Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

BlackRock Commentary: Seeking income and staying nimble

Jean Bovin – Head of BlackRock investment institute, together with Wei Li – Global Chief Investment Strategist, Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Scott Thiel – Chief Fixed Income Strategist all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

Tweaking our views: Markets are waking up to our expectation of more central bank rate hikes as inflation proves sticky. We go overweight U.S. short-term bonds for income.

Market backdrop: U.S. two-year Treasury yields jumped near 15-year highs – sparking an equity retreat – as Federal Reserve rate cuts later in the year were priced out.

Week ahead: Flash PMIs will show if activity is proving resilient at the start of the year. The PCE inflation data may confirm core inflation is staying persistently high.

We entered 2023 arguing the new macro regime required more nimble portfolios. A risk asset rally has stalled while markets have come around to our view of central banks hiking rates further to fight stickier inflation. This year’s moves prompt a tweak to our tactical views. We favor short-term government bonds for income. We trim our overweight to credit after spreads tightened. We go overweight emerging market (EM) stocks, adding to our relative preference over developed markets.

Yield is back

Risk assets have jumped to start 2023 thanks to falling inflation, Europe’s easing energy shock, China’s rapid restart from Covid restrictions and technical factors that drove the quick move up. Yet we think the rally also reflects hopes that the sharpest central bank policy tightening in decades can avoid economic damage: growth will be sustained even if rates stay higher, and inflation will drop to 2% targets. Central banks then wouldn’t need to further tighten policy and create recessions to lower inflation. Now bond markets are waking up to the risk the Fed hikes rates higher and holds them there for longer. We boost our allocation to short-term government bonds on our six- to 12-month tactical horizon to take advantage of higher yields. See the chart. We balance that by reducing our overweight to investment grade credit. We go overweight EM equities and prefer them over DM equities, partly to get exposure to China’s rapid restart.

This is not a typical economic cycle – and that’s why we have argued a new investment playbook is needed. Recent data has shown that U.S. economic activity is holding up. Core inflation is proving stickier than many expected as confirmed by recent U.S. CPI data and revisions. The U.S. labor market remains tight with unemployment at its lowest in five decades. We don’t think inflation is on track to return to policy targets – and a recession would be needed to get it down. That means solid activity data should be viewed through its implications for inflation. In other words: Good news on growth now implies that more policy tightening and weaker growth later is needed to cool inflation. That’s bad news for risk assets, in our view.

Shifting views

We increase short-term Treasuries to an overweight. The jump in yields – the two-year U.S. Treasury yield is now near 4.6% compared with 1.5% a year ago – that now means short-term bonds provide income. We also like their ability to preserve capital at higher yields in this more volatile macro and market regime. We reduce our overweight to investment grade credit. Credit spreads have tightened sharply along with stocks pushing higher, reducing their relative attraction. We remain moderately overweight and still think highly rated companies will weather a mild recession well given stronger balance sheets compared with before the pandemic. We also cut agency mortgage-backed securities to neutral due to the spread tightening.

We have had a relative preference for EM equities over developed markets (DM) for some time. We add to this relative preference by going overweight EM. We prefer EM as their risks are better priced: EM central banks are near the peak of their rate hikes, the U.S. dollar is broadly weaker in recent months and China’s restart is playing out. That is in contrast to major economies that have yet to feel the full impact of central bank rate hikes – and yet still have a too-rosy earnings outlook, in our view. Plus, the risk is growing that DM central banks press ahead with more rate hikes. We see risks in EMs, too, but think they are better priced for now. EM equities would not be immune to any resulting risk asset selloff and U.S. dollar surge if the Fed keeps hiking rates. And China’s restart – like those seen in DM economies – doesn’t change the long-term drags on growth it faces. Investors are still requiring more compensation for the geopolitical risk of holding Chinese assets – which has risen, in our view – and also considering risks from regulatory and government intervention.

Our Bottom line

We put into practice our new playbook of making more frequent changes to our tactical asset allocation. We lean further into short-term government bonds and our preference for EM equities over DM. We trim our overweight to investment grade credit and turn neutral on agency mortgage-backed securities.

Market backdrop

Two-year U.S. Treasury yields surged back near 15-year highs as markets priced out Fed rate cuts this year. The yield curve between two- and 10-year Treasuries inverted further to its most extreme levels since the early 1980s. The yield jump sparked a broad retreat in equities, with the S&P 500 falling for a second straight week. We think investors are realizing that sticky core inflation may mean the Fed hikes rates further – and holds them there for longer – than markets had expected.

We’re looking at flash PMIs in the U.S. and Europe for more signs of resilience. Stronger activity could reinforce expectations that further central bank tightening could be needed to bring inflation down to policy targets. We’re also watching the U.S. PCE report for confirmation of stickier core inflation as seen in the U.S. CPI.

Assets in review

Week Ahead

Feb. 21: Global flash PMIs

Feb. 23: U.S. jobless claims

Feb. 24: U.S. PCE inflation and spending


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 21st February, 2023 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

Playing demographic divergence now
All News

BlackRock Commentary: Playing demographic divergence now

The working-age populations in developed markets (DMs) are dwindling, contrasting with the growth observed in emerging markets (EMs). This trend adversely affects economic growth in DMs while bolstering growth prospects in EMs—a divergence that, according to BlackRock, is widely evident in asset valuations.

Hacktivism is hacking but for a political or social cause, rather than just for money. This article explores the threats from hacktivists and the ways to defend yourself and your organisation.
All News

As elections loom, beware of hacktivism

Hacktivism is hacking but for a political or social cause, rather than just for money. This article explores the threats from hacktivists and the ways to defend yourself and your organisation.

When building an investment portfolio, make sure to keep track of the fees and expenses you are being charged to trade or hold specific assets. This will help you ensure you enjoy the best possible returns from your money.
All News

Investing: Understanding Fees and Expenses

When building an investment portfolio, make sure to keep track of the fees and expenses you are being charged to trade or hold specific assets. This will help you ensure you enjoy the best possible returns from your money.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 


Sign up and open your account for free, within minutes.

MeDirect_Multi-Devices-cards

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.