2025 Global Outlook

226. 2025 Midyear Outlook: How investors Can Get A Grip on Economic Uncertainty

Episode Description:

So far, 2025 has been a year of sharp policy shifts and heightened uncertainty. With volatility becoming the new normal, how can investors stay grounded?

In this episode of The Bid, host Oscar Pulido welcomes back Glenn Purves, Global Head of Macro at the BlackRock Investment Institute, to break down the firm’s 2025 Midyear Outlook. They explore why the long-term economic picture has become less predictable, how mega forces like AI and geopolitical fragmentation are reshaping markets, and what investing in the here and now really means. From the role of private capital in funding infrastructure and energy to the balance between strategic and tactical asset allocation, Glenn shares how investors can find opportunity amid uncertainty—and what risks to watch for in the second half of the year.

Sources: 2025 Midyear Outlook, BlackRock Investment Institute

Written disclosures in each podcast platform and each episode description:
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.
Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.
For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

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<<TRANSCRIPT>>

Oscar Pulido: So far, 2025 has been quite a year for markets sharp US Policy shifts have, at times, made it seem like the world has been upended with volatility and heightened uncertainty. Expect it to be the new normal.

Investors are having to navigate a highly complex and rapidly changing environment. So what can we expect for the rest of 2025, and what opportunities can we be looking for as investors?

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Coming up, I'm pleased to welcome back Glenn Purves, global head of Macro at the BlackRock Investment Institute, to help us look ahead to the rest of the year. We'll explore why the long-term economic outlook has become less predictable, how investors can handle rapidly moving headlines, and how mega forces like AI and geopolitical fragmentation are reshaping economies. We'll also dive into some of the big questions that have arisen about the potential for fundamental changes to the structure of global markets.

Glenn, thank you so much for joining us on The Bid.

Glenn Purves: It's great to be here, Oscar. Thanks for having me.

Oscar Pulido: And welcome back. We've actually seen each other a couple of times this year. You've joined us to talk about market events when we've had volatility. We've been talking about, tariffs and trade policy, and today we're here to talk about the mid-year outlook that the BlackRock Investment Institute has just published. Tell us how you and the BlackRock Investment Institute are seeing the state of the world right now.

Glenn Purves: Sure, happy to, and thanks again for having me. It's been a very unusual first half of the year, I've heard people use different words about it. Upended is the one that, I've heard it and we actually use it in our outlook because so many people have mentioned it. We see it differently, we actually don't see the world as being upended, we see this as an acute manifestation of the transformation that we've been talking about for the last few years. Geopolitical fragmentation, AI, and all these other mega forces, that are transforming the global economy. And, when we look at tariffs and we look at, engagements by NATO in terms of transformations and commitments on defense spending, that's just an extension of geopolitical fragmentation. These are things that are changing the global economy. It used to be that we had a cyclical, adjustment in economies. You had cycles before and now it's structural. In a structural world, you have many different outcomes that can come about.

Oscar Pulido: You touched on things like geopolitical fragmentation and AI, which are some of these mega forces that the BlackRock Investment Institute has talked about for some time, and has described them as structural drivers of return over the long term. So maybe talk a little bit more about these themes and what other themes are there existing in the marketplace that you think can help investors navigate the environment?

Glenn Purves: So, in this outlook, we have three environmental core features.

The first is we've lost long term macro anchors. They've weakened. Things like inflation, volatility much higher than it used to be now. Fiscal discipline ebbing away. Growth trajectories constantly being revised. And even things like compensation investors want for treasuries, is rising away from abnormally low levels that they've been at, and confidence in institutions, we've been hearing a lot of discussion over the last few months about the role of US assets as a safe haven. Why does this matter? Well, historically and before the pandemic, when long-term macro anchors were mostly in place, we saw asset class returns tending to converge back towards longer term averages. You had stable growth, low inflation, supportive monetary policies, and it made it easier to generate returns via static exposures to broad bond and stock indices. And when equity sold off, bonds tended to cushion the blow. And this has changed, equity and bond returns have become more sensitive to short term data as investors try to infer what it means for the near and the long term. And it doesn't mean that investors should trim risk taking. On the contrary, and I think a key bottom line in our outlook is really that this is a great environment for risk taking, but it means that investors need to think differently about how they take risks.

The second is in the near term, structural constraints limit how far and how fast the world can really change. We call these immutable economic laws. I remember talking about it with you back in April. And we identified two of them in our outlook on debt. Debt sustainability relies on steady funding by foreign investors. And foreign investors hold a quarter of US treasuries. We think the 90 day pause on reciprocal tariffs that came about in April was partly due to yield spikes in treasuries. So that's an example of that law in effect. On trade supply chains, can't be rewired quickly without major disruption. Global production is very complex. Trade diversion doesn't happen quickly. And the interdependencies between the US and China, for instance, on production are quite apparent. And so I think that's what led to moving away from embargo level tariffs between China and the US in April, as well as some remissions on key components in electronics, semiconductors, and so forth that we saw. So given the global economy can't be revamped overnight, this allows us to keep taking risk in the near term. And that's a major punchline.

And the third is because we've lost these long-term macro anchors, mega forces step in, in order to provide those durable returns.

And because of them, these three factors, the features we've landed on our three investment takeaways, which are investing in the here and now, taking risk when no macro anchor exists and finding new anchors in the mega forces.

Oscar Pulido: And so Glenn, I think what you're touching on is that in past cycles we had more stability and more certainty about the macroeconomic environment. Things like inflation and growth and interest rates. And now we have a little less stability around some of those variables, but we have more stability and more confidence in themes like AI and infrastructure. and that drives some of the investment decisions that perhaps investors can be thinking about.

I want to talk also about something that the outlook mentions, which is investing in the here and now. Maybe you can talk about what does that mean in practice and what does that mean for the balance between strategic and tactical asset allocation decisions that investors often have to make?

Glenn Purves: So, because of these immutable economic laws, while there's been this uncertainty in the near term, we feel that there are these structural constraints that limit how far and how fast the world can change. So we cut through this uncertainty, that's the key punchline.

And then what it means is we lean in more on the tactical asset allocation. So the six-to-12-month horizon We have greater conviction on, than we would on the strategic because you've lost these longer term macro anchors.

Having said that, because you've lost them, you've got these mega forces that step in and that give you insights, not just in the near term, but also in the long term. And AI is a great example of this, right? when you step back and you think about all the capital spending going on in AI- and it's not just data centers, it's about the energy that is required in order to fuel these data centers and so forth. Those are massive opportunities for both private and public markets. And we're seeing this convergence of private and public blending together in order to find outcomes, investment outcomes that only capital markets can actually do in this environment when governments are so indebted.

Oscar Pulido: You talk about the greater certainty on the short-term horizon than the long-term horizon. So it sounds like greater conviction on investment calls in the next six to 12 months, I think is what you mentioned, but presumably that means you also have to revisit these tactical views more frequently?

Glenn Purves: Yeah, absolutely. We're watching the data the mega forces and all these elements very closely. Not just hard economic data, and not just the soft surveys and so forth, the macro side, but the developments of these mega forces, and it means, You've got to be granular, you got to be more selective. And in particular for the six to 12 months, we're always focused on, updating any tactical views that are based on new information, but we're very, I would say, very disciplined about the scope of what we're tracking. And in particular, AI energy. the geopolitical fragmentation is a big one as well. It covers defense, It covers trade as well, so there is the fiscal component to it, but it's also rewiring of supply chains and looking at how we see these supply chains in industrial production evolving over time. And it's a full hands-on deck sort of effort.

Oscar Pulido: These themes are meant to be longer term, but I'm just curious, we've been talking about these with other members of the BlackRock Investment Institute, Jean Boon, back in, in the beginning of the year when we talked about the outlook, was talking about these mega forces. How do you see them just playing out over the balance of the year? are there some that are higher conviction than others?

Glenn Purves: Yeah, I would say that certainly on the AI side and investments in, data centers, on the energy, that's required to support them, certainly that's one that we put a paper out last year, that focused on the various stages that we're in, it's a great paper but, that's one where we're focusing on and it's private public markets and, because it's huge and because there's a long duration of time in terms of creating these data centers and they're very expensive we see that as something that will continue because we see AI as, evolving and being a key element of global economies going forward. So there's a real structural aspect of that one.

I mentioned geopolitical fragmentation, when you step back and you look at how in particular you look at Europe and the lack of, investment that's gone on in say, defense and in infrastructure and public infrastructure for that matter, and you see how that will help that fiscal impulse that's going to be coming forward will help evolve The European sectors that are involved in those sort of areas. infrastructure, financial sector, defense sector-it's quite profound. And so that's one that we will have to continue to track, but we're also tracking, enablers as well. What are the things that say Europe, I'll continue on the Europe theme, what are the things that Europe is going to be doing in order to strengthen their capital markets? Work on their capital markets Union is one thing. All the other structural adjustments that are needed in order to improve competitiveness, productivity that Mario Draghi set out in his report last year. Where are the advances on that front as well? And I think it's a real inflection point for. For that region. and they have a real opportunity to seize the moment in particular on the back of the NATO agreement that was set out last week. So, it's not just specifically about that one mega force, but also the underlying policies and initiatives that are being pursued that support its development.

Oscar Pulido: Maybe we can go a little bit deeper into geopolitics. In fact, one of the times that you joined us earlier this year was with Catherine Cress. We were talking about, tariffs and trade policy, and Catherine heads up geopolitical research within the BlackRock Investment Institute.

So tell us a little bit more about this mega force. We have fresh conflict in the Middle East, tariffs and trade policy haven't gone away. There's still uncertainty about that, but how should investors think about the political and geopolitical landscape in terms of how it impacts the markets?

Glenn Purves: So we're here, early July and we will take stock of trade, for instance, as one of the elements of that geopolitical fragmentation. And, the 90-day pause on reciprocal tariffs is coming due very soon, because of those immutable economic laws that I set out. Because we can't rewire supply chains at speed without disruption. Because of the US debt sustainability relies on funding for, by foreign investors. we see the administration, we weren't surprised that the administration took a more pragmatic approach to trade policy. In April when we first called out these immutable ECMO economic laws, and we weren't surprised to hear the White House say that they're not going to be a hard set an end date on.

On July 9th, for these 90-day reciprocal tariffs, I think what they're looking for is a path in order to achieve trade agreements and security agreements in certain instances, with countries and their partners on the back of, in particular, a NATO agreement that took place last week. And something that they can feel as sustainable and it meets their objectives. I think there's going to continue to be tariffs in place for sure.

And I think those universal tariffs that have been set out at about 10% probably will be a feature going forward. I think that. the sector specific tariffs, we'll see where they end up. We've got ones on autos, we've got ones on, aluminum and steel right now, semiconductors, pharma, lumber, copper. Those are ones that have been identified, but we'll see whether those are introduced in time and at what levels. and I see those as being there as well for strategic sectors. And I think I said that in April when I was last on. but the reciprocal ones, it, it'll be uncertain as to seeing how that trajectory plays out and whether they go maximalist on that or not. I think that. 'Because of those immutable economic laws, they don't go maximalist.

They look for a pragmatic approach through trade negotiations on some of those. And we're in and around a 15% average effective tariff rate right now. And that's five times higher than they were, beginning of January. And so, in and around that zone seems to be something that perhaps they want to settle in on. But again, this notion of embargo level tariffs, this notion of we could see moments of this, but again, we've got these immutable economic laws that are in place and ultimately what we've seen is, a more pragmatic approach, I think to settling on an outcome that is desirable for the administration.

Oscar Pulido: Glenn, when I listen to your comments, you're clearly acknowledging that there's uncertainty out there, whether it's with trade policy, geopolitics, you mentioned that we've lost some of the anchors that we had in the macro space as compared to prior cycles, but you also mentioned that at the end of the day, you're still pro risk and that there are still investment opportunities to take advantage of in the current environment. So perhaps, what does this mean for investors when they hear all this? What are some of the risks and opportunities that they should be considering in their portfolios?

