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Q2 2022 GLOBAL OUTLOOK

Navigating the new market regime

Much has changed since our 2022 outlook - a war, energy shock and the Federal Reserve’s pivot on monetary policy. We stay underweight bonds, even as yields have sprinted upward, and overweight equities – with new regional differences.
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Investment themes

01

Living with inflation

We expect central banks to quickly normalize policy, with rates rising from historically low levels. We see a higher risk of the Fed slamming the brakes on the economy as it has struck a hawkish tone. Implication: We prefer equities over fixed income and overweight inflation-linked bonds.

02

Cutting through confusion

The Ukraine war has aggravated inflation pressures and has put central banks in a bind. Trying to contain inflation will be costly to growth and employment, and they can’t cushion the growth shock. Implication: We have tweaked our risk exposure to favor equities at the expense of credit.

03

Navigating net zero

Europe’s drive to wean itself off Russian gas should reinforce the net-zero transition. Yet some regions will produce more fossil fuels in the near-term as global energy systems are rewired. Implication: We favor developed market equities over emerging markets.

Learn more about our 2022 Outlook:

BlackRock Bottom Line: What does 2022 hold for markets?

Wei Li: The three themes for our 2022 global outlook, thriving in a new market regime, are living with inflation, cutting through confusion and navigating net zero.

[MUSIC PLAYING]

Wei Li: Our first theme is living with inflation. We have flagged inflation and we are now living with inflation. We expect inflation to settle at levels higher than pre-Covid, even as supply bottlenecks ease. We also expect the Fed to kick off rate hikes but remain more tolerant of inflation than previously.

The second theme is cutting through confusion. We want to acknowledge the risks around our base case. We have never experienced an economic restart like this and confusion is only natural among policy makers and markets adapting to this new reality.

Our third theme is navigating net zero. Climate change is real and we believe that the best possible outcome for growth and inflation is via a smooth transition.

The bottom line is we see the combination of a still robust economic restart, even if delayed. And the still historically low negative real yields, even if higher, supporting another up year for equities and down year fixed income. But we have dialed back our risk-taking given the unusually wide range of outcomes in 2022.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of December 2021 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.

In the U.S. and Canada, this material is intended for public distribution.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. 

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

In Switzerland: This document is marketing material.  Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded.

For investors in South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice. Investment Marketing and Portfolio Management Law, 5755-1994 (the “Advice Law”), nor does it carry insurance thereunder.

In Latin America: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds may not have been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx

In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL). This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances.

@2021 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

BlackRock Bottom Line: What does 2022 hold for markets?

Wei Li: The three themes for our 2022 global outlook, thriving in a new market regime, are living with inflation, cutting through confusion and navigating net zero.

[MUSIC PLAYING]

Wei Li: Our first theme is living with inflation. We have flagged inflation and we are now living with inflation. We expect inflation to settle at levels higher than pre-Covid, even as supply bottlenecks ease. We also expect the Fed to kick off rate hikes but remain more tolerant of inflation than previously.

The second theme is cutting through confusion. We want to acknowledge the risks around our base case. We have never experienced an economic restart like this and confusion is only natural among policy makers and markets adapting to this new reality.

Our third theme is navigating net zero. Climate change is real and we believe that the best possible outcome for growth and inflation is via a smooth transition.

The bottom line is we see the combination of a still robust economic restart, even if delayed. And the still historically low negative real yields, even if higher, supporting another up year for equities and down year fixed income. But we have dialed back our risk-taking given the unusually wide range of outcomes in 2022.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of December 2021 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.

In the U.S. and Canada, this material is intended for public distribution.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. 

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

In Switzerland: This document is marketing material.  Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded.

For investors in South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288

For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice. Investment Marketing and Portfolio Management Law, 5755-1994 (the “Advice Law”), nor does it carry insurance thereunder.

In Latin America: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds may not have been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx

In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL). This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances.

@2021 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

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A new market regime

We see 2022 heralding a new regime by delivering global stock gains and bond losses for a second year – what would be a first since data started in 1977. This unusual outcome is the next phase of our new nominal theme that is still playing out: Central banks and bond yields have been slower to respond to higher inflation in the powerful restart than in the past. That should keep real, or inflation-adjusted, bond yields historically low and support stocks.

The big change in 2022: Central banks will be withdrawing some monetary support as the restart does not need stimulus. We see more moderate equities returns as a result. We expect the Fed to kick off rate hikes but remain more tolerant of inflation. The Fed has achieved its inflation target, so its interpretation of its employment mandate will determine the timing and pace of higher rates. The European Central Bank, facing a weaker inflation outlook, is likely to stay easier on policy.

We had flagged inflation - now we’re Living with inflation.

A restart like none other

We’ve never had an economic restart like this. Add repeated, outsized data surprises to the mix – both to the upside and the downside – and confusion is natural among policymakers and markets adapting to a new reality.

At the same time, central banks are implementing new frameworks that change how they react to inflation. The risks arising from new Covid-19 strains only add to the confusion. We cut through numerous possibilities to ask: What would it take for us not to be in this new market regime?

What could go wrong?

We see two ways our new market regime view could be wrong. First, central banks might react differently. They could – in the face of persistent inflation pressures, perhaps tied to new Covid-19 strains, revert to their old response to inflation.

