2024 GLOBAL INVESTMENT OUTLOOK
Grabbing the wheel: putting money to work
Dec. 5, 2023 | The new regime of greater macro and market volatility has resulted in greater uncertainty and dispersion of returns. We believe a more active approach to managing investment portfolios will carry greater rewards as a result.
Investment themes
01
Managing macro risk
What matters in the new regime: structurally higher interest rates and tougher financial conditions. Markets are still adjusting to this environment – and that’s why context is key in managing macro risk.
02
Steering portfolio outcomes
We think investors need to grab the investment wheel and take a more dynamic approach to their portfolios while staying selective with allocations.
03
Harnessing mega forces
Mega forces are another way to steer portfolios – and think about portfolio building blocks that transcend traditional asset classes, in our view.
Read details of our 2024 outlook:
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A structurally different world
We think higher rates and greater volatility define the new regime. It’s a big change from the decade following the global financial crisis. Investors could rely on static, broad asset class allocations for returns – and gained little advantage from differentiated insights on the macro outlook.
Today, we think the flipside is true. Production constraints abound. Central banks face tougher trade-offs in fighting inflation – and can’t respond to faltering growth like they used to. This leads to a wider set of outcomes, creating greater uncertainty for central banks and investors, in our view.
Not the typical business cycle
There’s a temptation to interpret the new regime by taking a classic business cycle view of the current environment, we believe. This misses the point: the economy is normalizing from the pandemic and being shaped by structural drivers – shrinking workforces, geopolitical fragmentation and the low-carbon transition. The resulting disconnect between the cyclical narrative and structural reality is further stoking volatility, in our view.
Managing macro risk
Seemingly strong U.S. growth actually reflects an economy that’s still climbing out of a deep hole created by the pandemic shock – and tracking a weak growth path. What matters most, in our view, is that the environment implies persistently higher interest rates and tougher financial conditions. Financial markets are still adjusting to this new regime, and that’s why context is key for managing macro risk, our first theme.
Context is everything
Job growth since 2022 has outpaced what’s typically seen in an economic expansion. But zooming out shows the economy is just climbing out of a deep pandemic hole.
U.S. payroll changes vs. typical expansion, 2022-2023 and 2019-2023
Steering portfolio outcomes
We think macro insights will be rewarded in the new regime. Greater volatility and dispersion of returns create space for investment expertise to shine, as detailed in our second theme – steering portfolio outcomes. This involves being dynamic with investment strategies, while staying selective and seeking out mispricings.
Harnessing mega forces
One way to drive portfolio outcomes is by harnessing mega forces – our third theme. These are five structural forces we see driving returns now and into the future. They have become important portfolio building blocks, in our view.
Putting money to work
On a tactical horizon, our overall macro view would keep us underweight developed market (DM) equities as a standalone because we expect growth to stay stagnant with persistent inflation, prompting central banks to keep policy rates higher for longer. But we find greater alpha opportunities in DM stocks. When incorporating the AI theme and alpha, our overall view is more neutral on U.S. equities. See the chart below. We stay positive on Japan and we keep favoring AI theme in DM stocks.
Deep dive of including the mega force overweight on overall U.S. equity view
Source: BlackRock Investment Institute, December 2023 Note: Views are from a U.S. dollar perspective, December 2023. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Strategically, it is more of an income story. Our inflation view keeps us maximum overweight inflation-linked bonds. We still like income within private markets. Within DM government bonds, we stick with a preference for short- and medium-term maturities.
Investors need to take a more active approach to their portfolios. This is not a time to switch on the investing autopilot; it’s a time to take the controls. It’s important to be deliberate in taking portfolio risk, in our view, and we expect to deploy more risk over the next year.
