With higher interest rates and greater volatility in the markets, the world’s largest asset manager, BlackRock, is recommending that advisors adopt a more active investment style to garner greater results, something the firm discussed as it released its 2024 economic outlook Tuesday during a roundtable discussion at the firm’s New York offices.
One of the participants, Jean Boivin, head of the BlackRock Investment Institute, described the current environment in the context of the “Great Moderation,” a period economists mark between the mid-1980s and the mid-2000s that was characterized by supply overabundance. The ideal investment strategy in those times was to buy and hold, but those days are over, Boivin said, and investors need to stay active to take advantage of the opportunities the current economy offers.
While there are a lot more opportunities, he said, he also cautioned about macroeconomic risk, particularly the volatility in the bond market, which means advisors must change their investment strategy.
"We don’t think that the usual macro playbook necessarily applies in this environment,” Boivin said. “You need to be a lot more deliberate about these macro calls in this environment.” In the 20 to 30 years before 2020, you could have been a bit more on autopilot, he said, but now “you have to grab the macro wheel and be deliberate about the macro calls that are being made.”
Other BlackRock asset managers on the panel advised caution when it comes to the current economy and its positive numbers. It grew at a robust 4.9% (annualized) in the third quarter while other countries’ economies stagnated.
In addition, core inflation has fallen sharply and seven million new jobs have been created since January 2022. While that appears to be good news, Boivin explained those numbers must be put in the proper context.
By zooming out and looking at the numbers from where the economy was before the pandemic in 2020, you get a different interpretation, he said. The economy came to a full stop that year and has been trying to recover ever since. The current numbers have only just started to arrive at what economists were projecting for 2020.
“It looks like what we managed to climb out of is back to what it would have been on the very low range of the forecast at the time,” he said. “If somebody had fallen asleep in 2020 and woke up now … and looked at the situation, and what’s ahead of us, they would find that depressing and we’re talking about that being an exciting environment.”
Still, given the current numbers, the BlackRock managers do not think a recession inevitable.
“Nothing is flying in our view, so we are just back to ground level,” Boivin said. “The good news is it is not clear that something has to crash either since we are not flying, and a recession is not necessarily in the cards.”
One of the characteristics of the current market is its high interest rates, which have reached their peak, said Wei Li, BlackRock’s chief investment strategist. She anticipates that these will be cut off. However, when that begins and how aggressive it will be is still unclear as the Fed does not want to be too aggressive either, Li said.
Kristy Akullian, iShares’ senior investment strategist, highlighted steps advisors should take in their portfolios to deal with the current economy. In the equities sleeve she recommended removing some of the risk from the portfolio core.
To do that, she suggested an advisor either increase the quality of the investments or add guardrails. In the first case, advisors can use quality and quality factor ETFs. In the second, they can look at things like buffered ETFs.
“They limit some of the upside potential, but [provide] for a more targeted level of downside protection that we think can be helpful in the choppy environment that we may see and help in managing the macro risk that we may realize in 2024,” she said.
The BlackRock officials also discussed major themes in the economy such as artificial intelligence. Tony DeSpirito, global chief investment officer of fundamental equities, said “mega themes” such as these offer opportunity.
Though chipmakers and cloud providers are well-established winners, he said, there are also underappreciated tech companies such as those creating memory. AI could also help companies by allowing them to reduce costs. Finally, advisors should consider those businesses that own unique data sets.
“These are things that can work in equity markets regardless of what the overall markets are doing,” DeSpirito said. “I don’t think it’s about set it and forget it [because] I think it’s going to evolve over time.”