The financial markets of the world are experiencing a new era, what was in force for more than four decades no longer works, and today we are facing another reality, said the BlackRock Investment Institute in an analysis called “Global Outlook 2023”.
The analysis addresses the possible scenarios that we will see in this new era; BlackRock notes that the “Great Moderation”, that four-decade period of mostly stable activity and inflation is behind us and a new era is dawning.
What is coming will be a new regime of greater macro volatility. To get started, BlackRock forecasts a recession as central banks tighten monetary policy too much; that is, they will raise interest rates excessively, to combat inflation.
BlackRock notes that we will no longer see the sustained bull markets of the past for a while, and therefore, from their perspective, a new investment playbook will be necessary, meaning new ways of investing in the markets.
Living with (high) inflation
Inflation around the world will be stubbornly high, BlackRock believes that factors such as an aging workforce will keep inflation above pre-pandemic levels and therefore advises to keep part of the investments in inflation-linked bonds both on a tactical and strategic horizon.
All of this implies more frequent portfolio changes among investors.to balance views on risk appetite with estimates of how markets are pricing economic damage. It also requires taking more granular views by focusing on sectors, regions, and sub-asset classes, rather than broad exposures.
From this new reality of inflation persistently above the objectives of the central banks, several scenarios for investments can be recorded, very different from what happened before.
Several factors must be considered:
– Price of damage: BlackRock believes that stocks will not have a target price in the context of recessions, but will evaluate their addition to portfolios by assessing market risk sentiment or economic damage in price; that is, how much they have regressed.
– Rethinking ties: Although the attractiveness of fixed income investments is strong because increasing returns will mean incomethe institution considers that long-term bonds face challenges, so they will prefer short-term bonds and high-grade credit.
Other risks
BlackRock believes that the recession could hit Latin America next year and that, in general, the economic rebound will last until 2024. Likewise, warns of risks such as political populismwhich puts pressure on fiscal spending and increases global geopolitical tensions.
Of course, this new scenario has implicit risks that were less considerable before.
According to the BlackRock report, getting investment strategies wrong could be up to four times more costly than against the Great Moderation.
Aging is another big risk to the future economy and growth. In the next years, industrialized economies will not be able to produce enough labor, that will generate pressures as production capacity is reduced; that is why sectors such as health care will see a boom in the coming years.
the new order
BlackRock insists that we have entered a new global order, perhaps the most tense since the end of World War II and the end of the Cold War.
Likewise, there will be new mismatches in supply and demand as resources are reallocated and energy security will now be a priority, among other things.
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