Our investment views
Our new investment playbook – both strategic and tactical – calls for greater granularity to capture opportunities arising from greater dispersion and volatility we anticipate in coming years.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, December 2023
| Reasons | ||
|---|---|---|
| Tactical | ||
| DM equities | Our macro view keeps us underweight, but we see the AI theme and alpha potential has taken us closer to a neutral view. | |
| Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term U.S. Treasuries as we see two-way risks ahead. | |
| Strategic | ||
| Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to credit risk. | |
| Inflation-linked bonds | We see inflation staying closer to 3% in the new regime than policy targets, making this one of our strongest views on a strategic horizon. | |
| Short- and medium-term bonds | We overall prefer short-term bonds over the long term. That’s due to more uncertain and volatile inflation, heightened bond market volatility and weaker investor demand. | |
Note: Views are from a U.S. dollar perspective, December 2023. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| United States |  |
We are underweight the broad market – still our largest portfolio allocation. Hopes for rate cuts and a soft landing have driven a rally. We see the risk of these hopes being disappointed. | ||
| Europe | |
We are underweight. The ECB is holding policy tight in a slowdown. Valuations are attractive, but we don’t see a catalyst for improving sentiment. | ||
| U.K. |  |
We are neutral. We find attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to fight sticky inflation. | ||
| Japan |  |
We are overweight. We see stronger growth helping earnings top expectations. Stock buybacks and other shareholder-friendly actions are positives. Potential policy tightening is a near-term risk. | ||
| DM AI mega force | |
We are overweight. We see a multi-country, multi-sector AI-centered investment cycle unfolding, likely supporting revenues and margins. | ||
| Emerging markets | |
We are neutral. We see growth on a weaker trajectory and see only limited policy stimulus from China. We prefer EM debt over equity. | ||
| China | |
We are neutral. Modest policy stimulus may help stabilize activity, and valuations have come down. Structural challenges such as an aging population and geopolitical risks persist. | ||
| Fixed income | ||||
| Short U.S. Treasuries | |
We are overweight. We prefer short-term government bonds for income as interest rates stay higher for longer | ||
| Long U.S. Treasuries | |
We are neutral. The yield surge driven by expected policy rates has likely peaked. We now see about equal odds that long-term yields swing in either direction. | ||
| U.S. inflation-linked bonds |  |
We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | ||
| Euro area inflation-linked bonds | |
We are underweight. We prefer the U.S. over the euro area. We see markets overestimating how persistent inflation in the euro area will be relative to the U.S. | ||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Widening peripheral bond spreads remain a risk. | ||
| UK Gilts | |
We are neutral. Gilt yields have compressed relative to U.S. Treasuries. Markets are pricing in Bank of England policy rates closer to our expectations. | ||
| Japan government bonds | |
We are underweight. We see upside risks to yields from the Bank of Japan winding down its ultra-loose policy. | ||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||
| Global investment grade credit |  |
We are underweight. Tight spreads don’t compensate for the expected hit to corporate balance sheets from rate hikes, in our view. We prefer Europe over the U.S. | ||
| U.S. agency MBS | |
We are overweight. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | ||
| Global high yield |  |
We are neutral. Spreads are tight, but we like its high total yield and potential near-term rallies. We prefer Europe. | ||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||
| Emerging market - hard currency | |
We are overweight. We prefer EM hard currency debt due to higher yields. It is also cushioned from weakening local currencies as EM central banks cut policy rates. | ||
| Emerging market - local currency | |
We are neutral. Yields have fallen closer to U.S. Treasury yields. Central bank rate cuts could hurt EM currencies, dragging on potential returns. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are underweight. We see the European Central Bank holding policy tight in a slowdown and the support to growth from lower energy prices is fading. | ||
| Germany | |
We are underweight. Valuations are moderately supportive relative to peers, but we see earnings under pressure from higher interest rates, slower global growth and medium-term uncertainty on energy supply. Longer term, we think the low-carbon transition may bring opportunities. | ||
| France | |
We are underweight. Relatively richer valuations and a potential drag to earnings from weaker consumption amid higher interest rates offset the positive impact from past productivity enhancing reforms and favorable energy mix. | ||
| Italy | |
We are underweight. The economy’s relatively weak credit fundamentals amid global tightening financial conditions keep us cautious even though valuations and earnings revision trends look attractive versus peers. | ||
| Spain | |
We are underweight. Valuations and earnings momentum are supportive relative to peers, but the uncertain outcome of Spanish elections is a temporary headwind. | ||
| Netherlands | |
We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and earnings momentum than European peers. | ||
