BlackRock continues to overweight equities, despite sentiment being hit by the Omicron variant and the Fed’s move towards increasing rates.
In its latest commentary, BlackRock’s investment institute focused on the concept of ‘new nominal’, saying that the policy and market response to inflation would be historically muted.
‘We expect new virus variants to delay, but not derail, the restart and see policy rates rising only modestly in the new nominal’s next phase,’ BlackRock said.
The investment institute said the restart of the economy this year is nothing like the long, grinding recovery that followed after the financial crisis in 2008.
‘Economic activity surged, corporate profits rebounded at an astonishing pace in the restart, and developed market equities ripped,’ the team said.
BlackRock highlighted that many central banks are content to let inflation run higher, with bond yields moving up only modestly relative to the inflation picture.
‘The Fed last week belatedly acknowledged inflation risks, and we expect it to start raising rates next year,’ the investment institute said. ‘That’s a big change, but what matters are the rate trajectory and destination.’
Inflation in low-carbon world
Another big lesson from 2021 highlighted by BlackRock’s investment institute was the impact of the transition to sustainable sources of power. The team pointed out surging fossil fuel prices in 2021, which have exposed an uneven transition toward low-carbon power.
‘We still see an orderly transition in the medium term – but with bumps on the way leading to growth and inflation volatility,’ the investment institute said.
‘We think inflation pressures would be even more acute and growth lower in case of a disorderly transition or no-climate-action scenario.’
BlackRock’s team said the tectonic shift toward sustainable investing will give sustainable assets a return advantage for years to come.
‘Climate-driven repricing has already started, we believe, with carbon-efficient sectors able to lower their cost of capital.’
‘Lastly, carbon-heavy companies are not waiting for new climate policies but are changing their business models now, opening up selected investment opportunities,’ the investment institute added.