The arrival of a “new regime”: the harsh forecasts of BlackRock gurus for 2023

Hildebrand and his team led by Larry Fink argue that the Great Moderation, a period of low inflation and steady economic growth, allowed stocks and bonds to flourish in ways that will not be possible in the future.

For investors, this new economic era will require a fresh and flexible strategy involving asset selection and more active portfolio management.

“We do not see the sustained bull markets of the past. This is why a new investment manual is needed,” they wrote. “What worked in the past won’t work now.”

A new age

According to BlackRock, three main “regime drivers” are set out to keep inflation above central banks’ targets, moderate economic growth, and make it harder for investors to turn a profit in the coming years.

First, the aging of the population will reduce the workforce and force governments to spend more to care for the elderly, leading to a shortage of workers and reduced production.

Second, tensions between the world’s superpowers indicate that we have entered a “new world order,” where globalized supply chains that once helped drive down the price of goods may break down.

“This is, in our opinion, the most tense global environment since World War II,” Hildebrand and his team wrote. “We see geopolitical cooperation and globalization evolve towards a fragmented world with competing blocs. That comes at the cost of economic efficiency.”

Finally, a faster transition to clean energy will ultimately be inflationary unless a new stream of investment flows into carbon neutral solutions.

“If high-carbon production falls faster than low-carbon alternatives, shortages could result, driving up prices and disrupting economic activity,” they wrote. “The faster the transition, the more out of sync the transfer could be, which means more volatile inflation and economic activity.”

Putting a price on damage

BlackRock also broke down three themes to help prepare investors for the new normal in its 2023 forecast.

First, the asset manager’s experts argued that factoring in the “damage” caused by central bank interest rate hikes and the risk of recession when evaluating stocks will be critical next year.

“Stock valuations do not yet reflect the damage that lies ahead, in our view,” they wrote. “We found that earnings expectations are still priceless even in a mild recession.”

BlackRock doesn’t like developed-market stocks, at least in the short term, because Hildebrand and his team believe the Fed won’t save markets by cutting interest rates when a recession hits as it has in the past.

“Central bankers will not come to the rescue when growth slows in this new regime, contrary to what investors expect,” they argued. “That’s why the old playbook of just ‘buying the dip’ doesn’t apply in this regime.”

Hildebrand and his team even went so far as to argue that central bankers are “deliberately causing recessions” by aggressively raising interest rates to combat inflation.

“The new playbook calls for a continued reassessment of how much of the economic damage generated by central banks is in the price,” they wrote. “That damage is building up.”

living with inflation

Year-on-year inflation, as measured by the Consumer Price Index (CPI), probably peaked in June at 9.1% and some central bankers are already arguing that they are ready to cut it fast and lower rates.

But BlackRock has a different point of view.

“Even with the arrival of a recession, we believe that we will live with inflation,” Hildebrand and his team wrote. “We see inflation cool as spending patterns normalize and energy prices ease, but we see it persisting above policy targets for years to come.”

In this higher inflation environment, they recommend inflation-protected bonds and avoiding stocks, at least in the short term. “We believe that the markets have not yet priced in more volatile and persistent inflation,” they warned.

Source: Ambito