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BlackRock: Invest in disruptions, focus on innovation to navigate market turbulence



New regime in equity market highlighted. Macroeconomic volatility surges due to supply constraints. Geopolitical shifts and policy changes fuel inflation. Aging populations cause labor shortages, pushing up wages. AI potential solution but will take decades. Recession hits, yet tech equities rebound. Sharp performance divergence seen in stocks. Granular portfolio strategies advised, harnessing "mega forces." Invest in sectors set to grow and disrupt. Focus on innovation to navigate market turbulence.



Here is a quick summary of the Report:


  • New Regime with Persisting Supply Constraints

    • Unprecedented macroeconomic and market volatility dominated by supply constraints.

    • Factors including geopolitical shifts, global supply chain rewiring, low-carbon economy transitions, and aging populations cause persistent inflation and worker shortages, thereby increasing production and energy costs.

    • Artificial Intelligence (AI) might alleviate these issues but only in the long term (decades, not years).


  • Complex Equity Market

    • Increased divergence in equity market performance, with a notable lead by the tech sector.

    • AI represents a substantial opportunity for investment despite a challenging macro environment.

    • Granular investment strategy preferred, focusing on segments reflecting the macro outlook accurately and sectors influenced by mega forces.


  • Central Banks Facing Challenges

    • Limited tools to address supply constraints; stuck between promoting growth and controlling inflation.

    • Fastest interest rate hikes seen in decades.


  • Policy Implications and Investment Strategy

    • Likelihood of higher policy rates persisting for a longer period in major economies.

    • Potential occurrence of "full employment recessions" due to broad worker shortages in the U.S. and Europe, putting pressure on corporate profit margins.

    • Shift to short-dated U.S. Treasuries recommended for income generation.





  • New Opportunities Amidst Challenges

    • High macro volatility leading to greater market volatility demands a granular approach to investments.

    • Higher dispersion within and across asset classes in the new regime, increasing opportunities for uncorrelated exposures in portfolios.

    • Market mispricing offers relative value opportunities, requiring expertise and skill in security selection for above-benchmark returns.


  • Conclusion

    • Significant investment opportunities exist by identifying granular opportunities within asset classes rather than relying on the macro environment.

    • Emphasis on a detailed understanding of market pricing dynamics to seize opportunities arising from mispricings in the fast-changing new regime.


Big structural forces are dictating the new macro regime and asset returns. Identifying and leveraging catalysts that enhance these forces is crucial for finding investment opportunities in both sectors and companies that are yet to be acknowledged by the market.

  • AI developments, spurred by tools like ChatGPT, are still being analyzed by markets, with the potential to disrupt entire industries and increase cybersecurity risks due to heightened digitalization.

  • Geopolitical shifts, such as the U.S.-China rivalry, are expected to reshape global supply chains, with governments moving operations closer to allies, marking a potential end to years of globalization.

  • The low-carbon transition is leading to diverse speeds of economic decarbonization, influenced by policy, technological innovation, and changing consumer and investor preferences, opening avenues for large capital reallocation opportunities.

  • Demographic shifts with aging populations and reducing workforces in developed market (DM) economies are significant contributors to the new regime.

  • Transformations in the financial system are on the horizon, with higher interest rates redefining the roles of banks and credit providers.

  • Technological innovations are at the core of these mega forces, affecting various public and private markets, asset classes, and regions, and history shows that rapid adoption of new technology can revolutionize economies.


Understanding and utilizing these "mega forces" is key to uncovering new investment opportunities, as markets may underestimate the speed of transitions and the potential of new technologies.

The chart illustrates that new technologies can be adopted swiftly, with markets occasionally failing to fully appreciate the transition pace, presenting investment opportunities but also potential for temporary price surges due to overenthusiasm.

Investors should maintain a diligent eye on market pricing trends to harness the potential of these transformative forces effectively.


In the new regime characterized by powerful structural "mega forces" and heightened market volatility, the approach to tactical asset allocation needs to evolve to be more dynamic and nimble, according to BlackRock Investment Institute's updated playbook for June 2023.


