Complex new environment calls for granular investment strategies: BlackRock

SINGAPORE - The increasingly volatile macro climate and fast-evolving market conditions still provide abundant investment opportunities, but investors have to be more tactical and take a dynamic approach to asset allocation and portfolio construction.

So says BlackRock Investment Institute (BII) in its 2023 mid-year outlook paper, titled New Regime, New Opportunities.

The world has changed. The era of cheap funds, abundant resources and low prices is over, the institute noted.

“This new regime is shaped by persistent supply constraints, which are set to stoke ongoing inflationary pressures,” BII said in its report.

“We think that will compel major central banks to hold policy tight in the long term. This is not a friendly backdrop for broad asset class returns, but we see abundant investment opportunities amid the volatility.”

Mr Ben Powell, BII’s chief strategist for Asia-Pacific and author of the report, said investors should be aware that the process of investing needs to change in a new environment.

“The era of just selecting a good portfolio and forgetting about it is over,” Mr Powell told The Straits Times. “A new playbook is needed. The new investment regime calls for a more granular, nuanced, dynamic and proactive approach.”

Those who follow this new playbook will find numerous opportunities within asset classes and gain the ability to harness structural shifts such as the rise of artificial intelligence and geopolitical realignments of supply chains.

Mr Powell said central banks will not quickly ease policy in a world shaped by supply constraints – notably worker shortages in the United States.

“Central banks face a situation very different from 40 years ago, when there were few supply side constraints,” he said. “Today, policymakers face a complex environment, with inflation staying well above mean amid intense supply side tightness.”

Meanwhile, new mega forces including digital disruption, the rewiring of globalisation driven by geopolitics, the transition to a low-carbon economy and ageing populations as well as a fast-evolving financial system will create big shifts in profitability across economies and sectors.

So what should investors do?

Stay nimble, take a proactive approach and be willing to adjust your portfolio as circumstances change.

In terms of asset classes and geography, Mr Powell reckons investors should be looking at emerging market local currency-denominated debt (such as municipal bonds) and emerging market equities, which will benefit from the global mega trends.

He is underweight on European and US equities, neutral on Japanese equities, and upbeat on China and India.

On China, he sees valuations looking attractive and believes the market could be rejuvenated by stimulative and easing measures likely to be announced during the upcoming party Politburo meeting in late July.

As for India, its demographics will drive its economy and markets for decades, he added.

“The Aadhaar individual identification scheme has enabled hundreds of millions of citizens to access the financial and credit system,” he said. “The impact of this will be huge over time.”

Other emerging markets such as Indonesia will benefit from energy transition.

Japan will continue to battle a deflationary environment. However, Japanese equities are looking increasingly attractive as the country’s corporates are being pushed to adhere to better standards of corporate governance and provide higher returns on capital by regulators, said Mr Powell.

Earlier in June, legendary investor Warren Buffet announced purchases of additional shares in five major Japanese trading houses.

Going forward, Mr Powell sees at least one more US Federal Reserve rate hike before a pause. But he does not envisage a pivot to easing any time soon.

“While inflation has come down from 9 per cent to 5 per cent, bringing it down from current levels to the Fed’s 2 per cent target is a different ball game,” Mr Powell said.

Indeed, speaking in Portugal this week, Fed chair Jerome Powell (no relation to Mr Ben Powell) said he expects multiple interest rate increases ahead and possibly at an aggressive pace.

That said, BII sees the lagged effect of the 500 basis points hike gradually showing over the coming year.

But a new regime marked by supply side tightness and higher-for-longer rates will result in higher macro and market volatility.

The bottom line for investors is that they have to stay nimble and dynamic, and adjust their portfolios by taking a more granular approach in investment decisions.

“Broad asset class exposures of the past will no longer deliver the returns in the future,” BII’s Mr Powell concluded.