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OUTLOOK & IMPLEMENTATION GUIDE

Inflation and recession

The new regime of greater economic and market volatility is playing out. Central banks’ singular focus on inflation deepens our conviction they will overtighten policy in the near term – and cause economic damage that markets are underappreciating. We keep portfolio risk low as recessions loom.

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.

Investment themes

01

Bracing for volatility

We have entered a regime of higher macro and market volatility. This implied that market views may have to change more quickly and get more granular.

02

Living with inflation

We see the Fed and other major central banks ultimately living with higher inflation as it sees the effect of its rate hikes on growth and jobs. For now, the Fed seems to be responding solely to the politics of inflation. This has caused us to reduce portfolio risk.

03

Positioning for net zero

Investing in high-carbon-emitting companies with credible transition plans or that are key to the transition can give investors exposure to the transition as well as mitigate the impact of its bumps.

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 financial product or to adopt any investment strategy. The opinions expressed are as of September 2022 and may change as subsequent conditions vary.

Discover how we break down our key themes and outlook for Q4

[00:00:03.06] Karim: Welcome to our Q4 Outlook. We're headed into the final quarter of the year and it has been an eventful one. Looking at the next few months, the new market regime, which is marked by higher macro and market volatility, is firmly underway. And we do see more uncertainty. 

[00:00:21.76] I'm joined by Beata Harasim, Senior Investment Strategist for the BlackRock Investment Institute, to talk to us about what she thinks is at play for the final quarter. And then I will talk to you about how to implement macro themes in portfolios. 

[00:00:42.61] Beata: Thanks, Karim. Our first theme is bracing for volatility. Bond yields are at multi-year highs and equity returns are deeply negative as a tough combination of sluggish growth and higher rates looms. Our investment views had already been based on a mild recession in the US and a deeper one in Europe, given the energy crunch, but we don't think equities have come to terms with the combination of deteriorating activity and central banks pushing up rates more quickly. 

[00:01:13.01] We prefer high quality credit over equities and stay underweight US treasuries. Our second theme is living with inflation. We see policymakers responding to persistent price pressures with aggressive rate hikes without fully acknowledging the growth damage required to achieve inflation targets. 

[00:01:33.34] That's a recipe for more macro volatility and an anti-Goldilocks backdrop. We think economic damage from rate hikes and the energy crunch in Europe will eventually lead central banks to stop hiking, but not anytime soon given persistently high core inflation. We stick with our dialled-down risk stance. 

[00:01:54.94] Our final theme for Q4 is positioning for net zero. We believe that the world is not currently on track to hit net zero by 2050, however we see the transition accelerating over time, driven by strengthening policy, technological development, and changing preferences. The path will likely be bumpy, as this year illustrates. As resources are reallocated at huge scale towards decarbonisation, the transition will also contribute to supply-driven inflation and economic volatility over the coming decades. 

[00:02:29.64] Karim: Thanks, Beata. So how can investors position for these themes? In our first theme, we think that managing volatility should be through a multi-asset solution. On the fixed income side, we look to go up in quality with a focus on investment grade credit. And then on the equity side, we favour defensive factors and sectors. 

[00:02:51.22] One area is quality, but the other is also minimum volatility equities. In fact, volatility in FX and rates has outstripped the volatility in equities we've seen in recent months. And so this actually means that we think that there will be more equity volatility, which positions minimum volatility well. 

[00:03:13.78] Moving onto our second theme, living with inflation: we do look at inflation-linked bonds on a both tactical and strategic basis. In fact, we see that market expectations of inflation are still underpricing what could happen in terms of inflation pick up. And numbers have been stubbornly high in both Europe and the US. 

[00:03:36.79] And then looking at inflation hedging in equities, we focus on granular areas. For instance, in Europe, we look at energy and European banks. 

[00:03:47.02] Our final theme looks at how to position for the net zero transition. And here we focus on innovative sectors, like clean energy and agribusiness equities. But also we look at a cross-sector approach to focus on companies that do have a plan for the transition versus those that do not. Thank you for joining us.

Karim Chedid, Head of EMEA iShares Investment Strategy and Beata Harasim, Senior Investment Strategist for the BlackRock Investment Institute, break down our key themes and outlook for Q4.

Discover our key themes for the 2022 Q4 outlook
Read the latest views from BII across asset classes, as we take stock of recent events and their potential implications for tactical and strategic allocations.
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How to implement our investment ideas in your portfolio

Download the 2022 EMEA Q4 outlook implementation guide
Explore our implementation ideas and look at how investors could position, with an outcome-orientated approach to the key investment themes laid out in the BlackRock Investment Institute’s 2022 Q4 outlook.
2022 EMEA Q4 implementation guide

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