Investment Directions for Institutions

For Professional Investors only

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. (shown on screen)

Varia: Welcome to the latest edition of Investment Directions for institutional investors, where we look at how portfolios are evolving in today’s market.

This year has vividly illustrated the new regime that BlackRock Investment Institute has long described. Policy, which was once a stabilising force, is now a source of uncertainty - particularly for US assets. Meanwhile, mega forces like artificial intelligence, geopolitical fragmentation, and demographic shifts are increasing supply constraints, driving dispersion and inflation and supporting higher-for-longer interest rates.

Institutional portfolios face a challenging outlook: muted returns for broad static exposures, with central banks less able to spur economic growth amid still-high inflation, and elevated volatility, as higher interest rates challenge the traditional diversification benefits of fixed income.

Against this backdrop, we see three themes shaping institutional portfolios.

First -we’re seeing an increasing need to more intentionally size allocations to US assets.

We believe the prospect of continued US equity market leadership remains strong, yet macro and policy uncertainty and elevated valuations call for a more deliberate approach. We advocate scenario testing to assess risks and blending US and World ex. US exposures to size allocations. With a growing US fiscal deficit not reflected in long-end UST valuations, BII prefers non-US developed market government bonds on a strategic horizon. Finally, while the USD’s global role remains intact, BII’s expectation of a strategically weaker USD calls for international investors to revisit their currency hedging approaches

Second - there are more opportunities for active management.

The era of elevated liquidity and persistently low interest rates has made way for a new environment of macro uncertainty, mega forces, and higher interest rates. This can create greater dispersion and is opening opportunities for skilled active managers and h edge funds to deliver alpha. To achieve more resilient, diversified alpha in this environment, we look to blend fundamental and systematic strategies in portfolios

And third - we see growing tailwinds and demand for private markets.

The confluence of long-term structural mega forces looks set to benefit infrastructure equity, and we see potential attractive entry points emerging in private equity and real estate as valuations adjust after earlier rate hikes. Income private markets continue to offer higher yields than public markets, though slower economic growth makes credit selection key.

 Explore the full Investment Directions report to uncover actionable insights and case studies tailored to institutional portfolios.

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