Jean Bovin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Alex Brazier – Deputy Head, and Vivek Paul – Head of Portfolio Research 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
Mega forces in focus: We see markets adjusting to the new regime. This is not a typical business cycle – structural mega forces are shaping the outlook now, in our view.
Market backdrop: The 10-year U.S. Treasury yield jumped to 16-year highs as markets eyed higher-for-longer interest rates. Stocks ended a volatile week little changed.
Week ahead: The Middle East conflict is in focus. U.S. CPI data this week will help gauge how quickly supply mismatches are unwinding.
Markets are adjusting to the new regime of greater macro and market volatility, in our view. This is not a typical business cycle. What matters are the mega forces – or structural shifts – playing out now. Most point to higher interest rates and lower long-term growth: Aging constrains the workforce, and geopolitical fragmentation rewires supply chains. But digital disruption has potential for productivity gains. We see mega forces creating opportunities and risks across sectors and regions.
Developed market (DM) stocks have erased about half of this year’s gains – though tech has held up partly due to momentum behind the artificial intelligence (AI) mega force. See the chart. The 10-year U.S. Treasury total return is nearing a loss of about 4% this year with capital losses wiping out the income it provides. And the risk it bears has been thrown into the spotlight this year: a full percentage point climb in 2023 and double-digit basis point swings each day becoming routine. Surging long-term Treasury yields show markets are adjusting to a higher level tied to mega forces: looser U.S. fiscal policy, the big reallocation of resources in the low-carbon transition and geopolitical fragmentation rewiring supply chains. We see many DM economies on a structurally weaker growth trend due to mega forces such as aging populations. Long-term yields are more in line with our views, but we think equities still don’t fully reflect higher-for-longer policy rates.
Activity in the U.S. has stagnated for 18 months as the economy moves onto a lower growth path. Seemingly strong payroll gains last week might seem like good news. But companies were slow to rehire in the restart of activity following the pandemic – and they’re still catching up. We estimate that, without this catchup effect, job gains would be slowing. We think focusing on monthly job creation also masks a broader trend since 2020: Overall employment growth has been modest, yet unemployment is lower. That shows labor supply has slowed as the population aged. We think the tight labor market reflects this supply constraint, not a strong economy.
Harnessing mega forces
That’s why it’s key to harness the sector and company impacts of these mega forces in this tricky macro environment. The key for us: Identify the catalysts that can supercharge them, see how they interact with each other and uncover the likely beneficiaries not yet priced in by markets. We saw such a catalyst in AI earlier this year when we went overweight on our tactical six- to 12-month horizon. Our work finds the value of AI patents from public companies has surged, and it could suggest they’re submitting higher quality patents. This is not just about public markets: we find private markets make up a growing portion of firms filing for AI patents and may have more companies focused exclusively on AI.
We see other mega forces intersecting and creating big shifts in profitability across economies and sectors. We see potential across the energy system in the shift to a low-carbon economy, depending on the interplay of policy, tech, and consumer and investor preferences. Healthcare, real estate, leisure and companies with products and services for seniors may stand to benefit in DMs as people age, while emerging markets (EM) like India and Mexico benefit from younger populations. EM is also leading the way in digital payments in the future of finance. Some EMs could strike deals across divides in a fragmenting world and benefit from companies bringing production closer to home, while broader economic competition could spur global investment across tech, clean energy, infrastructure and defense. We also think a fast-changing U.S. financial landscape is poised to create opportunities in private credit as banks curb lending. U.S. regional banks have come under renewed pressure from surging yields just as Q3 earnings reporting season kicks off this week.
Bottom line
Mega forces are shaping the new regime with geopolitical fragmentation now in focus. Treasuries has served us well as yields rise. We stay underweight DM equities but lean into AI to harness mega forces while the macro backdrop remains unfriendly for broad asset class exposures.
Market backdrop
The 10-year U.S. Treasury yield jumped to new 16-year highs last week, while U.S. stocks ended a volatile week little changed. We are seeing the new, volatile regime in action, with sharp intraday and weekly market moves. U.S. payrolls data showed a surprisingly strong number of jobs created in September. We think the economy can only sustain a fraction of recent job growth as the population ages – or it risks stoking further inflationary pressures.
We’re eyeing U.S. inflation and spending data this week to gauge if the drop in goods prices will keep leading inflation lower as consumer spending shifts back to services. We estimate about two thirds of the spending shift has now unwound. Yet population aging will likely keep the labor market tight, driving inflationary pressures and a rollercoaster ride in the data.
Week Ahead
Oct. 12: U.S. CPI; UK GDP
Oct. 13: China CPI, PPI, trade data; U.S. trade data; University of Michigan consumer survey
Oct. 10-17: China total social financing
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