Developed market (DM) central banks have been steadily hiking interest rates since early 2022, as they attempt to bring inflation back down to target levels – but we think they’ve now reached the summit of that ascent.
We don’t expect central bank policymakers to start cutting interest rates any time soon – we think they’ll keep interest rates at a higher, or ‘tighter’, level for longer than in the past. Why? Inflation levels are still far above the 2% target levels set by DM central banks to keep their economies stable. Central banks use higher interest rates to make it more expensive to borrow money and more attractive to save it. This tends to reduce the level of spending in an economy and, therefore, inflation – but this lower spending also means slower economic growth.
Although inflation has started to fall in most developed markets, we think ongoing supply challenges could push it back up. Production costs have soared since the Covid-19 pandemic, due to supply chain disruptions, shifts in consumer spending and low labour supply. Many businesses have passed these extra costs onto consumers, raising prices and pushing up inflation.
All of this means that we’re in an unprecedented economic regime, in our view, marked by slowing economic growth and persistent inflation. In the past, when stocks went up, bonds tended to go down – and vice versa – but this relationship is breaking down in the new regime. We think this new dynamic calls for being more selective in investment decisions.
It may seem that the new regime offers few return opportunities due to greater economic uncertainty. Yet we see plenty of opportunities that don’t require a rosy view of the economy. We think that broad, static investment approaches – i.e. investing in the broad market and making infrequent changes to portfolios – won’t take you as far in this new regime as in the past. Instead, we think investors need to be nimble and selective in their investment approach, making more frequent changes to portfolios and identifying opportunities at a more granular level, such as through sectors or specific countries.
A new approach: BlackRock MyMap's response
In times of uncertainty, the ability to adjust the equity/bond ratio becomes critical. While static allocation funds lack this flexibility, multi-asset funds like BlackRock’s MyMap range have the agility to adapt their asset ratios to shifting circumstances.
As 2022 unfolded, BlackRock MyMap portfolio managers identified rising interest rates as a risk that could destabilise the stability provided by bonds in a diversified portfolio. In response, managers maintained a lower duration within their fixed-income investments, minimising exposure to more interest-rate-sensitive bonds.
BlackRock MyMap managers don’t limit their strategies to equities and bonds, which helped the funds navigate 2022. They delved into satellite assets like gold and commodities to establish an alternative form of diversification.
The return of a negative correlation between bonds and equities may provide temporary relief, but the global economic environment suggests more turbulence ahead.
Long-term changes in the macro environment, driven by geopolitical risk, demographic changes, and the transition to a low-carbon economy, are also likely to continue the inflationary trend.
In this new and more volatile regime, opportunities abound for those willing to take a more granular approach and act quickly to exploit widening discrepancies in asset values.
Creating funds for the future
Lessons from 2022, when the most risk-averse investors suffered the most from an unexpected change in the behaviour of equities versus bonds, should guide future strategies.
Remaining agile is the best way to ensure customers are not exposed to unnecessary risk. Understanding where the risk is coming from could help you to reduce your exposure to that risk. This is why MyMap takes advantage of BlackRock Investment Institute insights, using these to tailor changes in fund allocations across the range to meet different investment risk appetites.
Controlling costs is also crucial for long-term performance. Striking a balance between keeping costs low and maintaining enough agility to ensure performance is critical. All MyMap funds charge a 0.17% fee, except for the BlackRock MyMap 4 Select Income, which charges 0.28% (D-Share class only, Source BlackRock marketing material - www.blackrock.com/uk/literature/brochure/mymap-range-en-uk-rc-brochure.pdf Nov 2023).
Harnessing insights: The role of BlackRock Investment Institute
BlackRock MyMap's fund managers empower their investment choices with insights from the BlackRock Investment Institute, a team of economic and market experts who create BlackRock thought leadership. The BII provides valuable insights into the global economy, markets, sustainability, geopolitics, and long-term asset allocation.
The BlackRock Investment Institute studies asset class returns over timelines ranging from five to 50 years, seeking to identify underpriced assets that could be added to portfolios to potentially improve returns. For instance, BlackRock Investment Institute's calculations indicated that the expected return from inflation-linked bonds was higher than the market price, leading to a strategic allocation to these bonds. (Chris Ellis Thomas, Director EMEA Wealth Solutions, BlackRock Nov 2023)
Apart from identifying opportunities, these insights also contribute to risk management at BlackRock. By modelling shifting trends, the BlackRock Investment Institute seeks to identify and mitigate risks, such as those arising from extreme weather events. This shows that multi-asset funds attempt to help investors meet their return objectives within their risk tolerance.
In a future overshadowed by macro and geopolitical uncertainties, BlackRock's sophisticated infrastructure and MyMap's agile mandate seeks to provide the necessary tools to manage risk and deliver returns.
For those seeking a solution in this uncertain landscape, dynamic allocation, as offered by BlackRock's MyMap funds, may be part of the answer.
If you are looking for a simple, single solution to give you a global, diversified, investment portfolio the BlackRock MyMap funds combine our expertise into a framework that is well adaptive for these market conditions.
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Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
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.
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.
Fund-specific risks
MyMap 3, MyMap 4, MyMap 4 Select Income Fund, MyMap 5, MyMap 6: Counterparty Risk, Credit Risk, Currency Risk, Equity Risk, Liquidity Risk.
MyMap 3 Select ESG Fund, MyMap 7 Select ESG Fund: Environmental, Social and Governance (ESG) risk. Counterparty risk. Equity risk. Liquidity risk. Currency risk. Credit Risk and Credit Risk.
Description of Fund Risks
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Credit Risk
The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Equity Risk
The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.
Liquidity Risk
The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
Research Capabilities
There is no guarantee that research capabilities will contribute to a positive investment outcome.
Diversification
Diversification and asset allocation may not fully protect you from market risk.
Important Information
In the UK and Non-European Economic Area (EEA) countries: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
BlackRock Investment Funds (BIF): This document is marketing material. BlackRock Investment Funds (the “Trust”) is an authorised unit trust scheme which is organised as an umbrella comprising separate funds with segregated liability (the “Funds”). The Funds are subject to the rules of the FCA as set out in the COLL Sourcebook. Key investor information documents (“KIIDs”) for each unit class in each of the Funds are available from the Manager at www.blackrock.com. Investors should understand all characteristics of the funds objective before investing. This document does not constitute an offer or solicitation by anyone in any jurisdiction in which an offer or solicitation is not lawful or in which the person making such an offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such a solicitation. It is the responsibility of any persons in possession of this document and any persons wishing to apply for units in the Funds to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdiction, the legal requirements of applying for units in the Funds and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence, domicile or incorporation. Prospective investors should carefully review the prospectus for the Fund and should consider the risk discussion under “Risk Factors” prior to making an investment decision. Any investment decision with respect to the Fund must be made solely on the definitive and final version of the Fund’s prospectus as at the date of the investment. US Persons are not permitted to subscribe for units in the Funds. BlackRock may terminate marketing at any time. For information on investor rights and how to raise complaints please go to www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.
BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
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