Central banks could also be forced to be more aggressive if inflation expectations become de-anchored. We would be faced with inflation significantly above target, rising interest rates and falling growth: a classic stagflation scenario that is bad for both bonds and equities. Second, we could be wrong about growth prospects.

The chart shows how different our and the market’s view of future Fed rate hikes is from how the Fed might have reacted historically to the current mix of slack and inflation. In the past, we believe the Fed would have been pushing up rates in 2021 - again helping confirm this is a new regime.

It’s different this time
U.S. CPI inflation, federal funds rate and estimates, 1990-2025

This chart shows our 2022-2025 estimates for inflation (falling between 2.4-3%), the Fed funds rate (rising to 1.1% in 2025), market pricing (rising just below 2% in 2025) versus the historical Fed reaction of rate rises above 3.5% in 2025.

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, Federal Reserve Board, U.S. Bureau of Labor Statistics, Bloomberg, with data from Haver Analytics, December 2021. Notes: The chart shows the U.S. nominal federal funds rate (orange line), year on year headline CPI inflation (yellow) and some projected paths of the nominal federal funds rate. The U.S. CPI shown from 2022 - 2025 are our estimate embedded in our Capital Market Assumptions. The dotted red line shows our own projection of the federal funds rate. The purple line shows the path that would have been implied by a simple monetary policy rule linking the choice of policy rate to the rate of inflation and the level of the output gap. The pink line shows the current market-implied path.

Staying invested

How to thrive in this new market regime? We prefer equities in the inflationary backdrop of the strong restart. We favor DM stocks over as we dial down risk slightly amid rising risks to our base case.

We are underweight DM government bonds – we see yields gradually heading higher but staying historically low. We prefer inflation- linked bonds, partly as portfolio diversifiers. On a strategic horizon, we like private markets for their diversification and return potential.

Outlook in charts PDF

Staying invested

The backdrop for risk assets is favorable on a tactical horizon, yet less so than it was a year ago, in our view. We are trimming our tactical risk stance to one that is still pro- equities yet more balanced. This still means a modest equities overweight – with a preference for developed markets over emerging – amid strong growth and low real yields.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, December 2021

Note: Views are from a U.S. dollar perspective, April 2022. 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.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2021

Legend Granular

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.

Our base case: New nominal

We expect mildly higher inflation with a muted central bank response, keeping real rates historically low. Stocks can thrive, but bonds still suffer as the yield curve modestly steepens.

Higher energy burdens

We see the energy shock hitting growth in Europe the hardest because of the region’s heavy reliance on Russian gas. Europe’s energy burden is more than twice that of the U.S.

This chart shows that energy as a share of GDP has recently spiked in Europe and the U.S. Europe's energy burden is twice that of the U.S.

Sources: BlackRock Investment Institute and BP Statistical Review of World Energy 2021, with data from Haver Analytics, March 2022. Notes: chart shows the cost of oil, gas and coal consumption in the European Union and U.S. as a share of GDP. We use regional energy prices and divide by GDP in U.S. dollars. Data for 2022 are based on IMF’s latest GDP forecasts and the year- to-date average of daily commodities prices.

Hawkish central bank policies

The Fed struck a surprisingly hawkish tone in kicking off its hiking cycle. We see a higher risk of the Fed slamming the brakes on the economy as it may have talked itself into a corner.

This chart shows that the Federal Reserves projected fed funds rate path is higher than the current market pricing and what markets expected in March 2021.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Haver Analytics and Refinitiv Datastream, March 2022. Notes: The chart shows historical fed funds rate, current and year-ago market pricing in forward overnight index swaps and the Fed’s March 2022 projection based on the median dot of policymaker projections for the end of each year. The final green dot represents the Fed’s long-term policy rate expectation.

Other regimes explained

Safety premium questioned
The perceived safety of government bonds is questioned amid rising debt levels. Investors demand a larger compensation for the risk of holding long-term bonds. The yield curve steepens sharply. Yet this is a relative asset shift: equities can still do well.

Productivity boom
Sustained capital investment boosts potential growth, keeping the macro environment disinflationary. The Fed is patient and keeps policy loose, with rates below neutral. The yield curve steepens, real yields stay low, and risk assets do well.

Slamming the brakes
Delays to the restart, perhaps due to a new vaccine-resistant virus strain, result in weaker growth but persistently higher inflation. Central banks aggressively push against inflation, initially sparking a surge in yields. Result: recession with high inflation. The yield move hits stocks hard.

Runaway inflation
Inflation expectations become unanchored in the post-Covid confusion. A messy transition to net zero could exacerbate this. 1970s-style stagflation is back. Yields surge across the curve and risk assets sell off.

Stagnation
Growth slumps. Inflation pressures abate because labor market slack holds back wage growth. Central banks are unsuccessful in reviving growth and inflation. The yield curve flattens, and equities take a hit as earnings slump.

Classic risk-off
Asset bubbles form and burst. Trade wars flare up again and hurt global activity. Central banks struggle to respond. Long- term yields fall sharply from a flight to perceived safety and the term premium turns negative again. Risk assets suffer.

Meet the authors

Philipp Hildebrand
Vice Chairman of BlackRock
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Alex Brazier
Managing Director
Vivek Paul
Senior Portfolio Strategist, BlackRock Investment Institute
Elga Bartsch
Head of Macro Research
Scott Thiel
Chief Fixed Income Strategist, BlackRock Investment Institute