Key Updates:

  1. Granular Approach:

    • Moving away from broad and static investment solutions to more granular and nimble strategies.

    • Assessing macro outlook to dictate asset allocation with a focus on regional, sectoral, and industry opportunities.


  1. Harnessing Mega Forces:

    • Mega forces, which include large structural shifts like geopolitical fragmentation and technological innovation, are starting to influence returns and corporate profits.

    • These forces go beyond asset classes and are significant in the current time, not just in the future.


  1. Broad Asset Allocation:

    • The asset allocations are derived based on a 6-12 month tactical horizon and an assessment of the macro outlook.

    • Portfolio views are then implemented across a wide range of asset class exposures.


  1. Implementation Strategy:

    • Favorable views on income in developed market short-term government bonds and U.S. mortgage-backed securities.

    • A cautious approach to real estate investment trusts while showing interest in AI-related equities in developed markets.

    • A preference for Brazil and Mexico in emerging market local-currency debt.


  1. Dynamic and Nimble Approach:

    • The current market conditions marked by increased volatility and tight monetary policy discourage a static approach.

    • Fixed incomes offer real income exceeding inflation, despite not providing the same diversification from equity selloffs as before.

    • Advocacy for a more dynamic approach to leverage the opportunities arising from the market shocks associated with the new volatile regime.


Expert Insight:

Ursula Marchioni, the Head of EMEA Markets and Portfolio Solutions at BlackRock, emphasizes the need for more frequent changes in strategic views to adapt to the new, more volatile regime, highlighting the significance of being dynamic to seize emerging opportunities.


Chart Analysis:

The chart showcases a fluctuating trend in the strategic views from September 2018 to March 2023, underlining the necessity for investors to evolve from a "set-and-forget" mindset to a more responsive and adaptable strategy to capitalize on potential opportunities.


Summary:

In light of the prevailing market conditions characterized by heightened volatility and the influence of mega forces, BlackRock advocates for a more dynamic, granular, and nimble approach to tactical asset allocation. Abandoning static strategies for more adaptable ones can potentially aid in seizing opportunities presented in the new volatile market regime. It urges investors to be more responsive and to not rely heavily on past strategies that focused on static allocations to equities and bonds. The call is to navigate the current complex landscape with a more finely-tuned and responsive strategy to enhance potential returns.







Artificial Intelligence (AI)


Main Points:

  1. Increased Attention on AI:

    • AI and digital disruption are central topics in mainstream discussions.

    • The boom in computational power and data availability have fueled AI's ascent, with advances in machine learning presenting new AI tools.

    • There's a notable increase in mentions of AI in company earnings calls in 2023, highlighting the growing market enthusiasm for AI's potential.


  1. Implications of AI on the Job Market:

    • The ability of AI tools to automate a wider range of tasks, including those performed by humans, can potentially enhance productivity, albeit posing a higher risk of automation to white-collar jobs.

    • Companies with high staffing costs stand to benefit significantly from the cost savings accrued through automation, but there's a risk of lagging if they fail to adapt to this change.


  1. Role of Semiconductors:

    • Semiconductors are critical components in AI tools and models.

    • The market has responded enthusiastically to AI's potential, leading to a sector rally and increased capital flow towards semiconductor production.

    • There is an emphasis on boosting domestic production of semiconductors in countries like the U.S.


  1. Significance of Data:

    • The true potential of data in AI is underappreciated, with companies harboring vast proprietary data sets standing to benefit hugely by leveraging it to craft innovative models.

    • AI tools can unlock the tremendous value encapsulated in data, turning it into a kind of 'gold mine.'


  1. AI as a Mega Force:

    • AI has been initiated as a "mega force view," necessitating a granular approach for its articulation given its transcending nature across sectors and regions.

    • The market is actively engaged in discerning the ramifications of AI-driven disruptions.


Chart Takeaway:

  • The mention of AI in company calls has surged incredibly in 2023, pointing to the growing company and investor excitement around AI, spurred partially due to the popularity of large language models like ChatGPT.


