BlackRock Investment Institute Videos

Market take

Weekly video_20251215

Natalie Gill

Portfolio Strategist, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

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With only a handful of mega forces driving returns, we think there is no such thing as a neutral portfolio allocation. And rising bond yields across developed market economies mean traditional diversifiers like long-term Treasuries offer less portfolio ballast than they once did. Instead, this environment calls for being dynamic and seeking unique sources of return.

Title slide: Diversification mirage in plain sight

1: A powerful common driver

For several years now, we’ve laid out how the economic transformation mega forces were driving challenged traditional methods of diversification. We’re seeing that play out now. Trying to diversify away from the U.S. or the AI mega force towards other regions or equal-weighted indices amount to larger active calls than before. In fact, our analysis shows that – after accounting for factors that typically explain equity returns – a growing share of U.S. stock returns are tied to a single, common driver.

We think investors should focus less on spreading risk indiscriminately and more on owning it deliberately – in short, a more active approach. We also think portfolios need a clear plan B and a readiness to pivot quickly.

2: Spiking bond yields

Another illustration of the diversification mirage? The spike in developed market bond yields over the last several weeks – underscoring our view that long-term bonds don’t help balance portfolios as they once did. The surge is partly due to heightened concerns around loose fiscal policy and deteriorating fiscal outlooks. Japanese 30-year bond yields hit record highs earlier this month and are up more than 100 basis points this year. The latest move up was triggered by a Japanese government fiscal spending package, as well as the Bank of Japan signaling a potential rate hike this week. Central banks in countries like Australia and Canada have shifted their tone on rates – either flagging an end to cuts or a potential hike.

3: Global monetary policy disconnect

We see a growing disconnect between the U.S. and other central banks going into next year. The U.S. has stronger growth and inflation, but is taking a more dovish approach. By contrast, these other developed markets are facing weaker growth with more hawkish central banks. We’re eyeing this contrast as a risk heading into next year.

We’re also watching upcoming U.S. data in the aftermath of last week’s Federal Reserve interest rate decision, the most disputed since 2019 with three dissents. We think the Fed is erring on the side of being too easy even with the division. Any rebound in hiring or business confidence could reignite inflation pressures and bring back policy tensions with debt sustainability.

Outro: Here’s our Market take

We see the diversification theme from our full-year outlook unfolding now. We think this environment calls for seeking truly unique return sources – such as in private markets and hedge funds – as a distinct allocation for alpha. We stay pro-risk on the AI theme.

Closing frame: Read details: blackrock.com/weekly-commentary

BlackRock Bottom Line: 2024 Global outlook

Speaker: Wei Li, Global Chief Investment Strategist, BlackRock Investment Institute

Script:

Higher interest rates and greater volatility define the new regime we’re in. In turn, that’s creating greater dispersion of returns.

We think investors will benefit from taking a more active approach to portfolios as we head into next year. 

Here’s our three investment themes for 2024: number one, managing macro risk; number two, steering portfolio outcomes; and number three, harnessing mega forces.

BlackRock Bottom Line open

Title: BlackRock Investment Institute 2024 global outlook

Our first theme is managing macro risk. Production constraints mean central banks face tougher trade-offs between inflation and growth – they can’t respond to faltering growth like before. This leads to a wider set of outcomes and a more uncertain macro outlook.

We don’t think investors should wait for the macro environment to improve. Instead, they should look to neutralize macro exposures or be very deliberate about which risks they take.

Our second theme is steering portfolio outcomes. We believe the new regime rewards an active approach to portfolios. Greater volatility and dispersion of returns create space for investment expertise to shine – that involves being more dynamic with indexing and alpha-seeking strategies, while staying selective.

Our third theme is harnessing mega forces. We see five structural shifts reshaping markets and driving returns now and in the future. We think they have become important portfolio building blocks on their own.

The bottom line is: Going into 2024 in the new regime, we want to put money to work. We believe investors should take a more active approach to their portfolios and be deliberate in taking portfolio risk.