The narrative is changing from inflation to recession

Feb 13, 2023

BlackRock’s global chief investment strategist, Wei Li, looks toward a turbulent 2023. She shares her views with Laura Lallos, managing editor of Morningstar magazine.

Global investing environment.

We are in a world shaped by supply that involves challenging trade-offs. Developed markets can’t produce as much as before without creating inflation pressure. Central banks face a sharper trade-off between growth and inflation. This leads to greater macro and market volatility. China is on a path toward reopening, which will help stabilize the global supply chain.

3 long-term trends keeping production capacity constrained.

  • Aging populations mean continued worker shortages in many major economies.
  • Persistent geopolitical tensions are rewiring globalization and supply chains.
  • Transition to net-zero carbon emissions is causing energy supply and demand mismatches.

Inflation and Recession narratives.

High inflation has sparked cost-of-living crises, putting pressure on central banks to tame inflation. Yet, there has been little debate about the damage to growth and jobs. We think the “politics of inflation” narrative is changing, and the “politics of recession” will take over.

Lesson from 2022.

Be nimble. There are pockets of opportunity in this high market volatility. Develop granular views to tap into those. Think healthcare in equities, front end in government bonds, investment-grade and mortgage-backed securities in fixed income, and infrastructure in privates.

Navigating 2023.

More frequent portfolio changes. Our tactical portfolio outcomes will be determined by our assessment of market risk sentiment and our view of the economic damage reflected in market pricing. We stand ready to turn more positive as valuations get closer to reflecting the economic damage from tighter policy.

What is attractive, and what is not?

We remain bearish on developed-markets equities, as we think current valuations do not reflect the damage from central banks’ overtightening. Earnings expectations are not fully pricing in recessions. We are underweight long-dated fixed income, as we see long-term yields going higher.

We are leaning into the income offered by investment-grade credit. Mortgage-backed securities offer attractive valuations and income. We like the front end of the government-bond curve—in the United States in particular—for its high carry, high yield, and low interest-rate risk.

Wei Li leads the team that develops the BlackRock Investment Institute’s views on tactical asset allocation and represents the firm’s investment outlook to clients and the media. 

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sachinesque j
Feb 14 2023 07:59 PM
Aravind Sankeerth, I completely agree
Aravind Sankeerth
Feb 14 2023 06:04 PM
Well, that is a very good and thought-provoking article. As always Morningstar articles are crisp, small and readable rather than unwanted clutter that is pages long.

I am an optimist sitting in a small town in India, when I read such news. I feel that Human life has lost value and all the youngsters in the towns are jobless and vagabonding due to lack of job givers. There is a big mismatch is what Modi is saying and what we are seeing at the semi-urban level.

There is severe pain and degrowth. Least expense and people are all reducing consumption due to poverty.

There is theft, lying and anti-social stuff due to over population and there might be feuds and the corrupt police are the ones that benefit from petty issues. The sociaty down here is lawless and a few people own the system.
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