Global Weekly Commentary: Putting money to work in 2024
Transition themes
The new regime has led to greater dispersion of returns. We think this backdrop calls for managing macro risk, being selective and seeking out mispricings.
Market backdrop
U.S. stocks hit a new 2023 high and U.S. Treasury yields inched up on Friday after U.S. payrolls data. Market pricing of rate cuts in 2024 still looks overdone.
Week ahead
We see central banks pushing back against market hopes for rate cuts at this week’s meetings. We expect structurally higher interest rates in the new regime.
We think the new regime of greater macro and market volatility makes this the time to grab the wheel and take an active portfolio approach. Our 2024 Global Outlook outlines how we do that. First, we are deliberate in managing macro risks. Second, we aim to capitalize on greater dispersion of returns by getting selective within asset classes, geographies and sectors. Third, we tap mega forces, the structural shifts we see driving returns and transcending the macro backdrop.
More rewards for dynamism
Hypothetical impact of rebalancing on U.S. equity returns, 2016-2023
Past performance is not a reliable indicator of future performance. Index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, MSCI with data from Bloomberg, December 2023. Notes: The chart shows monthly U.S. equity returns based on the MSCI USA in the old and new regime in three scenarios: keeping the holdings unchanged (buy-and-hold), yearly rebalances and semi-annual rebalances. Rebalances optimize portfolios for returns, diversification and risk with perfect foresight of equity sector returns in the MSCI USA index.
The new regime’s higher interest rates and greater volatility are a sea change from the Great Moderation, the four-decade period of stable growth and inflation that was capped by ultra-low rates in the wake of the financial crisis. That helped suppress macro and market volatility, stoking bull markets in both stocks and bonds – but also limiting the reward of having investment insight. We find that reward is back. The test: Imagine you could perfectly predict future U.S. equity sector returns and adjust your portfolio to capture them. That would have had little upside in the four years before the pandemic. “Buy-and-hold” strategies (the orange bar on the left chart) would have generated similar returns to portfolios allocating to outperforming sectors more frequently (the left yellow and green bars). The reward has been much greater since the pandemic, with rebalancing delivering more than double the hypothetical returns of a buy-and-hold strategy. See the gap between the orange bar and the others on the right chart.
How do we try to capitalize on this new regime? First, we focus on managing macro risk – the first of three investment themes that help us identify opportunities to generate alpha, or above-benchmark returns. Markets have been swinging between hopes for inflation to fall as growth holds up and recession fears. Yet we think the context is that the economy has just climbed out of a pandemic-shaped hole. Plus, structural drivers such as shrinking workforces are poised to push up inflation. One macro risk we’re watching is the uneven market adjustment to structurally higher rates. The income cushion bonds provide has increased, leading us to upgrade long-term Treasuries recently to neutral on a tactical horizon. We went overweight European and UK government bonds at the same time, but have since trimmed again given the fall in yields. This more dynamic approach contrasts sharply with our previously long-held underweight in developed market long-term bonds.
Steering portfolio outcomes
Greater dispersion of returns creates space for investment expertise to shine and means security selection is likely to be more impactful – as detailed in our second theme, steering portfolio outcomes. This involves being dynamic with both indexing and alpha-seeking strategies, while staying selective and seeking out mispricings. For example, we upgraded Japanese equities twice without hedging against currency swings this year due to high compensation for the risk of holding them, strong earnings growth and shareholder-friendly corporate reforms. On sectors, we like European banks for their low valuations and positive outlook for net interest margins, as well as developed market technology.
Harnessing mega forces
Our preference for tech is supported by our third theme, harnessing mega forces, which offer opportunities uncorrelated to economic cycles. Case in point: Investor enthusiasm for digital disruption and artificial intelligence (AI) – one of five mega forces we track – has buoyed U.S. tech stocks and offset the drag of higher bond yields. Our expectation for high-for-longer rates would keep us underweight broad U.S. equities on a tactical, six-to-12-month horizon. Yet adding the AI theme has taken us closer to neutral. Other mega forces present opportunities, too. Within the low-carbon transition, climate resilience – society’s ability to adapt to and withstand climate hazards – is emerging as an investment theme. And we see geopolitical fragmentation dialing up investment in strategic sectors like tech, energy and defense.
Our bottom line
The three investment themes of our outlook guide us on how to take a more active approach to investing. Mega forces help us get granular in DM stocks. And higher rates have increased the income in fixed income, boosting its appeal.
Market backdrop
The S&P 500 hit a new 2023 high, beating the record it set on Dec. 1. The U.S. jobs report for November stemmed the fall in 10-year U.S. Treasury yields – down about 75 basis points from 16-year highs – from markets pricing in multiple Fed rate cuts next year. The data showed a gradually cooling labor market, but falling unemployment and still-high wage growth aren’t consistent with inflation returning to the Fed’s 2% target. So we don’t think the Fed will cut rates as swiftly as markets expect.
The Fed and ECB policy decisions will be the center of market attention this week. We think both central banks will push back against market expectations on how many rate cuts they’ll deliver in 2024 and how soon they will come. For the Fed, in particular, persistent inflationary pressures and loose fiscal policy will prevent it from cutting rates as swiftly as markets expect, in our view.
Week ahead
Dec. 12
U.S. CPI
Dec. 13
Federal Reserve policy decision
Dec. 14
European Central Bank (ECB), Bank of England policy decisions
Dec. 15
U.S., UK flash PMIs
Source
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of Dec. 7, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
© 2023 BlackRock, Inc. or its affiliates. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Dec. 11, 2023, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance.
In the U.S. and Canada, this material is intended for public distribution. In EMEA, in the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Italy, for information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in Italian. In Switzerland, for qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited - Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738). In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorised and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In New Zealand, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) for the exclusive use of the recipient, who warrants by receipt of this material that they are a wholesale client as defined under the New Zealand Financial Advisers Act 2008. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, no securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM1223U/M-3275110