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
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>>
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.
<<THEME MUSIC>>
Disclosure
This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.
For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures
For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the 'Advice Law'), nor does it carry insurance thereunder.
In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.
©2024 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.
MKTGSH1224U/M-4071758
