An ocean wave w/ kite surfer
2023 GLOBAL OUTLOOK - Q4 UPDATE

New regime, New opportunities

Oct. 2, 2023 | Markets are adjusting to the new regime and its implications - especially higher macro volatility - as the sharp rise in bond yields shows. We look through the short-term noise to tap into the abundant - yet different - investment opportunities on offer. In particular, we get granular within asset classes and harness mega forces.

Investment themes

01

Holding tight

Markets have come around to the view that central banks will not quickly ease policy in a world shaped by supply constraints. We see them keeping policy tight to lean against inflationary pressures.

02

Pivoting to new opportunities

Higher macro and market volatility has brought more divergent security performance relative to the broader market. Benefiting from this requires granularity and nimbleness.

03

Harnessing mega forces

The new regime is shaped by five structural forces we think are poised to create big shifts in profitability across economies and sectors. The key is identifying catalysts that can supercharge them and whether the shifts are priced by markets today.

Read details of our Q4 outlook:

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Adjusting to the new regime

Market narratives have been in flux all year: from recession and sharp rate cuts earlier in the year to soft landing hopes over the summer to more recently - a higher-for-longer rates backdrop. We have long argued we don’t see central banks coming to the rescue. The recent surge in bond yields reflects markets coming around to our view, we think. Yields on benchmark 10-year U.S. Treasuries have risen to 16-year highs above 4.50%. See the chart below. Policy rates may have peaked, yet we don’t see central banks cutting rates to levels that stimulate growth any time soon.

Market playing catch-up
U.S. 10-year Treasury yields, 1985-2023

The chart shows that bond yields briefly surged to 16-year highs in September 2023.

Source: BlackRock Investment Institute, with data from LSEG Datastream, October 2023. Notes: The chart shows the yield on the Datastream 10-year Benchmark Treasury.

Holding tight

Inflation has been falling as pandemic mismatches unwind. We think about two-thirds of the spending shift to goods from services has unwound. Goods prices are dragging inflation down as demand normalizes. A skills mismatch is also normalizing, helping cool wage growth.

Importantly, inflation declining through 2023 has come at the cost of economic growth. In Europe, manufacturing activity has slowed sharply. Meanwhile, a stealth stagnation in the U.S. has gone under the radar. GDP data suggest activity has held up in the U.S., but on some measures, the U.S. economy hasn’t grown much in the last 18 months.

An outright recession is still in the cards. But, more importantly, we expect the economy to broadly flatline for another year, making it the weakest two-year growth stretch in the post-war era, aside from the Global Financial Crisis.

We think labor market tightness – low unemployment - has been misconstrued as a sign of economic strength. But in this new regime, the typical business cycle framing – likely does not apply.

Something more structural is at play. We’ve long said we’re in a world shaped by supply. We see constraints on supply building over time – especially from a shrinking workforce in the U.S. as the population ages. We think this demographic constraint means the U.S. economy can only add around 70K new jobs a month without stoking higher inflation, compared to 200K previously.

We think the central bank response to stagnation will be muted. Persistent inflationary pressures driven by supply constraints means central banks will have to hold policy tight, in our view.

Finding new opportunities

A challenging macro drop backdrop doesn’t mean a dearth of investment opportunities. Quite the opposite, in our view. Higher macro volatility is translating into greater divergences in security performance relative to broader markets. That calls for much greater selectivity and more granular views. Harnessing the mega forces shaping our world will also offer abundant investment opportunities. It all boils down to what’s in the price.

We see attractive opportunities for income as markets realize that central banks will have to keep a lid on activity to stem inflation.  We like short-dated U.S. government bonds and have also turned more positive on UK and euro area bonds where yields have spiked far above their pre-pandemic levels. We also like emerging market hard currency debt.

We still steer clear of long-term U.S. bonds even after their surge. Why? We think term premium – the compensation investors demand for the risk of holding long-term bonds – will rise further, pushing yields higher, as markets price in persistent inflation, higher-for-longer rates and high debt loads.

