Navigating the new market regime

KARIM: Welcome to the Around the World Spotlight. A historic quarter – on many measures – is behind us, and in this video we will look at how to position portfolios for the rest of 2022 as we enter Q2. I am joined today by Beata Harasim, senior investment strategist from the BlackRock Investment Institute, to discuss Q2 outlook tactical asset allocation views from a multi-asset perspective.

BEATA: The first quarter of 2022 has seen a shift to a historically challenging market regime. Sentiment towards global equities has been poor, even though improving recently, and fixed income markets have been even more out of favour, with sentiment at the lowest level for decades. Much has changed since our 2022 Outlook. The tragic war in Ukraine has resulted in a global energy shock. We see this increasing inflation, pressuring consumers and hurting growth, especially in Europe. It is another supply shock on an already existing supply shock. Central banks are scrambling to normalise policy and raise rates this year, especially in the US – but we don’t expect them to go quite as far in terms of the total hikes as markets currently expect. In our latest Q2 outlook update, we remain underweight bonds even as nominal yields have shot up this year, as we expect investors to demand higher term premium. We also remain overweight developed market equities, given still supportive fundamentals, robust earnings and low real yields. We see many developed market companies well positioned in the inflationary backdrop thanks to pricing power. But we reduce our European equities overweight, given the vulnerabilities to the energy shock, and we favour US and Japanese stocks.

KARIM: Thank you Beata. So, how do we think about these views in terms of implementation ideas? First, we’ve gone from living with inflation to living with even more inflation, given fresh energy supply disruptions. We like energy producers as the cyclical part of a barbell approach in equities, balancing that with quality-tilted sectors like tech, which might help to add some ballast in portfolios amid market volatility and a potential growth slowdown. We favour inflation-linked bonds, but most of all, we zoom in on commodities, which have become a key topic in conversations with clients and have gained significant inflows this year: we’ve seen nearly US$27B into commodity ETPs globally already in 2022, reversing the outflows of 2021. A couple of reasons for why that is: first, commodities’ role as an inflation hedge, given that their price tends to go along with inflation rates, and second, especially in the case of gold, portfolio diversification and safe haven qualities. Moving on to sustainable exposures. They have faced some challenges recently, given that they tend to be underweight energy and overweight tech versus their parent benchmarks, which are biases that have presented headwinds this year. But we think it is important to look through the short-term, especially as our single stock exclusions were still positive contributors. We continue to prefer sustainable exposures, given the long-term tailwinds from the shift to net-zero, while in the medium term we see opportunities in areas that are pivotal to the energy transition, such as clean energy and green bonds.