| Switzerland | |
We are overweight. We hold a relative preference. The index’s high weights to defensive sectors like health care and non-discretionary consumer goods provide a cushion amid heightened global macro uncertainty. Valuations remain high versus peers and a strong currency is a drag on export competitiveness.. | ||
| UK | |
We are neutral. We find that attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to deal with sticky inflation. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are overweight core government bonds. Market pricing reflects policy rates staying higher for longer even as growth deteriorates. Widening peripheral bond spreads remain a risk. | ||
| German bunds | |
We are overweight. Market pricing reflects policy rates staying high for longer even as growth deteriorates. We hold a preference over Italian BTPs. | ||
| French OATs | |
We are overweight. Valuations look moderately compelling compared to peripheral bonds, with French spreads to German bonds hovering above historical averages. Elevated French public debt and a slower pace of structural reforms remain headwinds. | ||
| Italian BTPs | |
We are neutral. The spread over German Bunds looks tight amid deteriorating global macro, restrictive ECB policy and Italian fiscal policy back in the limelight / fiscal targets under pressure. Other domestic factors remain supportive, namely a more balanced current account. For now, we see income helping to compensate for the slightly wider spreads we expect. | ||
| UK gilts | |
We are overweight. Gilt yields are holding near their highest in 15 years. Markets are pricing in restrictive Bank of England policy rates for longer than we expect. | ||
| Swiss government bonds | |
We are overweight as the SNB approaches peak policy rates amid relatively subdued inflation in international comparison and a strong currency. Further upward pressure on yields appears limited given global macro uncertainty. | ||
| European inflation-linked bonds | |
We prefer the U.S. over the euro area. We see markets overestimating how persistent inflation in the euro area will be relative to the U.S. | ||
| European investment grade credit | |
We are neutral European investment-grade credit. Spreads have tightened vs. government bonds, and we now see less room for outperformance given weaker growth prospects amid restrictive monetary policy. We continue to prefer European investment grade over the U.S. given more attractive valuations amid decent income. | ||
| European high yield | |
We are neutral. We find the income potential attractive yet prefer up-in-quality exposures amid a worsening macro backdrop. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, December 2023. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Adjusting to the new regime
During the Great Moderation, analyst views of expected company earnings were much more grouped together outside of major shocks. Now they are more dispersed, showing that an environment of higher inflation and interest rates makes the outlook harder to read. See the chart below.
Dispersion of U.S. equity analyst earnings estimates, 1995-2023
Source: BlackRock Investment Institute, LSEG Datastream, December 2023. Notes: The chart shows the aggregate standard deviation of analyst earnings estimates for S&P companies. The green line shows the median from 1995 to end January 2020, the orange line shows the median since February 2020.
A more dynamic approach
We believe the new, more volatile regime rewards a more dynamic approach to portfolios. We see one-and-done asset allocations becoming less effective.
Hypothetical impact of rebalancing on U.S. equity returns
Past performance is not a reliable indicator of future performance. Index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, MSCI with data from Bloomberg, December 2023. Notes: The chart shows monthly U.S. equity returns – based on the MSCI USA – in the old and new regime under three scenarios: keeping the holdings unchanged (buy-and-hold), yearly rebalances and semi-annual rebalances. The rebalances optimize the portfolio for returns, diversification and risk with perfect foresight of equity sector returns in the MSCI USA index. This analysis uses historical returns and has been conducted with the benefit of hindsight. Future returns may vary and these results may not be the same other asset classes. It does not consider potential transaction costs that may detract from returns. It also does not represent an actual portfolio and is shown for illustrative purposes only.
The AI mega force at work
Investor enthusiasm for AI and digital tech has offset the drag of rising yields. That has pushed U.S. tech stocks to easily outshine the broader market in 2023. We see the potential impact of AI spreading to other sectors too.
S&P tech sector vs. S&P 500 performance, 2023 year-to-date
Past performance is not a reliable indicator of future results. Index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, with data from LSEG Datastream, December 2023. Notes: The chart shows the total year-to-date returns in U.S. dollar terms for the S&P 500 Technology sector (orange line) and the S&P 500 index (yellow line).
Meet the authors
Philipp Hildebrand
Vice Chairman, BlackRock
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist, BlackRock Investment Institute
Alex Brazier
Deputy Head of BlackRock Investment Institute
Christopher Kaminker
Head of Sustainable Investment Research and Analytics, BlackRock Investment Institute
Vivek Paul
Head of Portfolio Research, BlackRock Investment Institute
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