Equities have rebounded this year, led by tech. Looking ahead, surging yields and stealth stagnation may not be friendly conditions for broad equity exposures. Yet valuation dispersion within sectors has moved meaningfully higher relative to the past creating new opportunities. Benefiting from this requires getting more granular, eyeing opportunities on horizons shorter than our six- to 12-month tactical view and tilting to more active strategies that aim to deliver above-benchmark results. We turned overweight Japanese equities last month on potential earnings beats and shareholder friendly reforms. We also tap into the AI theme in developed market stocks.

Mega forces = new opportunities

Mega forces are structural changes we think are poised to create big shifts in profitability across economies and sectors. The mega forces are not in the far future – but are playing out today. The key is to identify the catalysts that can supercharge them and the likely beneficiaries – and whether all of this is priced in today.

We are tracking five mega forces: digital disruption like artificial intelligence (AI), the rewiring of global supply chains driven by geopolitical shifts and economic competition, the transition to a low-carbon economy, shifting demographics and a fast-evolving financial system. We believe granularity is key to find the sectors and companies set to benefit from mega forces.

Our investment views

Our new investment playbook – both strategic and tactical – calls for greater granularity to capture opportunities arising from greater dispersion and volatility we anticipate in coming years.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, October 2023

Asset   Strategic view Tactical view Commentary
Equities Developed market Developed market equities: strategic Overweight +1 Developed market equities: tactical Underweight -1 We are overweight equities in our strategic views as we estimate the overall return of stocks will be greater than fixed-income assets over the coming decade. Valuations on a long horizon do not appear stretched. Tactically, we stay underweight DM stocks but upgrade Japan. We are underweight the U.S. and Europe. Corporate earnings expectations don’t fully reflect the economic stagnation we see. We see other opportunities in equities.
  Emerging market Emerging market equities: strategic Neutral Emerging market equities: tactical Neutral Strategically, we are neutral as we don’t see significant earnings growth or higher compensation for risk. We go neutral tactically given a weaker growth trajectory. We prefer EM debt over equity.
Developed market government bonds Nominal Nominal government bonds: strategic Underweight -2 Nominal government bonds: tactical Underweight -1 Higher-for-longer policy rates have bolstered the case for short-dated government debt in portfolios on both tactical and strategic horizons. We stay underweight U.S. nominal long-dated government bonds on both horizons as we expect investors to demand more compensation for the risk of holding them. Tactically, we are overweight on euro area and UK bonds as we think more rate cuts are coming than the market expects.
  Inflation-linked Inflation-linked government bonds: strategic Overweight +3 Inflation-linked government bonds: Neutral Our strategic views are maximum overweight DM inflation-linked bonds where we see higher inflation persisting – but we have trimmed our tactical view to neutral on current market pricing in the euro area.
Public credit and emerging market debt Investment grade Investment grade credit: strategic Underweight -1 Investment grade credit: tactical uw-10 Strategically, we’re underweight due to limited compensation above short-dated government bonds. We’re underweight tactically to fund risk-taking elsewhere as spreads remain tight.
  High yield Investment grade credit: strategic Neutral High yield credit: tactical Underweight -1 Strategically, we are neutral high yield as we see the asset class as more vulnerable to recession risks. We’re tactically underweight. Spreads don’t fully compensate for slower growth and tighter credit conditions we expect.
  EM debt Government bonds: strategic Neutral EM debt: tactical Overweight +1 Strategically, we're neutral and see more attractive income opportunities elsewhere. Tactically, we’re overweight hard currency EM debt due to higher yields. It is also cushioned from weakening local currencies as EM central banks cut policy rates.
Private markets Income Income private markets: strategic Overweight +1 - We are strategically overweight private markets income. For investors with a long-term view, we see opportunities in private credit as private lenders help fill a void left by a bank pullback.
  Growth Growth private markets: strategic Underweight -1 - Even in our underweight to growth private markets, we see areas like infrastructure equity as a relative bright spot.

