The challenge of turbulent markets

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

At the start of 2022, many investors were looking forward to a brighter year ahead after the turbulence of the pandemic. Even though the world economy appeared to be on a bumpy path to recovery, the outlook was still better than it had been for two years.

Then Russia’s invasion of Ukraine fundamentally changed the outlook, ushering in one of the toughest years for financial markets on record.

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Prices had already been pushed higher by supply chain disruption, a direct result of the pandemic, and the Russian invasion brought a spike in energy prices, contributing to mounting inflationary pressures.

Central banks acted decisively, raising interest rates, and withdrawing quantitative easing measures. In doing so, they reversed the decade-long low-interest rate regime. That regime had helped support both bond and equity markets. Its withdrawal saw considerable disruption across financial markets.

These actions created the perfect storm for investors. Stock market volatility exploded, particularly in the previously-strong technology sector. And bonds, which are traditionally seen as safe havens, failed to provide their usual support. Both equities and bonds sold off significantly in 2022.

Only a narrow range of companies and sectors escaped the carnage and managed to make progress. The energy sector benefited from strong commodity prices and higher profits. This has also helped commodity-dependent countries, such as Latin America.

There have been some anomalies as well, such as India. The region has recovered well from the pandemic and the equity market has outperformed compared to other emerging markets.

But despite these bright spots, it has been a gloomy year for most other asset classes.

The year ahead

There are relatively few signs of the environment improving in the near term. As such, ISA investors may need to accept assets will remain volatile for some time to come.

The Federal Reserve has made it clear that its priority is to tackle inflation, whatever the impact on short-term economic growth. This is echoed by other central banks around the world that recognise the need for price stability.

Nevertheless, financial markets have fallen a long way in 2022 and valuations are much lower than where they started the year.

What’s more, there are plenty of good companies out there with strong growth and income potential.

At BlackRock, we continue to look for those companies that can deliver value in all economic conditions.

Investment discipline

In this type of febrile market, we believe investors need to fall back on sound investment disciplines. Holding a wide range of assets is particularly important at a time when traditional diversification strategies, notably holding bonds and equities, have not worked as well. This means looking beyond traditional markets such as the UK or the US, to those markets that have their own self-sustaining growth stories.

Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Diversification: Diversification and asset allocation may not fully protect you from market risk.

This applies not just to capital growth, but also to income. In BlackRock’s investment trusts, we use the full powers of the investment trust structure to explore ideas in overlooked areas, which open-ended funds have to ignore due to liquidity constraints. These may be illiquid frontier markets, royalty investments or option writing strategies to boost dividend income. We may also reserve income in buoyant markets to pay out in tougher times.

Strong stock picking is also key as a difficult economic environment exposes weak companies. Those with high debt levels could see their repayments rise, while those without pricing power may not be able to put up their prices to cover higher costs. Strong companies can grow even stronger during a downturn by taking market share from struggling rivals.

At BlackRock, we draw on our global analyst network to pick up the most compelling ideas.

The investment trust structure can be important in allowing us to take full advantage of those opportunities. In difficult markets, liquidity can be a problem. It can be tough to move in and out of positions. Open-ended funds may be forced to sell holdings to meet redemptions. In contrast, closed-ended funds have the flexibility to invest as they see fit.

Good risk analysis is also an important discipline in febrile markets. It is important for a fund manager to understand their exposure to different areas: to a rise or fall in interest rates, for example, or a spike in the oil price. This risk discipline is integral to everything we do at BlackRock. We arm our fund managers with all the risk tools they need to understand the decisions they take on investors’ behalf, such as the Aladdin platform which provides sophisticated risk analytics.

Risk Warning: While proprietary technology platforms may help manage risk, risk cannot be eliminated.

2023 could be another difficult year, making it hard to choose the right investments for an ISA, but there are opportunities in all market conditions. We aim to put ourselves in the strongest possible position to take advantage of those opportunities.

For more information on BlackRock’s range of investment trusts, please visit www.blackrock.com/its

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

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