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BlackRock Inc., a global asset manager, is sounding a note of caution amidst market optimism surrounding expectations of interest-rate cuts in 2024. Contrary to some traders positioning for early rate cuts by the Federal Reserve in the first quarter, BlackRock strategists anticipate that the easing cycle will likely commence in the middle of the year. The firm warns of potential disappointment and recommends a cautious approach, particularly advocating for a retreat from longer-maturity bonds.
Risk of Disappointment: BlackRock strategists, including Wei Li and Alex Brazier, expressed concerns about the potential for market expectations of rate cuts to be overly optimistic. They highlight the risk of disappointment and anticipate a new environment characterized by higher rates and increased volatility.
Investment Strategy: In response to the evolving landscape, BlackRock prefers short- and medium-maturity bonds as a source of income. However, the firm is maintaining an underweight position on long-dated Treasuries in its strategic allocation, as outlined in the 2024 Global Outlook published by the BlackRock Investment Institute.
Economic Outlook and Stock Recommendations: With expectations that rates will stay above pre-pandemic levels, BlackRock has downgraded its longer-term strategic view on developed-market stocks to neutral. This adjustment is attributed to rich valuations and a relatively weak economic outlook. Nevertheless, BlackRock is maintaining an overweight stance on AI-related companies.
Structural Changes and Volatility: BlackRock identifies structural drivers such as supply constraints due to geopolitics, shrinking workforces from aging populations, and the shift to a low-carbon economy. These factors are expected to result in lower growth, inflation persisting above official targets, and increased uncertainty, contributing to a more volatile environment. The strategists suggest that such volatility may favor active managers.
Concerns About Long-Dated Treasuries: BlackRock warns against investing in long-dated Treasuries, citing the soaring US debt burden as a contributing factor. The strategists express concerns that, if borrowing costs remain around 5%, the government could face challenges where interest payments surpass healthcare benefits, potentially leading to entrenched inflation and stumbling growth.
Other BlackRock Calls for 2024:
- Overweight on US inflation-linked bonds on a strategic basis.
- Neutral tactically on US inflation-linked bonds due to cooling inflation and a focus on growth.
- Underweight long-dated bonds on a strategic basis, maintaining a neutral tactical stance.
- Neutral on developed-market and emerging-market stocks strategically.
- Overweight US mortgage-backed securities.
- Underweight emerging market local-currency bonds and overweight hard-currency debt.
While recent market moves have seen rallies in both stocks and bonds, BlackRock’s cautious outlook emphasizes potential challenges and volatility in 2024. The recommendations provided align with a longer-term strategic perspective and tactical considerations for the next six to twelve months.