Glenn Purves: I think, I’ll start here where I started the beginning, right? Which is the number of times people have said to me, it, the world feels upended. But again, like we've been talking about a lot of these transformations now for years. and I could probably go back to, you mentioned Jean being on in, in December, but Jean was probably on a year before that and a year before that, talking about these mega forces, right?

And again, we see this as an acute manifestation of this transformation. and through it all, there's always been amazing opportunities for investors, right? And. When we see more volatility, when we see the kind of conditions that have played out over the last six months, this screams alpha, right?

And it's a great opportunity to go forging for truffles, right? But you got to know what you're doing. And you need to have the frame in order to, in order to navigate through. What feels like near term uncertainty, but actually, structurally as I said is limited in terms of how far and how fast the world can really change. And so the outlook and just, trailing back to this outlook that we've just put out is really about getting the grips on this uncertainty and helping people. Navigate through what feels like an upended world, but in reality is a massively opportune time for investing.

Yeah, I and I think that's a main punchline of this, of the outlook and it's a main punchline of this podcast, which is stay invested, be granular and manage. You have to manage the macro risks.

Oscar Pulido: And part of what you're saying is actually consistent with some of our recent guests who have talked about when volatility goes up, it actually presents a good investment opportunity and that's when there's some excitement for some of those individuals who are finding good opportunities to invest in the market.

And investors need to get a grip on uncertainty. we will certainly welcome you and other members of the BlackRock Investment Institute back to, keep hearing about the transformation that markets are going through. Glenn, thanks for sharing, your views on the midyear outlook, and thanks for doing it here on the bid.

Glenn Purves: Great. Thanks, Oscar for having me, always happy to be here.

Oscar Pulido: thanks for listening to this episode of the Bid. Over the summer, we will be taking a break from our regularly scheduled weekly episodes as we drop our special summer series where our producer, Stevie, and I bring you back, some of our favorite, episodes from the last year. Subscribe and tune in wherever you get your podcasts.

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Spoken disclosures at end of each episode:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

MKTGSH0725U/M-4634063

The Bid “2025 Outlook: Building The Transformation”

Episode Description:

As we look back, 2024 was marked by a delicate balance between economic recovery and ongoing challenges. Jean Boivin, Head of The BlackRock Investment Institute, joins Oscar to provide insights into the structural shifts we anticipate and explain how investors can navigate the five mega forces that the BlackRock Investment Institute identifies as key drivers of the new macro regime.

Sources: “2025 Outlook: Building The Transformation”, BlackRock Investment Institute, Dec 2024

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

<<THEME MUSIC>>

<<TRANSCRIPT>>

Oscar Pulido: 2024 has been quite a year for markets from euphoria and recession fears to central banks starting to cut rates as inflation falls. And all this against the backdrop of a major election year across the globe and an ever more fragile geopolitical landscape. Volatility and heightened uncertainty are likely to remain key features as we enter 2025, making this a highly complex and rapidly changing environment for investors to navigate.

Jean Boivin: Investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

So, what can we expect in 2025? I'm pleased to welcome back Jean Boivin, Head of the BlackRock Investment Institute to help us look ahead to the New year. Jean will provide insights into the global economic transformation that he believes is now underway and explain how investors can navigate the five mega forces that the BlackRock Investment Institute identifies that key drivers of that transformation.

Jean, thank you so much for joining us on The. Bid.

Jean Boivin: It's great to be here.

Oscar Pulido: So, Jean, it's that time of year where the BlackRock Investment Institute publishes its outlook for the year ahead, and in this case, the outlook for 2025. in it, you talk about a global transformation that is underway. So, tell us a little bit more about what you mean by that and how does it change your view on economies and markets?

Jean Boivin: So, we're getting to the end of 2024 as we speak. 2024 for us has confirmed the fact that this has been, continues to be a very unusual investment environment. You can look at the fears that was around recession 2024 that materialize these, typical indicators that didn't work. The fail-safe indicator that failed in 2024 for recessions. You can look at inflation that has come down, but come down without growth, really slowing. And you can look at monetary policy that has reached peak tightness in 2024, and yet financial conditions that have been easier than average and have continued to ease.

