med-tech. One export that’s gaining traction: hospital monitors that free up time for doctors and nurses.
Second, a revamp of the country’s savings architecture aimed at guiding domestic savings into real assets, such as equities.
Low-carbon transition: Japan is a net energy importer and aims to be carbon neutral by 2050. Companies
with expertise in energy efficiency and electrification are attractive, including cutting-edge semiconductor and battery companies that are available at cheaper valuations than global peers.
Ageing societies: Japan’s labor force has been shrinking for decades and one result is a set of companies that
are world leaders in areas such as robotics, automation and med-tech. One export that’s gaining traction: hospital monitors that free up time for doctors and nurses.
chains in the wake of the pandemic and to mitigate against geopolitical risk. Beneficiaries could include Japan’s leading factory automation and robotics companies and Japanese technology fabrication plants.
Year to date returns (%)
Rick Rieder
Chief Investment Officer of Global Fixed Income
Where might I take /avoid risk within fixed income?
Last year, 75% of market participants in the Bank of America Fund Managers Survey believed a recession was likely in the next 12 months. Not only has the U.S. avoided recession in 2023, but real GDP actually accelerated. The sources of this economic strength have been a growing labor market (albeit slower than last year), and a resilient U.S. consumer. At the same time, as the economy has shown some recent signs of moderation and readjustment from prior supply/demand imbalances, we have witnessed very encouraging improvement on the inflation front. Indeed, six-month annualized Core CPI is running at 3.6%, as of October 2023, which is meaningfully lower than the 6.4% level witnessed in September 2022, according to Bureau of Labor Statistics data, as of November 14, 2023. With the U.S. economy moderating, and growth in Europe likely even weaker, we think inflation globally will follow a lower trajectory, drawing closer to developed market central bank targets.
As we reach the end of this hiking cycle, we anticipate the yield curve is likely to eventually steepen, with a rally led by the front-end and belly, and the back end of the curve remaining more range bound. Therefore, we think it makes sense to utilize high-quality, front-end assets as a ballast for portfolios (as carry/volatility ratios appear quite attractive, see graph), and we are increasingly comfortable taking on greater duration and spread risk, in order to participate in upside as well. As a result, we are investing in U.S. and European front-end to intermediate investment grade corporate debt, which display historically attractive spread levels, Agency Mortgage-Backed Securities at good valuations, which helps to diversify spread exposure, and high-quality securitized assets. We are adding risk in the belly of the curve in 5-10-year U.S. and European investment-grade credit, as well as very selective positions in high-yield.
Areas to remain more tactical with, in our view, are emerging markets external sovereign debt, where spreads are tight and where political and event risk remains significant. Yields can be attractive here, but volatility can be quite high as well. Also, high-yield bond positions need to be managed carefully as spreads are tighter and with potentially real dispersion here, so we prefer higher-quality segments of this market and European exposures that display relatively better valuation and where foreign exchange hedges make all-in yields more attractive. In all these markets there are places of opportunity but greater care as markets move further away from monetary and fiscal stimulus and consequently idiosyncratic volatility can be high. In addition to heightened political risk, we are also concerned with U.S. fiscal policy and debt issuance trends, which could weigh on market technicals.
Source: Bloomberg, data as of November 16, 2023Note: The carry/vol data presented with an 8 year look back.
The U.S. economy has displayed remarkable resilience in the face of the most aggressive policy rate hiking cycle the Federal Reserve has undertaken in decades.
U.S. 2Y
U.S. 3Y
U.S. 10Y
U.S. 30Y
Carry on Yield / LT Vol
0.8
Carry
4.13%
4.36%
4.71%
4.7
4.56%
Last year, 75% of market participants in a BAML survey believed a recession was likely in the next 12 months. Not only has the U.S. avoided recession in 2023, but real GDP actually accelerated. The sources of this economic strength have been a growing labor market (albeit slower than last year), and a resilient U.S. consumer. At the same time, as the economy has shown some recent signs of moderation and readjustment from prior supply/demand imbalances, we have witnessed very encouraging improvement on the inflation front. Indeed, six-month annualized Core CPI is running at 3.6%, as of October 2023, which is meaningfully lower than the 6.4% level witnessed in September 2022, according to Bureau of Labor Statistics data, as of November 14, 2023. With the U.S. economy moderating, and growth in Europe likely even weaker, we think inflation globally will follow a lower trajectory, drawing closer to developed market central bank targets.
Short-end carry/volatility ratios historically attractive
Michael Krautzberger
Head of Fundamental Fixed Income, EMEA
For much of 2023, investors – scarred by the memories of 2022 – used inverted yield curves and high cash rates as a reason to stay conservative and wait for clarity on what is an unusually complex economic outlook.
However, as we approach 2024, the drop in inflation has meant a return in demand for interest rate risk and re-ignited the debate about where to put money to work. The soft growth outlook, weak bank lending and softer commodity environment has seen a drop in both realized inflation and future expectations.
now seemingly behind us, the European Central Bank has become more concerned about downside risks to their outlook – a stark contrast to 2023. This should provide support for moving duration exposures further out the yield curve to lock in rates that remain far above historic norms, and indeed far above levels that we would expect for ‘neutral’ levels.
We forecast inflation to continue to revert back close to central bank targets over the next 12 months, allowing 2024 to see the start of rate cutting cycles. Indeed, the European economy remains mired close to zero growth for a year now, and with the energy price shock of 2022
the favorable spreads still on offer in many risk segments. Given we also expect interest rate volatility to subside, this leads us to continue to favor allocations to investment-grade credit. These allocations warrant selectivity, however, with a notable number of idiosyncratic issuer events over the past 12 months. Other higher quality sectors, such as covered bonds and supranational, are now trading near all-time wide levels to the risk-free rates. There remains significant and growing dispersion between sectors which means investors who get micro in their decision making can reap rewards, without relying on top-down beta bets to deliver alpha.
