Waves of transformation
Investment themes
Getting real
We see a new wave of investment into the real economy transforming economies and markets. Spotting winners will require deep insights on the technology being developed – and the potential disruption it entails.
Leaning into risk
We look for investments that can do well across scenarios and lean into the current most likely one. For us, that’s a concentrated artificial intelligence scenario where AI winners and other beneficiaries can keep driving stocks.
Spotting the next wave
Investors should look for where the next wave of investment opportunity may come. We stay dynamic and ready to overhaul asset allocations when outcomes can be starkly different.
Read details of our outlook:
Embracing transformation
The regime of greater macro and market volatility has taken hold, shaped by supply constraints like shrinking working-age populations. The result? Higher inflation and interest rates and weaker growth relative to pre-pandemic – and elevated public debt.
But now investment opportunities transcend the macro backdrop. We see waves of transformation on the horizon, driven by five mega forces – or structural shifts. We see three of them spurring major capital spending: the race to build out AI, the low-carbon transition and the rewiring of supply chains. The size, speed and impact of that investment is highly uncertain, but we think it could transform economies and markets on a scale rarely seen in history. We lean into the concentrated AI scenario where a handful of AI winners can keep driving stocks, see details below.
In this new regime, the real economy matters more. Our first theme is Getting real. We see the biggest opportunities in the real economy as investment flows into infrastructure, energy systems and technology – and the people driving them. Nvidia’s recent surge reflects the big investment expectations and uncertainty from the rise of AI. See the chart below.
Volatile AI stock valuations reflect the uncertainty ahead
A potential investment boom
Mega forces are driving this transformation and are starting to unleash massive investment into the real economy: infrastructure, energy systems, advanced technology – and people.
Our second theme is Leaning into risk. We think investors should take risk more deliberately now, across multiple dimensions. First, consider the time horizon. Second, be deliberate in choosing the type of risk exposure. Some U.S. company stocks are now larger in value than the entire benchmark index of some nations, showing how they can dominate broad index exposures. This emphasizes why investors must be deliberate with their risk-taking. See the chart below. Third, be deliberate about blending different sources of return across public and private markets.
Companies larger than country stock markets
Weighing five near-term scenarios
We worked with BlackRock portfolio managers to develop five, distinct scenarios for the near-term outlook of six- to 12-months. They help put parameters around varying states of the world – albeit they do not capture the many potential outcomes beyond that horizon.
These scenarios span a wide range of outcomes.
Concentrated AI
AI-driven growth boost not enough to offset other structural drags. Inflation pressure is ongoing and policy rates stay high for longer.
High rates, hard landing
Sticky inflation rules out rate cuts, and strong demand could trigger further hikes. Growth slows sharply. AI valuations hit hard.
Subdued growth, stubborn inflation
Growth slows to a lower trend pace, inflation is sticky above target and policy rates stay higher.
Broad productivity gains (AI and capex boom)
AI-driven growth is broad based, lifting potential output. Inflation is muted and policy rates are cut sharply.
Rescued hard landing
Rate hikes overwhelm a broad-based AI-driven growth boost. Inflation falls below target. Central banks deliver deep rate cuts.
Ready to adapt
We think companies may need to revamp business models and invest to stay competitive. For investors, it means company fundamentals will matter even more. The gap between winners and losers could be wider than ever, in our view.
We look for investments that can do well across scenarios and lean into the current most likely one. For us, that’s a concentrated AI scenario where a handful of AI winners can keep driving stocks.
We stand ready to adapt as and when another scenario – potentially suddenly – becomes more likely as the transformation unfolds. So our third theme is Spotting the next wave. This is about being dynamic and ready to overhaul asset allocations when outcomes – and investment opportunities - can be vastly different.
Key market views
- U.S. stocks: We stay overweight U.S. stocks and the AI theme on a six- to 12- month view.
- Japanese stocks: We stay overweight Japanese stocks on an improving outlook of higher inflation, wage growth and corporate pricing power. Yet risks from yen strength and policy missteps from the Bank of Japan remain
- Private markets: We see private markets as an avenue to tap into the early winners and the infrastructure needed for the investment boom ahead. The real economy will be a focal point, with infrastructure, energy systems, and technology investments playing a critical role in shaping the future. Still, private markets are complex and not suitable for all investors.
Ready to adapt
Our scenarios framework helps ground our views on a tactical horizon. Yet we could change our stance quickly if a different scenario were to look more likely. This is one reason why we may need to think about strategic asset allocation differently in the future – building on our long-held view that strategic views should be dynamic in this new environment. It is no longer possible to base strategic views on just one central view of the future state of the world with some deviation around it, in our view.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, October 2024
Reasons | ||
---|---|---|
Tactical | ||
AI and U.S. equities | We see the AI buildout and adoption creating opportunities across sectors. We get selective, moving toward beneficiaries outside the tech sector. Broad-based earnings growth and a quality tilt make us overweight U.S. stocks overall. | |
Japanese equities | A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks. | |
Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term credit. We’re neutral long-term U.S. Treasuries. | |
Strategic | ||
Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk. | |
Fixed income granularity | We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds. | |
Equity granularity | We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook. |
Note: Views are from a U.S. dollar perspective, November 2024. 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, October 2024
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. We don’t think this environment is conducive to static exposures to broad asset classes but creates more space for alpha.
Asset | Tactical view | Commentary | ||||
---|---|---|---|---|---|---|
Equities | ||||||
United States | We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins. | |||||
Europe | We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | |||||
U.K. | We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | |||||
Japan | We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks. | |||||
Emerging markets | We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high. | |||||
China | We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges. | |||||
Fixed income | ||||||
Short U.S. Treasuries | We are underweight. We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term. | |||||
Long U.S. Treasuries | We are neutral. Markets are pricing in sharp Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on incoming data. We prefer intermediate maturities less vulnerable to investors demanding greater term premium. | |||||
Global inflation-linked bonds | We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | |||||
Euro area government bonds | We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | |||||
UK Gilts | We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy. | |||||
Japan government bonds | We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs. | |||||
China government bonds | We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | |||||
U.S. agency MBS | We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | |||||
Short-term IG credit | We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S. | |||||
Long-term IG credit | We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S. | |||||
Global high yield | We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe. | |||||
Asia credit | We are neutral. We don’t find valuations compelling enough to turn more positive. | |||||
Emerging market - hard currency | We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused. | |||||
Emerging market - local currency | We are neutral. Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply. |
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. 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.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024
Asset | Tactical view | Commentary | ||
---|---|---|---|---|
Equities | ||||
Europe ex UK | We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | |||
Germany | We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions. | |||
France | We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity. | |||
Italy | We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years. | |||
Spain | We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI. | |||
Netherlands | We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers. | |||
Switzerland | We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think. | |||
UK | We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | |||
Fixed income | ||||
Euro area government bonds | We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | |||
German bunds | We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs. | |||
French OATs | We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges. | |||
Italian BTPs | We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. | |||
UK gilts | We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy. | |||
Swiss government bonds | We are neutral. The Swiss National Bank has been cutting policy rates this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here. | |||
European inflation-linked bonds | We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive. | |||
European investment grade credit | We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the U.S. given spreads are not as tight. | |||
European high yield | We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the U.S. Spreads compensate for risks of a potential pick-up in defaults, 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 euro perspective, November 2024. 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.