How BlackRock is investing in a volatile world (and 3 asset class examples)

No one likes to hear that markets are going to be volatile. Partly because of the expectation of pain on the downside and even though some volatility is inevitable when it comes to investing. But, BlackRock Institute’s APAC and Middle East Chief Investment Strategist, Ben Powell argues that investors will need to be intentional in their decisions and allocations going well – we’ve got quite a ride ahead.

There’s a lot of activity to unsettle markets.

We’re seeing a change in the interest rate cycle and divergence among central banks, like the RBA who is remaining decidedly hawkish. In addition, rewiring of global supply chains is also underway, since COVID took us all by surprise. And if that wasn't enough, we are living through waves of transformation – just look at the volumes of CAPEX pouring into AI. And all of this is before we factor geopolitics.

In a roundtable on Wednesday morning, BlackRock’s team shared its view on investing for the coming years and how it is positioning its portfolios. If you think risk is now off the table, you’d be wrong. Rather, it's about being targeted.

What’s coming in markets

Whether investors acknowledge it or not, we were living through a golden period for equity markets from after the GFC until COVID hit. Times have changed and markets are looking more complicated going forward.

Volatility will stem from changing central bank policies, geopolitics, rewiring of global supply chains, and continuing ‘waves of transformation’ like AI, according to Powell.

The world is starting to diverge when it comes to monetary policy. New Zealand and the European Central Bank have already cut rates, the US Federal Reserve is tipped to start cuts this month, and by contrast, