Developed market (DM) central banks began steadily hiking interest rates in early 2022, as they attempted to bring inflation back down to target levels – but we think they’ve now reached the summit of that ascent.
Throughout 2022 and 2023, rate cuts weren’t on the horizon–interest rates were kept at a higher, or ‘tighter’, level for longer than in the past. Why? Inflation levels are still far above the 2% target levels set by DM central banks to keep their economies stable. Central banks use higher interest rates to make it more expensive to borrow money and more attractive to save it. This tends to reduce the level of spending in an economy and, therefore, inflation – but this lower spending also means slower economic growth.
Although inflation has started to fall in most developed markets, we think ongoing supply challenges could push it back up. Production costs have soared since the Covid-19 pandemic, due to supply chain disruptions, shifts in consumer spending and low labour supply. Many businesses have passed these extra costs onto consumers, raising prices and pushing up inflation.
All of this means that we’re in an unprecedented economic regime, in our view, marked by slowing economic growth and persistent inflation. In the past, when stocks went up, bonds tended to go down – and vice versa – but this relationship is breaking down in the new regime. We think this new dynamic calls for being more selective in investment decisions.
It may seem that the new regime offers few return opportunities due to greater economic uncertainty. Yet we see plenty of opportunities that don’t require a rosy view of the economy. We think that broad, static investment approaches – i.e. investing in the broad market and making infrequent changes to portfolios – won’t take you as far in this new regime as in the past. Instead, we think investors need to be nimble and selective in their investment approach, making more frequent changes to portfolios and identifying opportunities at a more granular level, such as through sectors or specific countries.
A new approach: BlackRock MyMap's response
In times of uncertainty, the ability to adjust the equity/bond ratio becomes critical. While static allocation funds lack this flexibility, multi-asset funds like BlackRock’s MyMap range have the agility to adapt their asset ratios to shifting circumstances.
As 2022 unfolded, BlackRock MyMap portfolio managers identified rising interest rates as a risk that could destabilise the stability provided by bonds in a diversified portfolio. In response, managers maintained a lower duration within their fixed-income investments, minimising exposure to more interest-rate-sensitive bonds.
BlackRock MyMap managers don’t limit their strategies to equities and bonds, which helped the funds navigate 2022. They delved into satellite assets like gold and commodities to establish an alternative form of diversification.
The return of a negative correlation between bonds and equities may provide temporary relief, but the global economic environment suggests more turbulence ahead.
Long-term changes in the macro environment, driven by geopolitical risk, demographic changes, and the transition to a low-carbon economy, are also likely to continue the inflationary trend.
In this new and more volatile regime, opportunities abound for those willing to take a more granular approach and act quickly to exploit widening discrepancies in asset values.
Creating funds for the future
Lessons from 2022, when the most risk-averse investors suffered the most from an unexpected change in the behaviour of equities versus bonds, should guide future strategies.
Remaining agile is the best way to ensure customers are not exposed to unnecessary risk. Understanding where the risk is coming from could help you to reduce your exposure to that risk. This is why MyMap takes advantage of BlackRock Investment Institute insights, using these to tailor changes in fund allocations across the range to meet different investment risk appetites.
Controlling costs is also crucial for long-term performance. Striking a balance between keeping costs low and maintaining enough agility to ensure performance is critical. All MyMap funds charge a 0.17% fee, except for the BlackRock MyMap 4 Select Income, which charges 0.28% (D-Share class only, Source BlackRock marketing material - https://www.blackrock.com/uk/literature/brochure/mymap-range-en-uk-rc-brochure.pdf Nov 2024).
Harnessing insights: The role of BlackRock Investment Institute
BlackRock MyMap's fund managers empower their investment choices with insights from the BlackRock Investment Institute, a team of economic and market experts who create BlackRock thought leadership. The BII provides valuable insights into the global economy, markets, sustainability, geopolitics, and long-term asset allocation.
The BlackRock Investment Institute studies asset class returns over timelines ranging from five to 50 years, seeking to identify underpriced assets that could be added to portfolios to potentially improve returns. For instance, BlackRock Investment Institute's calculations indicated that the expected return from inflation-linked bonds was higher than the market price, leading to a strategic allocation to these bonds. (Chris Ellis Thomas, Director EMEA Wealth Solutions, BlackRock Nov 2023)
Apart from identifying opportunities, these insights also contribute to risk management at BlackRock. By modelling shifting trends, the BlackRock Investment Institute seeks to identify and mitigate risks, such as those arising from extreme weather events. This shows that multi-asset funds attempt to help investors meet their return objectives within their risk tolerance.
In a future overshadowed by macro and geopolitical uncertainties, BlackRock's sophisticated infrastructure and MyMap's agile mandate seeks to provide the necessary tools to manage risk and deliver returns.
For those seeking a solution in this uncertain landscape, dynamic allocation, as offered by BlackRock's MyMap funds, may be part of the answer.
If you are looking for a simple, single solution to give you a global, diversified, investment portfolio the BlackRock MyMap funds combine our expertise into a framework that is well adaptive for these market conditions.
