Blackrock has 3 investment lessons for 2023 to stay a step ahead of the market

The historic shock waves of 2022, involving the Russia-Ukraine war, soaring inflation, and a perfect market storm were equally hard for both retail and institutional investors. BlackRock Investment Institute, an arm of the largest asset manager in the world, said the year has taught it a lot, of which three lessons are important.

The first lesson it draws is that one must widen the lens of possible scenarios because the new regime of higher macro and market volatility entails a wider range of outcomes. And it requires quick reactions.

The year 2022 saw a number of crises: war in eastern Europe, which led to soaring energy prices; headline inflation surged to multi-decade high in several countries, spurring central banks to embark on steep rate hike paths; UK gilt crisis showed a return of the so-called bond vigilantes – punishing fiscal splurges; and at year-end Bank of Japan also surprised markets by loosening its yield control policy.

“We must fight behavioral biases like inertia that make it hard to embrace change or carry out too little to make a difference,” wrote Jean Boivin, Head – BlackRock Investment Institute, along with his team, in a weekly newsletter. “Sometimes you know something is happening but just don’t want to believe it – either because of recency bias or out of sheer disbelief.”

Blackrock’s funds have underperformed in the last several months and that has led to contraction in asset size. The investment behemoth in October last year said its assets under management (AUM) dropped 16 percent year-on-year to $7.96 billion, as a stronger dollar dampened the value of investments in Europe and Asia.

The fund house has also been under pressure from Republicans in the US due to its stance on Environmental, social, and corporate governance (ESG). Its net income dropped 17 percent.

Underperformance has been a highlight of not just a problem with Blackrock but across the market where most fund managers have failed to deliver on expectations.

Price mismatch

The second lesson that Blackrock draws is related to pricing of the asset. It said geopolitical risk now warrants persistent risk premia across asset classes, rather than being something markets only react to when it materialises.

“We think the war in Ukraine and strategic competition between the US and China are long-term geopolitical risks, not just market drivers of short-lived sell-offs,” said Boivin. “Fragmentation could also create more supply and demand mismatches as resources are reallocated. We see this keeping inflation pressure higher than before the pandemic and contributing to market volatility.”

The fund house sees technology decoupling between the US and China as both focus on boosting self-reliance, reducing vulnerabilities. This is the topmost risk to markets, it believes.

Among other high risk events it sees are a likelihood of large scale cyber attacks as the Russia-Ukraine conflict persists and an extended conflict, alongside a long-term political, economic and military standoff between the West and Russia. There is an ever-present risk of intentional or accidental escalation between NATO and Russia, Blackrock added.

The North Atlantic Treaty Organization (NATO) is an intergovernmental military alliance between 30 member states in Europe and North America that is one of the main forces behind the conflict, though indirectly.

No buy-on-dip, please!

This leads to the third and final lesson: Such risks need a new investment playbook in the new regime. This means not being lulled into thinking what worked in the past will work now, like automatically buying the dip.

In the last few years or even decades, as the market has been on a bull run barring a few short term drawdowns, buying the dip has been the ideal strategy suggested by everyone – from reputed fund managers to your street-side paanwalas.

Blackrock believes the situation may change hereon. The stability and multi year market rally that we are used to cannot be taken for granted now. Thus, a change in investment rulebook is required.

“We see stock rallies built on hopes for rapid rate cuts fizzling. Why?” ask Biovin and his team. “Central banks are unlikely to come to the rescue in recessions they themselves caused to bring inflation down to policy targets. Earnings expectations are also still not fully reflecting recession, in our view.”

As of now Blackrock is not positive on risk assets including equities but if the market continues to price in more of the damage it stance may change.

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