Global Weekly Commentary: Strategic reasons to get active
More active long term
We think market optimism can persist for now but stay nimble. We get more active in our long-term portfolios given a greater dispersion of returns.
Market backdrop
U.S. stocks steadied after a brief dip on stronger-than-expected inflation data last week. We think that shows one data release won’t spoil upbeat risk appetite.
Week ahead
Global manufacturing and services activity is in focus this week. The data may offer an early gauge of Q1 GDP growth as central banks hold policy rates steady.
U.S. stocks recovered after a hit from strong inflation data last week, highlighting one data point won’t disrupt buoyant risk appetite. We’re tactically overweight U.S. stocks as we think market optimism can persist for now. Yet we are strategically active – or ready to pivot our views as we expect resurgent inflation coming into view to spoil sentiment. In the long term, we see a greater role for active strategies that can produce above-benchmark returns due to richer asset valuations broadly.
Uncertainty spurs dispersion
Dispersion of S&P 500 performance, 2010-2024
Past performance is not a reliable indicator of current or future results, and index returns do not account for fees. It is not possible to invest directly in an index. Source: BlackRock Investment Institute, with data from LSEG Datastream, February 2024. Notes: The chart shows the dispersion in S&P 500 monthly stock returns on a daily basis and the median level of dispersion from July 2010 after the global financial crisis through 2019, and from 2020 through Jan. 31, 2024.
We believe there is less consensus and more uncertainty about key macro variables, like inflation, than in the past. Elevated uncertainty is reflected in the heightened dispersion of returns in the new regime, we find. Monthly returns of individual S&P 500 stocks (orange line in the chart) have deviated more from their average since 2020 (green line) than in the prior decade (yellow line). We opted to be selective in U.S. stocks as a result last year, leaning into the artificial intelligence (AI) theme and away from the broad market. Last month, we turned overall overweight U.S. stocks on a six- to 12-month tactical horizon, while still preferring tech. That’s because we think positive market sentiment can persist and broaden out for now as the Federal Reserve readies to cut interest rates and inflation falls nears its 2% target this year.
Yet we are nimble in reassessing our views given our expectation inflation will resurge in 2025. We think mega forces – big structural shifts like geopolitical fragmentation, demographic divergence and the low-carbon transition – are set to make inflation more volatile and settle higher than before the pandemic. On a strategic horizon of five years and more, our stance on developed market (DM) stocks is less positive than our tactical view and we stay neutral. Persistent inflation means real returns, or those exceeding inflation, will be lower over a strategic horizon. Long-term valuations for some asset classes look too high when baking in this outlook and our expectation for interest rates to settle higher than before the pandemic.
Why we get dynamic
That return outlook means that the traditional portfolio approach of static asset allocations won’t work as well as in recent decades, in our view. We stay dynamic in our strategic views as one part of the solution. We trim our overweight to inflation-linked DM bonds as real yields have slid. We up investment grade credit to neutral on a preference for Europe, where credit risk seems better rewarded. In addition to being more dynamic, we think active strategies will play a greater role in strategic portfolios. Our work finds that the difference in our estimate of active returns between the top and bottom 25% of managers is near its widest since 2011. Skill and acting more frequently on good insights can be better rewarded now, in our view.
Top managers may have more potential for active returns in private markets. Dispersion across them has risen in the new regime and tops public markets, based on the limited data available from NCREIF. We prefer income private markets over growth as a shifting U.S. corporate funding landscape likely boosts demand for private credit – part of the future of finance mega force. We see infrastructure equity as a bright spot within growth private markets as it cuts across all mega forces. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.
Our bottom line
We’re being strategically active in our portfolios. We’re overweight U.S. stocks tactically as we think positive risk appetite can persist for now, yet we stay nimble. We take a more active approach in the long run as structural shifts play out. Professional investors can visit our Capital market assumptions website for more details on our strategic return expectations.
Market backdrop
U.S. stocks steadied last week, recovering from a brief dip after U.S. CPI inflation data for January was stronger than expected. U.S. 10-year Treasury yields jumped as markets priced out Fed rate cuts – bringing markets closer to our expectations for rate cuts. We think the quick recovery in stocks highlights that one data release is not enough to spoil positive market sentiment for now. The Fed starting to cut rates and inflation nearing 2% should support stocks in the near term, but we stay nimble.
Global manufacturing and services activity is in focus this week, with global PMIs due for release, including for the U.S. and Europe. We look to the data as an early indication of Q1 GDP growth. We see interest rates in most developed markets remaining higher for longer than before the pandemic due to persistent inflationary pressures in the long term.
Week ahead
Feb. 21
Euro area consumer confidence survey; Japan trade data
Feb. 22
Global flash PMIs
Feb. 23
Germany Ifo Business Climate Index
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 Feb. 15, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, 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.
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