Concluding Note:

AI has commandeered considerable attention in the recent period, particularly in 2023, with an escalation in mentions during company earnings calls, highlighting a burgeoning interest in and recognition of AI's potential to revolutionize businesses and economies. Leveraging AI could mean substantial productivity gains, particularly for companies with high staffing costs or those that have a large segment of tasks amenable to automation. The focus is now on embracing AI as a vital force driving future developments, with a spotlight on enhancing semiconductor production and unearthing the untapped potential of extensive data sets. It is imperative for companies to remain abreast with this trend to secure a favorable position in the rapidly evolving landscape.



Mega Forces


Main Points:

  1. Shift from Globalization:

    • The Ukraine war and tense U.S.-China relations signal the beginning of an era marked by global fragmentation and competing economic and defense blocs, deviating from the post-Cold War period of globalization and geopolitical moderation.


  1. National Security and Resilience:

    • The new era prioritizes national security and resilience over efficiency, potentially leading to lower growth and higher inflation without significant tech-driven productivity enhancements.


  1. Policy Changes and Investments:

    • There might be a rise in industrial and protectionist policies encouraging investment in infrastructure and robotics.


  1. Emergence of Multi-Aligned Countries:

    • Countries with substantial resources and significant roles in the supply chain like the Gulf oil states, India, Brazil, Vietnam, and Mexico are expected to grow in power and influence, aligning based on national interests which might influence supply chains and industrial policies.


  1. Geopolitical Confrontations and Industry Growth:

    • There is an increased risk of geopolitical confrontations occurring on various fronts including land, space, and cyberspace, potentially fostering growth in defense, aerospace, and cybersecurity industries.


  1. Investment Opportunities and Risks:

    • While the surge in investments in technology, clean energy, infrastructure, and defense presents opportunities, it brings with it economic costs in the long term, especially in Emerging Markets (EMs).


  1. Increased Volatility in Economic Growth:

    • Economic growth is expected to be more volatile and susceptible to shocks, urging investors to exhibit caution in selecting themes benefiting from these trends.


Chart Takeaway:

  • The chart indicates that globalization fostered an increase in trade activities between countries, prominently after the Second World War. However, the ascent in trade as a percentage of global GDP has stagnated following the global financial crisis, showcasing a fragmenting world.

Quote by Tom Donilon:

  • Tom Donilon, the Chairman of the BlackRock Investment Institute, predicts a world where the emphasis will be on national security and resilience rather than efficiency. He perceives potential investment prospects as the West aims for greater self-sufficiency in sectors such as technology and energy.

Concluding Note:

In light of the current geopolitical tensions and fragmented global landscape, there is a shift from a world unified through globalization to one characterized by fragmented economic and defense blocs. This has fostered a renewed focus on national security and resilience, overshadowing the erstwhile priority of efficiency. The evolving dynamics offer both opportunities and challenges, as seen with the potential growth in various industries and the increase in economic volatility. The onus lies on investors to navigate this complex landscape prudently to leverage emerging opportunities while mitigating risks.








Mega Forces


Main Points:

  1. Shift from Globalization:

    • The Ukraine war and tense U.S.-China relations signal the beginning of an era marked by global fragmentation and competing economic and defense blocs, deviating from the post-Cold War period of globalization and geopolitical moderation.


  1. National Security and Resilience:

    • The new era prioritizes national security and resilience over efficiency, potentially leading to lower growth and higher inflation without significant tech-driven productivity enhancements.


  1. Policy Changes and Investments:

    • There might be a rise in industrial and protectionist policies encouraging investment in infrastructure and robotics.


  1. Emergence of Multi-Aligned Countries:

    • Countries with substantial resources and significant roles in the supply chain like the Gulf oil states, India, Brazil, Vietnam, and Mexico are expected to grow in power and influence, aligning based on national interests which might influence supply chains and industrial policies.


  1. Geopolitical Confrontations and Industry Growth:

    • There is an increased risk of geopolitical confrontations occurring on various fronts including land, space, and cyberspace, potentially fostering growth in defense, aerospace, and cybersecurity industries.