So, these things are not lining up in a usual way. That, to us, speaks to exactly where you started, which is that we think this is not about an expansion and a recession or a cycle. We're really in the midst of real transformation. So that's the key word, transformation that are changing the makeup of economies that are changing the way markets are evolving and developing.

And that has profound implications, we think, on how we should be looking at opportunities. One example is that in this environment. We cannot rely on assuming that there's an underlying trend that the economies are evolving around, as we've done for decades before 2020 and spend more most of our time thinking about the fluctuations around that trend.

Instead, right now, it's really the trend itself that we're learning about because of this transformation. So, when you think about five years out, the range of potential outcomes we might be facing because of AI. Or because of the fragmentation of geopolitics or the energy transition, could lead us in very different kind of makeup of, economies, different trajectory.

And so that's the reason why, and maybe as a proof point of what I've tried to put on table here is that if you look in over the last two years, the reaction of the 10-year yield, the long-term rates in the US to short-term data is totally outsized compared to everything we've seen for the last two or three decades.

That to us means that investors look at the information that is coming and they're not just reassessing what's going to happen over the next quarter, but they're reassessing the next five years, the next 10 years. And again, that speaks to, we're in the midst of a transformation along these dimension that is pretty profound.

Oscar Pulido: And you mentioned a few things that, part of what's driving this transformation is you mentioned ai, you talked about, geopolitical instability, the energy transition. These are some of the mega forces that the BlackRock Investment Institute has highlighted as structural drivers of return.

Let's talk about the geopolitical instability one because we've recently talked with Catherine Kress, here on The Bid about what a historic year it was for elections around the world. An election cycle where a lot of incumbents did not fare well. And so that's going to bring. some, new policies perhaps as we go into the year ahead, we're also seeing geopolitical instability in Ukraine and the Middle East. So how does this impact your view on markets and economies as well?

Jean Boivin: Yeah, there's a lot of to unpack here, but there are two main things maybe I would highlight.

The first is, yeah, 2024 has been a very bad year for incumbents. You don't want to be in that situation, where you don't have much room to maneuver with typical levers of fiscal policy or even monetary policy inflation is still an issue, and a lot of desire for change. That has been the backdrop. I think that has led to a lot of promise for change.

We'll see how much change is really happening, but this is really a promise for change coming everywhere around the world in these elections, the US included. And that leads to two big implications when we think about the investment landscape.

The first one is that this continues to push towards a more fragmented world. the protectionist, momentum is reflected in all of these elections, and in the US certainly, this is throwing sand in the mechanics of the global trade engine, makes it harder to transact internationally, makes it more costly.

And so that contributes to a world where trade will be less efficient going forward and more costly. So, there’s an inflation kind of implication coming from there. So that's a big theme, one of the mega forces we talked about. The second big implication is the same one I was describing before wherein the investment landscape for decades before 2020, you could assume a steady underlying trend and then you could obsess about the fluctuations. You could also count on government that had an objective of macro stability. They didn't always succeed, but they were trying to achieve some stability, either through monetary policy or through fiscal frameworks that were meant to provide confidence and trust. I believe that one of the implications of 20 24 election cycle is that we cannot count on this.

I don't think the primary objective of government will be necessarily to provide macro stability. There's a bit of disruption coming from the political side that is more real. There's going to be action that will not, that will have achieved a dollar objective but will not necessarily be in the aim of having a stable growth environment.

And that opens the questions of where will the guardrails of stability come from? And we can frame this as a. A shift away from government providing stability to maybe markets having a bigger role in providing some of the stability. And when it comes to fiscal policy, we might be testing markets appetite for deficits more instead of the government trying not to get close to that testing limit. We might test it and at some point, the market would provide some restraint.

And when we think about measures on the tariff side, protectionist side, that could be disruptive to growth. Maybe again, this is the market that's going to restrain those instincts if we see market reacting strongly. So, it might be a rockier road that we're going to be facing, but one that ultimately gained some stability through the market, forces instead of government policies.

One place where the restraint might not be expected in this environment is if it's on the upside. So, a lot of animal spirit could be generated in this environment. We've seen it. It's not clear who's going to be taking away the punch bowl here. And so, I think one thing down the road to guard against because of this election, outcomes and so on is the fact that we might see some fraught building up. We don't think this is the case for now to worry about, but a year down the road maybe we'll have to think about this.

