BlackRock: AI stocks "deserve" their share price outperformance

A "rebound" in inflation, a new lower-growth global economy, and the continued outperformance of stocks exposed to key mega-trends like artificial intelligence (AI) are just some of the key themes in BlackRock's base case for the 2024 investing year.

But there is good news - 2024, in the eyes of BlackRock's Wei Li, will be an easier investing environment than 2023. The bad news is that 2024 will likely be a year of two "legs" - the first being supportive of risk assets (lower inflation and above-zero growth), while the second leg could cause a big repricing in many asset classes.

In this wire, you'll hear from Li and her colleagues about where they are putting cash to work for the next 12 months - both here and abroad.

BlackRock's high-level calls

• Three Fed rate cuts, Three RBA rate cuts this cycle
• First RBA rate cut to come in November/December 2024
• Sluggish economic growth "should not be a surprise"
• Overweight US and Japanese stocks, fuelled by AI megatrend and friendly regulatory changes respectively
• On AI firms: "These are the companies that are delivering earnings and they deserve to outperform the rest of the market," says Li.
• Five key megatrends to drive markets moving forward: AI, geopolitical fragmentation, ageing populations, the future of finance, and low carbon transition

And while BlackRock is no longer forecasting a recession, Li cautions investors to think about where we have come from.

"We're not talking about a recession anymore but trend growth is lower. And when markets think about that new reality, that could also cause some repricing in the same way an inflation rollercoaster could," Li says.

Li also adds that it's not about how many rate cuts - it's about where rates sit at the end of this process that matters the most.

"Where rates stabilise around is going to be different to what we are used to. Typically after the first rate cut, there have been 300 basis points in rate cuts in the subsequent three years. We're looking at half of that for this cycle because of inflationary pressures and the fact that central banks are constrained in their ability to come to the rescue," she says. 

Finally, on the inflation "rollercoaster", Li clarifies that she believes inflation may "rebound but not run away."

"While there are structural constraints that will push inflation higher, there are also forces like productivity and AI that will likely keep a lid on how high inflation can actually go," she says. Li's base case view is that inflation may settle around 3% in the US while in Europe, that figure may be closer to 2%.

Australia-centric view

BlackRock, like many other firms, has taken note of the per capita recession that is now occurring in Australia - and expects the picture won't get any rosier in the near-term.

"Growth will remain below-trend and that will probably continue for the rest of 2024. But it's not a recession outlook or a hard landing at this stage, it's a soft landing to no landing scenario," Craig Vardy, head of fixed income, BlackRock Australasia says. 

Vardy sees the first RBA rate cut coming in the fourth quarter of this year, which in itself is not far from where rate pricing or the economic consensus currently sits. But even if the Federal Reserve goes earlier, Vardy expects the timeline won't be pulled forward unless productivity crashes and financial conditions significantly tighten.

"The RBA is probably playing a smart game at the moment, leaving a lot of optionality in their commentary," Vardy says. 

"The risk is you don't want to be cutting rates too early given the work you've done to try to get on top of inflation. The RBA was slow to hike and it feels like they will be slow to ease as well, even if the Fed goes in June," he adds.

What does it all mean for asset allocation?

BlackRock's largest overweights within the global equity universe come in three main themes: emerging markets, Japan, and AI-exposed stocks.

Tactically speaking, the long Japanese equities position reflects "favourable capital market assumptions and shareholder-friendly returns," says Katie Petering, Head of Multi-Asset Investment Strategy at BlackRock. The firm is also long US equities, owing primarily to the AI theme. But given valuations are high at the moment, there is also some protection across some of the model portfolios.

"In some portfolios, where we can employ derivatives for protection measures, we do have some downside protection strategies for high yield and US equities. That's just in case of a risk-off event. They are very short-term positions but we are slightly pro-growth," Petering says.

In the fixed-income universe, the team is neutral on duration but nominates Australian and US inflation-linked bonds as its preference. While it's not a common addition to wealth management portfolios, it is, Petering says, symbolic of "higher inflation expectations and the inflation rollercoaster theme". 

Among the other asset classes, investments in infrastructure assets stand out. 

"We have exposure to infrastructure [assets] for their inflation-linked cash flows, and it provides balance to portfolios," Petering says. 

Other high-conviction investments include an overweight to the Australian Dollar – intended to provide "ballast" – and an allocation to hedge funds as well as gold (which is designed to insulate against any geopolitical flare-ups).