There is a fundamental ‘regime change’ happening in portfolio construction, according to BlackRock, moving away from a relatively stable 30-40 year period in both growth and inflation, to a more volatile environment.
This change would affect the way portfolios are constructed – both tactically and strategically.
This was one of the key messages Katie Petering, head of investment strategy at BlackRock, discussed at the IMAP Independent Thought Conference in Sydney.
She outlined some of the important insights on asset allocation and portfolio construction from the BlackRock Investment Institute’s Global Outlook Mid Year 2022 report.
As part of this ‘regime change’, where markets adapted to heightened macro volatility and higher risk premia, the BlackRock Investment Institute identified three investment themes that it believed would play out over the coming six months.
These were:
1. Bracing for volatility;
2. Living with inflation: and
3. Positioning for net zero.
According to Petering, it was the view of BlackRock that ‘The Great Moderation’ – a four-decade period of steady growth and inflation – was over.
She said that with the rush by central banks to raise interest rates in a bid to contain inflation that’s rooted in supply constraints, they were failing to acknowledge the stark trade-off: crush economic growth or live with inflation.
“We see this driving a new regime of higher macro and market volatility, with short economic cycles,” said Petering.
“As a result, we anticipate higher risk premia across the board – both equities and fixed income – and we believe portfolio allocations will need to become more granular and nimble, as portfolio managers and advisers embrace this volatility.”
BlackRock didn’t view this more volatile period as a ‘buy-the-dip’ opportunity. Instead, it expected the market environment to become a lot more volatile, as central banks tried to find the right balance between growth and inflation.
“That means the traditional 60/40 portfolio needs to be re-evaluated,” said Petering. “Traditional correlations just won’t work anymore, which means we need to re-consider our portfolios. And until policymakers acknowledge and act on the trade-off between growth and inflation, at BlackRock, we’re not going to get tactically more bullish on equities.”
