Man surfing on sea waves
Q4 2024 Investment Outlook

Waves of transformation

Oct. 2, 2024 | The world could be undergoing a transformation akin to past technological revolutions. But the speed, size and impact of that investment is highly uncertain. We think leaning into the transformation and adapting as the outlook changes will be key.

Investment themes

01

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.

02

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.

03

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.

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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.

Purple Coler
Concentrated AI

Concentrated AI

AI-driven growth boost not enough to offset other structural drags. Inflation pressure is ongoing and policy rates stay high for longer.

Yellow Color
High rates, hard landing

High rates, hard landing

Sticky inflation rules out rate cuts, and strong demand could trigger further hikes. Growth slows sharply. AI valuations hit hard.

Green Color
Subdued growth, stubborn

Subdued growth, stubborn inflation

Growth slows to a lower trend pace, inflation is sticky above target and policy rates stay higher.

Pink ColorRescued hard landing
Broad productivity gains

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.

Orange Color
Rescued hard landing

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

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 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.

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

Legend Granular

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.

 

 

 

Authors
Philipp Hildebrand
Vice Chairman, BlackRock
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist, BlackRock Investment Institute
Christopher Kaminker
Head of Sustainable Investment Research and Analytics, BlackRock Investment Institute
Vivek Paul
Head of Portfolio Research, BlackRock Investment Institute

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