Waves of transformation

Karim Chedid:
Hello, and welcome to Around the world: spotlight on our Midyear Outlook. We see reasons for optimism in the second half of the year – over H1, we saw resilient growth in developed markets, solid earnings, and major DM easing cycles kick off with the ECB cut in June. But we also see reasons for caution, with macro data likely to remain volatile and elevated geopolitical risk as elections stay in focus. So we’re preparing portfolios to capture upside and manage risk. I am joined today by the BlackRock Investment Institute’s Beata Harasim, who will go through our key investment themes for H2. I’ll then look at what these themes mean for investors’ portfolios.

Beata Harasim:
Thanks Karim. The world could be on the verge of a transformation akin to past technological revolutions – thanks to a potential wave of investment in artificial intelligence (AI), the low-carbon transition and a rewiring of global supply chains. But the speed and size of that investment – and its impact – is highly uncertain. And it comes against an unusual economic backdrop after the pandemic: sticky inflation, higher interest rates and weaker trend growth. Many outcomes are possible – that calls for a more granular and active investment approach.

Our first theme is Getting real – we think the biggest opportunities lie in the real economy as investment flows into tangible assets like infrastructure, energy systems and technology. If this pans out, we think companies will need to adapt business models and invest to stay competitive. For investors, it means company fundamentals will matter even more. Winners and losers could emerge faster than ever, in our view.

That’s why our second theme is Leaning into risk. We think greater uncertainty does not mean investors should simply reduce risk. It means leaning into the most likely scenario. We lean into a concentrated AI scenario where a handful of AI winners are likely to keep driving the market, even in a backdrop of higher inflation and interest rates after the pandemic.

Yet we stand ready to pivot as the likelihood of another scenario increases while getting granular with investment opportunities. So our third theme is spotting the next wave . This is about using scenarios to achieve portfolio resilience when outcomes can be so different – and incorporating the information across those scenarios to do so.

Investment implications: We stay overweight U.S. stocks and keep leaning into the AI theme on our tactical horizon of six to 12 months – and this reflects our new process for constantly assessing scenarios. In most scenarios, we expect to stay in a higher-for-longer interest rate environment. We think private markets and infrastructure are key ways of achieving diversification in this regime.

Karim Chedid:
Thanks, Beata. So what do these themes mean for asset allocation?

In equities, heightened uncertainty and dispersion lead us to keep quality at the core, and we look to alpha-seeking strategies to capture even deeper quality characteristics. Yet we also see significant opportunities ahead, particularly as AI continues its exponential growth, with vast investment and infrastructure build out needed. We look to position portfolios for the next leg of the AI trade: digital security, to protect large data sets and consumers, infrastructure, to build out new and upgraded data centres, and the energy sector, to power those developments. We’re also warming up to European equities, given an improving macro and fundamental backdrop in the region: we look to high-conviction alpha-seeking strategies, complemented by precision index exposure to early-cycle opportunities.

In fixed income, the start of rate cuts in Europe makes us comfortable extending duration in rates in the region, while we stay at the front end in the US. We look to lock in cycle-high yields through fixed maturity products, and see relative value in EUR HY.

Finally, an environment of greater dispersion and uncertainty calls more dynamic portfolios, we think, and we look to diversify beyond traditional allocations -- through Japanese equities for their low correlations to other equity markets; active high income strategies to diversify sources of quality income; and alternatives, including dynamic liquid exposures and private market investments. Thank you for joining, and click the link to read more.