New playbook in action

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.