  1. Investment Opportunities and Risks:

    • While the surge in investments in technology, clean energy, infrastructure, and defense presents opportunities, it brings with it economic costs in the long term, especially in Emerging Markets (EMs).


  1. Increased Volatility in Economic Growth:

    • Economic growth is expected to be more volatile and susceptible to shocks, urging investors to exhibit caution in selecting themes benefiting from these trends.


Chart Takeaway:

  • The chart indicates that globalization fostered an increase in trade activities between countries, prominently after the Second World War. However, the ascent in trade as a percentage of global GDP has stagnated following the global financial crisis, showcasing a fragmenting world.

Quote by Tom Donilon:

  • Tom Donilon, the Chairman of the BlackRock Investment Institute, predicts a world where the emphasis will be on national security and resilience rather than efficiency. He perceives potential investment prospects as the West aims for greater self-sufficiency in sectors such as technology and energy.


Concluding Note:

In light of the current geopolitical tensions and fragmented global landscape, there is a shift from a world unified through globalization to one characterized by fragmented economic and defense blocs. This has fostered a renewed focus on national security and resilience, overshadowing the erstwhile priority of efficiency. The evolving dynamics offer both opportunities and challenges, as seen with the potential growth in various industries and the increase in economic volatility. The onus lies on investors to navigate this complex landscape prudently to leverage emerging opportunities while mitigating risks.







Low Carbon Transition & Population Aging


Main Points

1. Low-Carbon Transition

  • BlackRock Investment Institute Transition Scenario (BIITS)

    • BlackRock is developing BIITS to help clients understand and navigate the evolving landscape of the low-carbon transition.


  • Massive Reallocation of Capital

    • The transition involves massive capital reallocation to restructure energy systems based on policy, technology, and preferences of consumers and investors.


  • Tipping Points

    • Points where low-carbon technology becomes cheaper than existing sources and faces fewer adoption barriers, leading to an uneven and multispeed transition across regions and sectors.


  • Economic and Investment Implications

    • The transition could cause inflationary pressures due to higher energy prices and increased capital spending, albeit possibly decreasing over time with reduced low-carbon technology costs.


2. Chart Takeaway (Low-Carbon Transition)

  • Electric Vehicle (EV) Companies Valuations

    • EV companies' valuations surged but recently retreated, even as their market share in the automobile sector continued to grow according to IEA estimates.


3. Aging Populations

  • Challenge Predominantly for Developed Markets (DM)

    • Aging is mainly a problem for DMs, impacting consumer spending and public finances due to a decrease in working-age population and resultant diminished income.


  • Global Labor Force

    • The global labor force is growing slower than at any point since WWII, with fewer workers available to support a larger non-working population, affecting government spending and potentially increasing debt burdens.


4. Chart Takeaway (Aging Populations)

  • Working-Age Population Shifts

    • The working-age population is set to decrease in high-income economies while increasing in low-income economies.


5. Aging Impacts on Economy

  • Inflationary Aspect

    • Aging could potentially drive inflation as demand dynamics change with older populations not necessarily consuming less, but altering what they consume.


  • Policy Challenges

    • Aging poses policy challenges, necessitating difficult decisions for central banks.


6. Case Study: Japan

  • Shrinking Working-Age Population

    • Japan’s experience since 1994 with a shrinking working-age population offers insight into potential economic impacts.


  • Potential Remedies

    • Solutions include increasing female workforce participation, immigration, raising retirement age, or enhancing productivity through measures like AI integration.


7. Impacts on the U.S

  • Constraints on Labor Supply

    • The aging population is restricting the U.S labor supply, posing challenges but also opening investment opportunities in sectors such as healthcare and real estate catering to seniors.


Conclusion

The transition to a low-carbon economy and aging populations are two pivotal “mega forces” impacting global economies and investment landscapes. BlackRock is developing tools like BIITS to help investors navigate the complexities and opportunities arising from the low-carbon transition. Meanwhile, the changing demographics due to aging populations pose both challenges and opportunities, requiring thoughtful policy decisions and offering avenues for targeted investments. It is essential for investors to be agile and informed to effectively maneuver through the evolving market dynamics influenced by these forces.





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