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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

The chart shows a breakdown of our U.S. equities view. When incorporating the AI theme and alpha, our overall view is more neutral on U.S. equities.

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.
Geographic granularity We favor getting granular by geography and like Japan equities in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich.
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

Legend Granular

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.

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.

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

This chart shows that analyst views of expected earnings are more dispersed since 2020 compared to the previous decades of the Great Moderation.

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

This chart shows that in a hypothetical scenario taking a more dynamic investing approach in in the new regime would have likely outperformed a buy-and-hold strategy to a much greater extent than before the pandemic.

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

This chart shows that the S&P500 tech stocks are driving overall S&P 500 returns so far this year.

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