Oscar Pulido: And since you talk about animal spirits, I can't help but think about the amounts of money that we hear that are being spent in areas like artificial intelligence, the capital expenditures that we've seen from corporations, from the private sector of the economy.

So, let's talk a little bit about the investment needs that the mega forces create. AI being one of them but of course there are many others. Can you give us a sense for just how much are we talking about, when we think about the broader mega forces, what is the size of that investment need and how is it going to get funded?

Jean Boivin: So, we put out a publication on the AI landscape and the analysis we did there, plus if you add the energy transition needs in terms of investment that is required, the two together, if you look over the next six years by 2030, the quantum of what we're talking about is on par with the scale of the CapEx that was deployed in the aftermath of the Industrial Revolution. So, we're talking huge numbers. This is based on what the industry, the companies, are forecasting their CapEx deployment to be.

So, these are things that are seen as being realistic by each of these companies. If you add them up, this is what it comes out to. Now, we were talking about this a year ago, and you could say, well, this is aspirational. And to be clear, it's the same quantum of the industrial revolution in terms of CapEx, but we're talking about six years from now.

The industrial revolution happened over like a century. So, it's not only the scale, but the speed at which this is supposed to be happening is unprecedented. So, you could question whether this is realistic or too much optimism, but the reality is expectations were for about 200 billion to be deployed in 2024, and we are now tracking $240 billion, so 20% more. So even though that was seen as ambitious, it's happening even faster. That build out story is transformational and as transformational potentially as like the biggest revolution we've seen.

Oscar Pulido: I think whenever you take a hundred-year period of capital expenditures and an economy evolving and now say it's going to happen over a six-year window, I think that starts to qualify as a global transformation. I think now I see why you're using that term. When you talk about this transformation, it sounds like it's going to create plenty of investment opportunities. What does it look like practically the investment opportunity set when you're talking about these economic shifts?

Jean Boivin: One thing that is at the heart of all of these mega forces is that they all, and this is the title of our outlook, building the transformation they all require building, building the infrastructure, building the capacity to do it.

Right now, we're in a build-out phase. Adoption is beginning, we are not quite there yet. And eventually we're going to see a transformation. But we need to build it out first. We talked about the quantum that this means. This is true for ai. You think about the political fragmentation, globally, which means rewiring of trade patterns means investment in ports and harbor to adapt to these patterns.

So, I guess a common theme I'm building to is this infrastructure opportunity that is massive globally. That's something that is not in one region. This is in many places of the world, so that has a global aspect to it. and it's something also that is requiring a lot of funding from the private sector.

So, we're not in a situation where infrastructure will be mainly finance funded by the government anymore because we are in this kind of landscape, which we have high debt everywhere, much more constrained. So, that transformation combined with these financing needs together, I think create a big opportunity for infrastructure. So that's one.

If you then go to AI per se itself, we think this is first and foremost about the build out right now. The build out, requires scale to be able to have the balance sheet to finance the type of scale of investment needed that favors, bigger players, that leads to concentration as a result in the outcome we've seen in 2024.

So, you know, we look at the US equity market, it's extremely concentrated. If you compare historically, but at the same time, we think it's concentrated for a reason. There's a logic, it's big players that can, build this out. So, for now, concentration is a feature, not a bug of this environment. And so, another investment implication is not necessarily to be too afraid of the market being concentrated, or even the valuation in this environment. Because if you believe in that transformation, this is what you should expect. Being invested in US equities with, even in the tech more specifically, is part of what we would recommend going into 2025.

And then more broadly, we think this environment when inflation is not resolved, we'll come back maybe to that. But that leads to favoring, short-term credit over long-term duration or long-term bonds as a place where we would balance the portfolio as well.

So, to summarize all of this, the main lens to apply and where do you have to find the opportunities is maybe to step a bit away from the broad asset class and regions and think more about these thematics, these mega force and where they play out. And this is where we see where to take risk in 2025.

