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BlackRock Commentary: Staying dynamic in our strategic views

Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research, and Devan Nathwani – Portfolio 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

Our dynamic approach: We stay dynamic on a strategic horizon to take advantage of sharp valuation shifts. We go overweight emerging market stocks for the first time since 2020.

Market backdrop: U.S. stocks hit all-time highs while 10-year yields fell after the CPI data met expectations. We think the Fed needs to see inflation cooling more to cut rates.

Week ahead: We eye Japan inflation data this week and the implications for the Bank of Japan. We see the BOJ supporting the return of mild inflation and wage growth.

We see the new macro regime of greater volatility causing more frequent valuation shifts between asset classes. Valuations may not always drive short-term results but matter long term. Staying dynamic – even on a strategic horizon of five years and longer – creates opportunities to capitalize on these shifts. Getting granular allows us to target areas where we see the most repricing potential, like emerging market (EM) stocks. We go overweight developed market (DM) government bonds.

We’re in a new, more volatile regime where macro risks are elevated and valuations are shifting more quickly. Assessing valuations on a strategic horizon of five years and longer is key for long-term investors, even if short-term performance can be driven by other factors. We get granular to uncover opportunities. In EM equity, we don’t feel prices reflect fair value over a strategic horizon. The difference in equity risk premia – a gauge of the excess yield investors receive for the risk of holding stocks over cash – between EM and DM equities has grown to its widest level in nearly four years, reflecting cheaper relative EM valuations. See the chart. DM government bonds are another area we find opportunities – notably in short-dated DM and long-dated DM bonds excluding the U.S. We go overweight EM stocks and DM government bonds for the first time in four and five years, respectively.

Under the hood of our strategic overweight to EM stocks, we stay selective. We see broad EM stock valuations as attractive. While China’s structural challenges remain, we consider them largely understood by markets and reflected in valuations. We find opportunities in EMs like Mexico, India and Saudi Arabia that we see at the crosscurrent of many mega forces – structural shifts driving returns now and far in the future. EMs rich in natural resources and supply chain inputs stand to benefit from geopolitical fragmentation, turning them into multi-aligned trading partners. Demographic divergence favors most EMs – where domestic working-age populations are still growing – over DMs with flat or shrinking worker pools.

Staying selective in stocks

We remain neutral DM stocks and stay selective – yet see reasons to like Japanese equities. The long-awaited comeback of inflation in Japan brightens the outlook for corporate profits as companies can raise prices on products and services while rising wages are set to support consumer spending. Ongoing corporate reforms aimed at boosting shareholder value also underscore our view. We favor an above-benchmark allocation to Japan over a strategic horizon (for professional investors).

Heightened market sensitivity to economic data releases has driven market volatility so far this year, especially in government bonds. Last week’s U.S. CPI showed inflation slowing as expected – yet we still see inflation settling closer to 3% over the long term. This is not priced into fixed income markets in our view – underpinning our strategic preference for inflation-linked bonds. How inflation and central bank policy evolve from here will vary by region. We expect policy rates to fall more in the UK than the U.S. This dynamic makes UK government bond yields more attractive than other DM debt. That’s why we like long-dated DM government bonds outside of the U.S., such as UK gilts. Yet we keep our preference of short-dated over long-dated maturities across DMs. We’re now overweight DM government bonds overall on a strategic horizon for the first time in five years. In a whole portfolio context, we go underweight investment grade credit given tight spreads.

Our bottom line

We prefer EM over DM equity given relative valuations but stay selective in both. We like inflation-linked bonds in a high-for-longer rate regime. We now favor DM government bonds over IG credit – driven by our preference for UK gilts.

Market backdrop

U.S. stocks notched fresh 2024 highs last week, while U.S. 10-year Treasury yields fell to around 4.40% – about 35 basis points below this year’s peak. The U.S. CPI met consensus expectations and broke a three-month streak of hotter-than-expected readings. While the data may give the Federal Reserve some comfort that the previous upside surprises were anomalies, we think the Fed needs more evidence of inflation coming down to start cutting policy rates.

We watch Japan inflation data for the Bank of Japan policy implications. We think the BOJ will be slow to tighten policy to support the return of mild inflation and healthy wage growth. Global flash PMIs will provide an update on whether growth momentum is picking up, if slowly, in the euro area and cooling in the U.S. The U.S. durable goods report will be in focus for another snapshot of how the industrial part of the economy is holding up.

Week Ahead

May 22: Japan trade data; UK CPI

May 23: Global flash PMIs

May 24: Japan CPI; U.S. durable goods

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 20th May, 2024 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.

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