Thriving in a new market regime

Karim: Hello and welcome to the Around the World 2022 Outlook and Implementation Guide special. I’m joined by Natalie Gill, from the Portfolio Research team in the BlackRock Investment Institute, to discuss our key investment themes for 2022 and how these can be implemented in portfolios.

Natalie:
•  Our first theme is Living with inflation: We have entered a higher inflation regime. We have seen inflation jump this year due to supply and demand mismatches during the economic restart. Even once these supply pressures abate and inflation cools we see it persisting at levels higher than pre-Covid.
• Second, Cutting through confusion: A confluence of events for which there is no historic parallel - the restart, new virus strains, supply driven inflation and new central bank frameworks - has created confusion. There’s a growing risk that markets or policy makers misread the current surge in prices. We see the range of outcomes as wide.
• Our final theme is Navigating net zero: the transition is not just a long-term story - it is here and now. We already see evidence to suggests that the cost of capital for carbon efficient sectors is falling, enhancing returns. Companies and countries will need to adapt - this will provide opportunities for investors wanting to drive the transition.
 
Karim: Thanks Natalie – so, how can investors position for these themes?
• We prefer a multi-asset approach to ‘living with inflation’, using inflation-sensitive equities like value, and alternatives like infrastructure, as well as inflation-linked and floating rate bonds to prepare portfolios for a higher inflation regime while managing duration. 
• Next, we see two key ways to ‘cut through confusion’ and position for the wide range of potential outcomes: 1. getting selective in high conviction areas such as DM equities, and granular in EM through an allocation to China and EM ex-China; and 2: by bolstering all-weather portfolio resilience through a focus on diversifiers. 
• To navigate net zero, we like assets that may benefit from the growing preference for sustainable exposures. We’ve seen a growing trend in 2021 of investors replacing the core of their portfolios with sustainable equivalents – quality exposures such as the tech and healthcare sectors also appear well positioned for the green transition.