At the start of the year, BlackRock highlighted central banks, a confusing market backdrop and the move to net zero as three themes that investors should pay attention to in 2022.
Each of these was affected by the Russia/Ukraine war but the asset management giant believed they were still going to move markets over the coming months.
Money Management has found out how the strategists of the BlackRock Investment Institute (BII) have updated their three themes and how investors should position themselves.
Living with inflation
BlackRock’s first 2022 theme looked at central banks’ attempts to raise interest rates and shrink balance sheets against the backdrop of rising inflation. The Federal Reserve had already started lifting rates and was expected to continue to do so in the months ahead.
BlackRock expected central banks to continue normalising policy even though inflation was at multi-decade highs but added that “the eventual sum total of rate hikes will be historically low” given their recent willingness to tolerate higher inflation.
“Yet we see a higher risk of the Fed slamming on the brakes to deal with supply driven inflation after its hawkish pivot when raising rates for the first time since the pandemic,” BlackRock warned. “Another risk to our view is that inflation expectations become unanchored, forcing central banks into taking more aggressive policy action.”
What can investors do?
BlackRock’s base case was that central banks would implement a “muted” reaction to higher inflation and keep real rates low, which suggested an environment that favoured equities over bonds. The firm likes inflation-sensitive equities, such as the energy and financials sectors.
It also said investors should take a multi-asset approach to preparing portfolios for inflation and consider commodities for their diversification and inflation-hedging properties as well as inflation-linked bonds.
Cutting through confusion
At the start of 2022, BlackRock’s second theme looked at how a “unique mix of events” – the restart of economic activity, virus strains, supply-driven inflation and new central bank frameworks – could increase the risk of a policy mistake when policymakers attempted to curb inflation.
Now added to this confusion is the Russia/Ukraine war, which has exacerbated inflationary pressures and put central banks “in a bind”. The risk here is that central banks react to slowing growth from higher energy and commodity prices by reverting to old policy responses to higher, supply driven inflation, which could damage growth even further and cause a dreaded recession with high inflation.
What can investors do?
BlackRock said that the wide range of potential outcomes means investors should be selective in their risk-taking and focus on portfolio resilience.
It added that suppressed real yields in developed markets was supportive of risk assets and a strong correlation between corporate earnings and inflation means stocks look well placed to benefit from the expected macro environment. BlackRock recently upgraded developed market equities in light of this.
“We look to quality stocks for ballast, alongside cyclical exposures like UK equities, where investors have been taking a more selective approach,” strategists said. “Chinese assets and liquid alternatives could offer an element of diversification.”
Navigating net zero
The third and final theme was how the global economy can moved towards a net-zero future through a greater adoption of clean energy.
The energy shock caused by Russia’s invasion and the following sanctions imposed by the West brought the issue of energy security into sharp focus. In the short term, this could mean increased use of oil and coal for energy as Europe makes up for less Russian gas, but BlackRock did not see this as a sign that the long-term transition to clean energy was at risk.
“The drive in Europe for greater energy security should spur the development of clean energy. Tight fossil fuel markets, with sustained high prices, act like a carbon tax on consumers. Europe is now spending about 9% of its GDP on energy – the highest share since 1981. And the green energy premium – the extra typically paid for choosing renewables over traditional energy – has been eroded,” the firm said.
What can investors do?
BlackRock suggested the best investment opportunities for this theme was in sectors that had clear transition plans and preferred those that stand to benefit the most from this transition, such as technology and healthcare.
In addition, it looked for exposures that were actually aligned with and helping to drive the transition. These can range from companies that have explicit decarbonisation targets through to investments in transition finance such as green bonds.
