In its latest research paper, global asset manager BlackRock said waiting for the macroeconomic environment to improve may not be a sound strategy for investors, instead, the emphasis should be on neutralising macro exposures or strategically choosing exposures based on high conviction.
“We see more scope to outperform the market now than in the less volatile Great Moderation,” the asset manager said in its 2024 Investment Outlook.
The report highlighted the dominance of production constraints and emphasised that central banks are struggling with increasingly challenging trade-offs as they strive to address inflation without compromising economic growth. These factors have contributed to a broader divergence of opinions among market participants, BlackRock said.
“For example, analyst estimates of future S&P 500 equity earnings are more dispersed now than before the pandemic, according to LSEG data. They are having a harder time reading the earnings outlook.
“So macro insight is likely to be more rewarded. Still, we think investors need to be alert to risks around macro exposures in the new regime,” BlackRock said.
The firm pointed to two critical factors affecting markets – the uneven adjustment to structurally higher inflation and policy rates and the challenges posed by structurally lower growth and higher rates on US government debt.
Active management is key
Given this heightened volatility and dispersion in the new regime, BlackRock believes an active approach to portfolio management is key.
The fund manager suggested that while structurally higher policy rates should eventually lead to higher returns on all assets, not all valuations have adjusted. Moreover, it cautioned that static exposures to broad asset classes that worked during the Great Moderation’s bull markets may not deliver the same risk-adjusted returns now.
“We see alpha, or above-benchmark returns, playing a bigger role in the new regime – and believe a more dynamic portfolio approach is warranted when cash offers attractive returns,” the fund manager said.
BlackRock also emphasised the value of acting on good insights in a timely manner, as demonstrated by the outperformance of portfolios that have embraced such strategies since 2020.
The fund managers also noted that “getting granular” with portfolio allocations can help investors thrive.
“For example, returns on short-term Treasuries have outpaced those on long-term bonds since mid-July 2023, according to LSEG data, as investors started to demand compensation for taking long-term interest rate risk,” the firm said.
Ultimately, BlackRock’s research indicated that investment expertise is likely to play a crucial role in navigating the challenges and opportunities presented by the current macroeconomic landscape, offering portfolios a competitive edge in the new regime.
