Facing a transition to a very different, post-pandemic economy, the world's largest asset manager, BlackRock, unveiled a new investment strategy playbook that avoids many of the strategies favored in the past and adopts a more active management style.

In a roundtable earlier this year, BlackRock managers spoke about the shift from the so called “great moderation,” a period defined by sufficient supply and production of goods and services where price fluctuations were minimal and driven largely by consumption demand.

Since the pandemic, the economy has transitioned into a different era where production is often constraind and these limits will be what dictates prices. BlackRock recently hosted another media roundtable highlighting the outlook for next year and the impact of this changing economy and how advisors must react.

The conversation centered on the inevitability of a recession brought on by aggressive actions taken by the U.S. Federal Reserve and other central banks to combat inflation. The Fed raised interest rates by 75 basis points three times. It has indicated more increases are coming, even if they are not as aggressive.

While higher interest rates will help lower inflation, they are also depressing the economy, making a recession more likely. That means central banks are unlikely to be as able to help rescue the economy like in the past. “This is not a recession where we can expect central banks to come to the rescue as they did in past recessions,” said Wei Li, BlackRock’s global chief investment strategist.

BlackRock said a new playbook is needed to deal with this changing landscape. “We’re in a new regime and this new regime requires a new playbook, so what used to work during a pervious recession may not work anymore,” Li said.

The firm's new playbook features three primary themes, according to Jean Boivin, head of the BlackRock Investment Institute. The first is abandoning the buy-the-dip and ride-the-bull market strategies that performed so well in the last decade. Boivin said such a strategy will not work this time around. Instead, it makes sense to be more underweight in developed market equities.

The second theme is to rethink bonds. That's because of several factors, including the high yields bonds are reaching, Boivin said. In addition, the role of long-term bonds within a portfolio should be reassessed. He recommended that portfolios focus on short-term government bonds, investment-grade credit and agency mortgage-backed securities for income. At the same time, he advised remaining underweight in long-term government bonds.

“In the context of the environment that we’re seeing, and the recession we are seeing in 2023, we don’t necessarily expect long-term bonds to play their protection role as they have,” he said.

The final theme is living with inflation. While the managers expect inflation to fall, they do not anticipate it to reach the same levels it was at prior to the pandemic. They predict it will bottom out at around 3% or so. As such, advisors will have to still deal with inflation for the foreseeable future.

BlackRock's reasoning is that while central banks are aggressively fighting inflation, they will stop at a certain point, just shy of what they need to do to fully reduce inflation.

A major aspect of the new playbook relies on advisors' ability to think on their feet. With markets going through a period of macro and market volatility, advisors should understand that one strategy may no longer be sufficient when managing a portfolio, according to Li.

“We are not positioning one set of views as the set of views that are expected to work for the entirety of the upcoming year,” she said. “We have to be a lot more nimble and have to be more frequent in making adjustments to portfolios.”

Despite market volatility, investors should not give up on equities, BlackRock managers said. In the long term, equities have a proven track record of having the best returns toward building wealth, said Tony DeSpirito, chief investment officer of U.S. fundamental equities at BlackRock. “I would recommend staying invested, but do so in a resilient way, and I see lots of opportunities for active management,” he said. It is not all positive news for equities as the S&P was down as much as 25% earlier this year. However, while earnings have held their own, thus far, DeSpirito was not confident they would hold up in the long term. "There is no telling when the Fed’s actions will impact the economy, meaning the outlook for earnings could be softening, he said.

So, while lower equity prices have yielded opportunity, DeSpirito recommended choosing investments that will protect portfolios against those soft earnings.

“I think we should stay invested because equities are on sale, but we should do so in a resilient way because of the earnings risks that are out there,” he said. “Equities on sale are a better deal now than they were at the beginning of the year.”

In terms of putting together a portfolio, most consist of stable funds and those that fluctuate. DeSpirito is leaning more on the stable side and interested in certain sectors like healthcare, utilities and staples, with healthcare being the strongest option of the three.

As for those on the cyclical side, DeSpirito favors energy and financials over industrials. The reason is the former two tend to benefit more from rising interest rates. Industrials tend not to perform as well, he said.

Finally, those looking for liquidity can turn to iShares and ETFs as a tool for this space, said Gargi Chaudhuri, head of iShares Investment Strategies, Americas, at BlackRock.

In addition, there are opportunities currently in the fixed-income space as well, she said, due to the Fed Funds rate, which jumped to 4% from 0.25% in just nine months. This had an adverse impact on equities and fixed income.

This rapid normalization of monetary policy has spurred a reset among asset classes, creating huge opportunities, particularly in fixed-income markets, Chaudhuri explained.

The firm’s iShares 2023 Investor Guide explains that an investor could earn more than 5% in a low-duration, high-quality fixed-income bond. This demonstrates the growing importance bonds will play in an individual’s overall portfolio.

“Higher yields in fixed income also means that investors do not need their equity allocations to work as hard, and within their equity allocations they can focus on earnings resiliency in the face of an uncertain economic environment,” the guide said.