Note: Views are from a U.S. dollar perspective, October 2023. 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 2023

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 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 2023

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, October 2023. 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.

Greater dispersion = greater opportunities

Surging yields and stealth stagnation aren’t friendly conditions for broad equity exposures. Valuation dispersion within sectors has moved meaningfully higher relative to the past – creating new opportunities, we think.

The left chart shows the S&P 500 12-month forward earnings yield and the two-year U.S. Treasury yields converging. The right chart shows greater dispersion of global sector price-to-earnings ratios.

Sources: Past performance is not a reliable indicator of current or future results, and index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute with data from LSEG Datastream, September 2023. Notes: The left chart shows the S&P 500 12-month forward earnings yield and the two-year U.S. Treasury yield. The right chart shows the cross-sectional standard deviation of 12-month forward price-earnings (P/E) ratios for the 11 standard GICs sectors.

We are overweight Japanese equities

Japan stands apart from the DM pack. Accelerating share buybacks and other shareholder friendly corporate reforms, strong earnings and still-accommodative monetary policy boost their appeal.

The left chart shows greater Japan stock dividends and accelerating share buy backs. The chart on the right shows stronger earnings in Japan compared to the rest of the world.

Sources: BlackRock Investment Institute, with data from Morgan Stanley Research, Nikkei NEEDS-BULK/FDS, TSE, Alphasense, Bloomberg and FactSet, August 2023. Notes: The chart on the left shows the annual cumulative capital returned to shareholders via buybacks and dividends for the top-tier companies listed on the TSE and Prime Market firms. 2023 data is annualized. The chart on the right: Past performance is not a reliable indicator of current or future returns. Index performance does not account for fees, it is not possible to invest directly in an index. Source: BlackRock Investment Institute, with data from LSEG Datastream, October 2023. Notes: The chart on the right shows the equity earnings revisions for Japan and World equities. The lines show the number of companies with upward revisions to 12-month forward earnings divided by the number with downward revisions. Index proxies used: MSCI Japan and MSCI ACWI.

We are overweight hard currency EM debt

We prefer emerging hard currency debt due to higher yields. It is also cushioned from weakening local currencies as EM central banks start to cut policy rates.

The left chart shows EM PMI is higher relative to developed markets. The chart on the right shows EM hard currency yields are roughly twice that of five-year Treausury yields.

Sources: Past performance is not a reliable indicator of current or future results, and index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, Bank of International Settlements (BIS), Bloomberg, S&P, JPMorgan with data from LSEG, August 2023. Notes: The chart on the left shows the difference between the S&P emerging market manufacturing PMI and U.S. PMI. The chart on the right has data from LSEG, August 2023. Notes: The chart shows yield levels for the JP Morgan Emerging Market Bond Index Global Diversified (EM hard currency), JP Morgan GBI-Emerging Market Bond Index Global Diversified and the benchmark U.S. five-year Treasury.

AI may prove to be a value driver for public companies

The value of AI patents from public companies has surged and it could suggest they’re submitting higher quality patents. Excitement for AI could spread to private markets too.

The chart on the left show a spike in the value of public company AI patents in 2020. The right chart shows the that share of AI patents granted to non-public companies has room to grow further.

BlackRock Investment Institute, with data from United States Patent and Trademark Office (USPTO) and Dimitris Papanikolaou, Professor of Finance at Kellogg School of Management, September2023. Notes: The chart to the left shows the aggregate USD$ value of AI patents granted to public firms and is measured as stock market reaction around the day each patent is granted. The chart on the right shows the number of AI patents granted to non-public companies divided by the total number of AI patents granted by the USPTO.

Meet the authors
Philipp Hildebrand
Vice Chairman, BlackRock
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist, BlackRock Investment Institute
Alex Brazier
Deputy Head of BlackRock Investment Institute
Christopher Kaminker
Head of Sustainable Investment Research and Analytics, BlackRock Investment Institute
Vivek Paul
Head of Portfolio Research, BlackRock Investment Institute