BlackRock Investment Institute has taken a different approach to its 2023 outlook, outlining three key themes versus one core approach for the upcoming year, all of which it has caveated is subject to change by January.
Its 2023 global outlook has been titled A new investment playbook, reflecting the "new regime of high macro and market volatility", Wei Li, the firm's global chief investment strategist, told Investment Week.
One of the outlook's authors, Li explained that in previous years the firm would position itself with one set of investment views for the coming 12 months and apply that for the entirety of the year.
But now that the "easy" environment of "macro stability, low output, low volatility and inflation" was over, the company had to take a new path and accept a willingness to adapt it.
"This is unprecedented, I have not done this before," Li said.
According to her, the move was not controversial but necessary, given the market landscape of the next few years.
"We are talking about structural and macro scarring," she said.
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Li explained that instead of presenting investment scenarios and then the playbook for them, BlackRock had focused on building in an ability to react to the shifting market picture.
This involved "throwing out the old playbook and bringing in a new one", specifically pushing against old investment truisms that served in the low interest rate, high QE era.
Mantras such as ‘buy the dip' were not applicable anymore, according to Li.
"You cannot automatically buy the dip, you have to assess the macro damage before and then assess what is in the price before you do anything."
She also criticised the hopeful groupthink that because things are bad that means they must get better.
"I heard a lot from people that 2022 is so bad for markets it can only be better in 2023," Li said.
While the investment house does think that parts of the picture will be more positive next year, it is more nuanced than simply planning for a mean reversion.
"Assuming things is a dangerous strategy," Li said.
This feeds into the first of the three key themes in BlackRock's outlook: "Sizing the damage from this year and seeing what is in the priced into markets".
According to the paper, equity valuations are not fully reflecting the chaos caused this year and is therefore not appreciating the market risks correctly.
Li pointed to the S&P 500 as a case study for this, saying it was "too optimistic" after earnings season.
Days before this outlook was published, US equities rallied on the back of Federal Reserve board chair Jerome Powell's comments that its hiking policy could slow, but Li said investors had only listened to part of the speech and ignored the chair saying that rates will be staying higher for longer, not that it was reversing its policy.
Delivering in 2023 will require investors to go back on a lot of their innate biases, Li said, especially as many economies enter what BlackRock called a "foretold" recession.
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The strategist also said the forthcoming recession "would be caused by the central banks' over tightening", echoing the paper's analysis that "central bankers will not ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect".
The second theme was rethinking the role of bonds in portfolios.
"There is this automatic kind of tendency of wanting to hide in long duration bonds in a recession, because that used to be the old recession playbook," Li said.
"But in our view, we actually need to think hard about the driver of recession and then subsequently where to hide", which for her is in income.
As a result, BlackRock's portfolios are currently at their most defensive, although underweight on nominal long-term government bonds.
The third theme is "living with inflation".
As mentioned, BlackRock's base case sees inflation structurally higher over the next few years as aging demographics, political fragmentation and even the net zero transition will create inflationary pressure for the foreseeable future, hence holding an overweight to inflation-protected bonds.
Days before speaking to Investment Week, Li had been in New York doing the first round of presentations to clients on this new outlook and format.
When asked how it had been received, Li said it struck her how virtually everyone in the audience was in agreement with her views.
"I got no pushback", she said.
However, Li said that the outlook could significantly change by the time they begin touring it more widely in the new year.
"We are releasing the outlook in December and this is what we think now, but as we take this on the road in January, we may well have done some other changes to the current mix of portfolios because who knows what could happen," the strategist said.
The basis of this new approach was to be "dynamic and get ready for changing views very, very quickly".