Oscar Pulido: Jean, you talked earlier about one of the interesting observations of 2024 was that maybe economies didn't follow the historical textbook that they tend to follow. And you mentioned interest rates were high, but financial conditionings were loose. And so, it has been interesting to just see how the macro environment plays out.

One of the things that you follow very closely is central bank policy, and one of the big questions throughout the year was, when and will central banks start to cut interest rates? They finally started to cut interest rates in the second half of the year. Can you talk a little bit about are those rate cuts going to continue or how are central banks going to navigate what appear to be persistent inflationary pressures?

Jean Boivin: So, one of the big challenges of talking about central bank's outlook, is that this is at the heart of the issue where we are, where we think is we're going through right now, which is that we're not going to recycle. It's a transformation. It's about structural change and trends. immediately, if you talk about central banks, then you adopt a frame around a cycle, central banks are about cycle. We think, in fact, this is part of the reason why we've seen very significant shift in narratives in 2024 because the temptation to apply a cyclical lens to what is not a cycle is very high.

So that's the context in which I'm approaching the outlook for central banks in 2025. Yes, they've started to ease, monetary policy, but they eased when financial conditions were already easy. Inflation has fallen, but for reason that to our mind have little to do with, the classical cycle- we haven't seen growth slowing. We haven't seen financial condition tightening, which is the mechanism by which inflation would fall, typically if it was due to monetary policy. So, I think this inflation falling that we've seen that has prompted central bank to ease monetary policy was not the result of an evolution of the cycle.

Underneath all of this, we think that there are these ongoing forces that will keep inflation sticky. And I think we're seeing even more of that over the last few months. we see inflation start to tick up again, that was our expectation. We have been at the view, and I guess we continue to be very much of the view that even though the Fed has started to cut rates in September, no matter what their expectation was, we don't think this is the beginning of a typical easing cycle. So, this is a recalibration, we might get some more cuts, but the bigger story is that I think we won't go very far in terms of cutting and inflation will reappear not in a massive way, but re reappear, constrain them in their ability to cut rates.

And that's going to contribute to more rates that are, structurally higher than they have been for, Since 2000. and also, long-term rates that I think will continue to drift up as a result. So central banks at the end of the day may be cutting a bit more, but this is not an easing cycle story. and inflation is not, resolved in our review. so that's going to be what's going to play out through 2025.

Oscar Pulido: So, what does this mean for investors who maybe can't look at the past as the playbook that they would've used if in fact we're going through structural changes, and you can't apply the cyclical lens that you've applied.

What does this mean portfolios? You've touched on US equities being an area that you still find compelling. And you talked about thinking about themes as opposed to asset classes and maybe that being a way to think about portfolios, but what else would you add to that?

Jean Boivin: In this environment, we need to be ready. And again, with 2024 illustrated that we need to be ready for a temptation to apply a cyclical lens to other phenomenon that we eventually learn are not about the cycle. Central banks, like all of us will be pushed in the direction they will have to course correct. This is something we need to be, gearing up for in 2025. And the way to deal with that is, we unfortunately are not in a world where we can like. build a portfolio, think about an asset allocation, setting it and forgetting it. Certainly not for five years, but even for the course of 2025, we need to be more active. We need to be more nimble.

And I think whenever we see markets going far in the direction of adopting a recession lens or cyclical lens. We would take the other side of this, try to temper those, temptation. That has worked well in 2024, and we think that's going to continue to be a story for 2025, but on top of being more granular, not look at asset class, look more about thematic, I think the dynamism aspect is crucial. You can do that in different ways in portfolios, but, reassessing, will be key.

Oscar Pulido: Well, Jean, now you've done the hard work of setting out the outlook for 2025 and I guess now comes the fun part, which is to see, how accurate it is-

Jean Boivin: -Or not!

Oscar Pulido: Or not! We will definitely, check in periodically over the course of 2025 with you and other members of your team at the BlackRock Investment Institute to see how it's going. Thank you for sharing, your views on the outlook here, and thank you for doing it on The Bid.

Jean Boivin: Thanks a lot.

Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, mark Weidman, head of BlackRock's Global client Business, will guest host a miniseries on the investment opportunities in the infrastructure landscape. Make sure you hit follow and don't miss this exciting miniseries.

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