BlackRock’s ETF division says the investment environment has fundamentally changed, which has “profound implications” for future portfolios. In its 2023 investor’s guide, Blackrock’s iShares, one of the world’s largest exchange-traded fund providers, said the era of cheap money is over and the higher rate regime bred for longer was here to stay. “High levels of inflation should prevent the Fed from easing aggressively, even if a recession sets in,” Gargi Pal Chaudhuri, head of iShares Americas investment strategy at BlackRock, wrote in the 30 note. november. “While markets continue to trade on the possibility of a Fed ‘pivot’, we believe central bank authorities will raise and then hold rates in restrictive territory through 2023 – pending long lead times. and variables from the tightening of monetary policy affect the economy. This change has “profound implications for portfolio construction,” Chaudhuri said. “It’s time to consider a new portfolio manual.” She lists three ways investors can play this change in the markets. 1. Work your money; buy bonds Chaudhuri said it’s time to rethink the role of bonds as a higher rate environment leads to higher fixed income yields. “This will likely drive a return to fixed income as it returns as an investable asset class,” she wrote. “Rapidly rising yields have created significant opportunities in high-quality, high-quality fixed income exposures.” BlackRock also said investors can earn income in the “comparative safety” of cash-like instruments through ultra-short duration securities. 2. Reallocate growth stocks Growth stocks, such as big tech, were investors’ favorites in an era of low rates. But this year, tech stocks have been among the worst performing sectors. Many investors remain clinging to the question of when to return to the sector, but Chaudhuri said he could be wrong. “‘Buying down’ is often confused with the question ‘when should I buy tech again?’ ‘” she said. “This implicit question fails to acknowledge the regime change that has taken place: the accommodative monetary policy that drove growth outperformance for a decade (and large-cap tech in particular) is over.” As a result, BlackRock prefers to take a defensive stance on a tactical basis, favoring stocks such as healthcare and energy producers, as well as small-cap stocks which it believes are trading at the biggest discount per versus large-cap stocks since 2001. BlackRock isn’t alone in advising investors to be defensive; Goldman Sachs recently said investors should continue to position themselves defensively through 2023 as the stock market has yet to bottom. In its outlook for 2023, Blackrock’s iShares added that value-style stocks offer exposure to the real economy – embodying “a mature segment of the overall market – which is more defensive in nature with higher earnings yields and less sensitivity to the American consumer”. Infrastructure and agricultural producers are two such sectors, BlackRock said. 3. Living with inflation Inflation is likely to remain, given continued strength in services and housing, according to BlackRock. “Even if the Fed’s tightening starts to bite and economic activity begins to slow, we believe inflation is likely to remain above the Fed’s 2% target due to price stickiness in services and other key components of the consumption basket, such as housing,” Chaudhuri said. Investors should hold inflation-linked bonds given this environment, BlackRock said. “After spending a few years in negative territory, [Treasury Inflation-Protected Securities] real rates have been revised upwards and regained their role as potential ballast in a multi-asset portfolio,” he said.
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