BlackRock has moved to a neutral stance on developed market stocks in light of increased risks that hawkish central banks will choke global growth.
The asset manager recently said it was reducing risk in its portfolios because of “a worsening macro outlook”.
In its latest update, BlackRock revealed it had since gone neutral on developed market equities, having previously held a modest overweight, citing recent comments from Federal Reserve chair Jerome Powell as the reason.
Last week, Powell said in a Wall Street Journal conference that the central bank would persist with interest rate hikes until inflation begins to fall back towards a healthy level. “What we need to see is inflation coming down in a clear and convincing way,” he said. “And we’re going to keep pushing until we see that.”
Noting that this suggested the Fed saying it would bring down inflation “at any cost”, BlackRock strategists replied that “reality will be more complex”.
Firstly, the current supply-driven inflation – caused by a combination of post-pandemic bottlenecks and the conflict in Ukraine – meant central banks faced “the sharpest policy trade-off in decades”: whether to risk choking off growth through sharply higher interest rates or to accept living with supply-driven inflation.
“The Fed’s hawkish pivot this year has been stunning and pronouncements on reining in inflation have become regular fare. Chair Jerome Powell just last week said the Fed would keep hiking rates until inflation is ‘tamed’ – a comment that dismisses any trade-off or the lagged effect of monetary policy on the economy,” the firm’s strategists said.
“The Fed now appears to be constraining itself to the hawkish side of policy options with such language, just as talking about the jump in inflation being ‘transitory’ last year boxed it in when inflation proved more persistent and forced a sharp pivot. We think the Fed could be forced into another sharp pivot later this year, which we expect rather than a recession. These Fed pivots are driving market volatility, in our view.”