But what about risk assets? The European consumer has significantly de-levered over recent years and savings rates remain at elevated levels, meaning we do not see conditions for a hard landing that would derail
05
6
8
06
07
08
09
11
12
13
14
16
17
18
22
23
24
Euro area inflation (YoY%)
Headline YoY%
Core YoY%
Forecast Headline inflation
Forecast Core inflation
Source: BlackRock, Bloomberg as of November 2023. There is no guarantee that any forecasts made will come to pass.
Inflation (%)
James Sweeney, Ronald van Loon
Fundamental Fixed Income Portfolio Management Group
For the first time in years, investors are receiving good compensation for lending to the U.S. government.
This is partly related to weak pricing action amid strong supply of Treasuries, which has created opportunities for investors. At the same time, inflation has fallen and is likely to fall further in 2024. A resurgence can’t be ruled out entirely, but inflation no longer poses the same obvious risks as it did a few years ago. Indeed, U.S. growth seems set to slow in the quarters ahead, alongside falling and normalizing inflation, a combination that historically bodes well for bondholders.
Our base case scenario is that the rate cutting cycle in Europe will start around mid-2024, and that the bond market will price a deeper cutting cycle that is currently priced in the yield curve. We also expect good demand for fixed income assets from long-term institutional investors, whose healthy solvency ratios in aggregate open up a window of opportunity to de-risk versus liabilities. Taken together, these factors support a positive picture for long-term interest rates in Europe.
Yields are sufficiently high in both regions that investors will earn solid returns even if yields rise slightly. However, if our base case for growth and inflation come to pass, then we see further upside from positive total returns as we gradually move to a more dovish central bank regime. 2024 may prove one of the best times to buy government bonds in recent decades.
In Europe, the outlook for total return of long dated fixed income instruments is the most positive investors have seen in a decade. Starting yields are not to be scoffed at.
Four per cent interest rates lead to a decent income component of bond total return. That makes negative total returns in the year ahead increasingly unlikely.
A decade of 30-year German Government Bond Yields
Source: BlackRock, Bloomberg as of November 2023
1.0
2.0
2.5
3.5
Yield (%)
James Keenan
Global Head of Private Debt
$3500
2024 E
2025 E
2026 E
2027 E
$3000
$2500
$1500
$1000
$2000
$500
$0
In March 2023, banks faced another disruption, leading to increased bank regulation, consolidation and stricter lending standards. We believe the continued contraction in bank credit availability, combined with borrower preferences for the efficiency and flexibility of private debt, will result in global private debt market expanding to $3.5tn by year-end 2028.2
This contraction likely won't only affect middle-market corporate loans; private debt investors are likely to see more opportunity across various asset classes, including asset-based loans and real estate debt, and partnerships with banks.
Asset-Based Loans (ABL), a $500bn market as of 2022, involve assets such as property, equipment, inventory, account receivables and intellectual property.3 Banks hold approximately 87% of the U.S. ABL market, with significant exposure to regional banks.4 Private lenders are poised to enter this market, providing flexible financing solutions to borrowers and offering investors a countercyclical return-profile with robust structural protections.
While select banks may enact real estate debt portfolio sales in response to sector stress, we anticipate banks to remain market participants but reduce the number, size and riskiness of real estate loan structures. We expect this to create opportunities for private lenders, particularly in senior mortgages, mezzanine loans and construction loans.
2028 E
For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Source: BlackRock, Preqin. Historical (actual) data from Preqin, as of each calendar year-end, through March 31, 2023. 2024E to 2028E are BlackRock estimates.
Unrealized Value
Dry Powder
Forecast AUM
Private lenders filled this void, leading to direct lending Assets Under Management (AUM) growing significantly from US$32bn in 2008 to US$750bn in 20231.
After the GFC, increased regulation and capital requirements prompted banks to retreat from certain lending, especially to middle-market corporates.
In March 2023, banks faced another disruption, resulting in increased bank regulation, consolidation and stricter lending standards. We believe that the continued contraction in bank credit availability, combined with borrower preferences for more efficiency and flexible private debt, will expand the global private debt market to $3.5tn by year-end 20282.
Asset-Based Loans (ABL), a US$500bn market as of 2022, involve assets such as property, equipment, inventory, account receivables and intellectual property3. Bankscurrently hold approximately 87% of the U.S. ABL market, with significant exposure to regional banks4. Private lenders are well-positioned to expand into market, providing flexible financing solutions to borrowers and offering investors a countercyclical return-profile with robust structural protections.
While select banks may enact real estate debt portfolio sales in response to near-term sector stress, we anticipate banks will remain market participants but reduce the number, size, and riskiness of real estate loan structures. This will create opportunities for private lenders, particularly in senior mortgages, mezzanine loans and construction loans.
The evolving relationship between banks and private debt managers is expected to lead to more partnerships. For example, in real estate lending, banks aiming to maintain borrower relationships, are turning to private lenders for warehouse facilities. Banks are also looking to reduce capital charges and allocate balance sheet space for additional lending by turning to private lenders for Synthetic Risk Transfers.
Sources: BlackRock, Preqin. Historical (actual) data from Preqin, through March 31, 2023 BlackRock market estimate. Secured Finance Network 2022 Market Sizing, as of June 6 2023. “SFNet 2023 Market Sizing Study Documents a Mammoth-Sized $4.866-Trillion U.S. Secured Finance Market” White Oak Global Advisors, as of February 2023. “Perspectives on asset based lending in 2023 and beyond” *All data in USD.
Global Private Debt AUM to Reach US$3.5tn by 2028
Global Private Debt AUM (US$bn)