Repelling from a rock wall

New playbook in action

March 30, 2023 | The banking tumult on both sides of the Atlantic has made crystal clear how important it is to stay nimble and update investment views in real time. This is the new playbook in action amid the volatile economic and market regime. We prefer inflation-linked bonds and very short-term government paper for income.

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


Pricing the damage

Financial cracks and economic damage from the fastest rate hiking cycle since the 1980s are emerging. What matters: the pricing of these and our assessment of market risk sentiment.


Rethinking bonds

We see higher yields, especially in short-term government bonds, as a gift to investors after years of being starved of income.


Living with inflation

Central banks are likely to pause their rapid rate hikes when the economic and financial damage becomes clearer, with inflation likely settling above 2% policy targets.

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 March 2023 and may change as subsequent conditions vary.

Discover how we break down our key themes and outlook for 2023

Karim Chedid: Welcome to Around the World: Spotlight on Our Q2 Outlook. 

We said at the start of the year that a new investment playbook is needed to stay nimble in a new economic regime, which is characterised by higher macro and market volatility. And we have seen this play out in 2023 so far. 

We think aggressive tightening cycles across developed markets (DM) have caused financial cracks to emerge, reinforcing our recession view. And we lean into our risk-off stance for now, but we are prepared to selectively add to risk once markets start pricing in the damage. 

I'll be walking through our implementation ideas for the current environment. But first, I'm joined by Ann-Katrin Petersen, Senior Investment Strategist at the BlackRock Investment Institute, to discuss how our key investment themes have evolved for Q2. 

Ann-Katrin Petersen: Thanks, Karim. 

Our first theme is pricing the damage. Central banks and developed markets have been hiking fast, and we believe that was bound to cause economic and financial damage, as we saw in the first quarter. And since the old playbook no longer applies, we expect them to keep hiking rates as they focus on their fight against stubbornly high inflation, despite the current market pricing, and as they use other tools to safeguard financial stability. We stay underweight developed market equities, but stand ready to turn positive as the damage we expect gets priced in. 

Our second theme is rethinking bonds. In an environment of higher-for-longer rates and inflation, as borne out by central bank policy moves and inflation trends so far this year, we think that short-term government debt looks more attractive for income. Meanwhile, credit tightening has increased recession risks, we think, so we trim our credit view. 

So we think we are going to be living with inflation, and this is our third theme. Ultimately, we expect the rapid hiking cycles by central banks to stop with inflation still above 2% targets. This leads us to overweight inflation-linked bonds on both a tactical and the strategic horizon. 

Karim Chedid: Thanks, Ann-Katrin. 

What do these themes mean for investors? In the current environment, we look to two strategies: safe haven exposures and risk assets, where we see the damage to be priced. We favour the front end of the curve across fixed income, with ultra-short government paper particularly attractive for income, in our view. 

While we have trimmed our view in credit, we still see compelling yields in investment grade (IG), with better value in EUR IG. We've upped our conviction on inflation-linked bonds, especially on any drops due to growth concerns. And we see a role in portfolios for gold, which has benefited from the significant rates repricing at the end of Q1. 

Also, we maintain a relative preference for EM (emerging market) over DM equities based on stronger macro momentum. The damage in EM looks better priced to us. China's reopening has also been a tailwind, and sectors with high revenue exposure to China could be well-positioned to capture this reopening trade indirectly. Think materials, think natural resources, and think consumer discretionary in Europe. 

We've recently upgraded local currency EM debt and believe it looks cheap. It provides income, and it benefits from many of the structural factors that support its equity counterparts. For those seeking a nimbler approach to navigating volatility, we do look at strategies that focus on stable fundamentals and minimising volatility. Think minimum volatility, think quality, and think unconstrained equity strategies. 

You can read more about all of this and our positioning in the Q2 Outlook Implementation Guide. Thank you for joining.

Karim Chedid, Head of EMEA iShares Investment Strategy and Ann-Katrin Petersen, Senior Investment Strategist for the BlackRock Investment Institute, break down our key themes and outlook for Q2.

Discover our key themes for the Q2 global 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 Q2 2023 EMEA 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 Q2 global outlook.
Q2 2023 EMEA implementation guide

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