The challenge of turbulent markets

Good companies can still thrive, even in the toughest economic conditions for a decade. How do BlackRock fund managers put themselves in the best position to find opportunities?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

At the start of 2022, many investors were looking forward to a brighter year ahead after the turbulence of the pandemic. As countries reopened, the world economy appeared to be on a bumpy path to recovery. The invasion of Ukraine by Russian troops fundamentally changed the outlook, ushering in one of the toughest years for financial markets on record.

The Russian invasion brought a spike in energy prices, contributing to mounting inflationary pressures. Prices had already been pushed higher by supply chain disruption during the pandemic. Central banks acted decisively, raising interest rates, and withdrawing quantitative easing measures. In doing so, they reversed a decade-long low interest rate regime. That regime had helped support both bond and equity markets.1 Its withdrawal saw considerable disruption across financial markets.

It was a perfect storm for investors. Stock markets were volatile and unpredictable, particularly in the previously-strong technology sector,2 yet bond markets did not provide their usual support. Both areas sold off significantly.

Only a narrow range of companies and sectors have made progress. The energy sector has benefited from strong commodity prices and higher profits. This has also helped commodity-dependent countries, such as Latin America.3 There have been some anomalies as well, such as India, which has recovered well from the pandemic and where the stock market has been strong.4 But for most other areas, it has been a gloomy year.

The year ahead

There are relatively few signs of this improving in the near term. Investors may need to accept that environment will remain volatile for some time to come. The Federal Reserve has made it clear that its priority is to tackle inflation, whatever the impact on short-term economic growth.5 This is echoed by other central banks around the world that recognise the need for price stability.

Nevertheless, financial markets have fallen a long way in 2022 and valuations are lower than where they started in 2022.6 There are still good companies, with a strong pathway of growth, delivering higher earnings and dividends. At BlackRock, we continue to look for those companies that can deliver value in all economic conditions.

Investment discipline

In this type of febrile market, we believe investors need to fall back on sound investment disciplines. Diversification is particularly important at a time when traditional diversification strategies, notably holding bonds and equities, have not worked as well. This means looking beyond traditional markets such as the UK or US, to those markets that have their own self-sustaining growth stories.

This applies not just to capital growth, but also to income. In the BlackRock investment trusts, we use the full powers of the investment trust structure to explore ideas in overlooked areas. These may not be investable for an open-ended fund due to liquidity constraints, but can be held in an investment trust structure. These may be smaller markets, such as frontiers, or royalty investments or using option-writing to boost dividend income. We may also reserve income in buoyant markets to pay out in tougher times.

It is also a time for strong stock-picking. A difficult economic environment exposes weak companies. Those with high debt could see their repayments rise, while those without pricing power may not be able to put their prices up in the face of higher costs. In contrast, stronger companies can grow even stronger during a downturn, taking market share from struggling rivals. At BlackRock, we draw on our global analyst network to pick up the most compelling ideas.

The investment trust structure can be important in allowing us to take full advantage of those opportunities. In difficult markets, liquidity can be a problem. It can be tough to move in and out of positions. Open ended funds may have this forced upon them, as they may need to buy and sell shares to meet redemptions. In contrast, closed-ended funds have the flexibility to invest as they see fit.

Good risk analysis is also an important discipline in febrile markets. It is important for a fund manager to understand their exposure to different areas: to a rise or fall in interest rates, for example, or a spike in the oil price. This risk discipline is integral to everything we do at BlackRock. We arm our fund managers with all the risk tools they need to understand the decisions they take on investors’ behalf, such as the Aladdin platform which provides sophisticated risk analytics.

2023 could be another difficult year, which makes choosing an investments difficult, but there are opportunities in all market conditions. We aim to put ourselves in the strongest possible position to take advantage of those opportunities.