BlackRock - Macro update: Q2 2023

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At the start of the year, we wrote that a new investment playbook was needed to stay nimble in a new economic regime, where growth and inflation are likely to fluctuate more than in the past – leading to higher market volatility, or larger and more frequent changes in the value of stocks and bonds. We’ve seen this play out in 2023 so far, following recent tumult in the banking sector. 

Developed market (DM) central banks have been rapidly raising interest rates since last year, as they try to bring inflation back down to target. However, inflation remains persistently high, and economic growth appears to be slowing – reinforcing our view that a recession is likely in store later this year. We don’t think central banks will come to the rescue, as they have in the past; the old playbook – where central banks would have stepped in to support growth by cutting interest rates – no longer applies. We think major central banks will stick to a ‘separation principle’ – using interest rate levels to rein in inflation while turning to other tools to ensure the stability of financial markets. Ultimately, the scale of the economic damage depends on how far central banks are prepared to go to bring down inflation. When they take stock of the damage caused, we expect they will eventually stop raising interest rates and learn to live with higher inflation. In the short term, we take a cautious view on riskier assets like equities, but we’re ready turn more positive as the situation evolves: being nimble in portfolio decisions is a core tenet of our new playbook.

Being nimble in portfolio decisions is a core tenet of our new investment playbook.

We focus on three key themes for Q2:

 1) pricing the damage to see if the value of assets appears to be factoring in the damage we see ahead;

 2) rethinking bonds and their role in portfolios, as we turn to bonds for income with yields back to more attractive levels; and

 3) living with inflation by managing the effects of sustained price pressures on investments. Over the following pages, we explore how investors can implement these views in portfolios

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Important Information:

Capital at Risk

All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: Blackrock Investment Institute, November 2022. Notes: The boxes in this stylized matrix  show how our tactical views on broad assets classes would switch if we were to change our assessment of market risk sentiment or assessment of how much economic damage is priced in. The potential view changes 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.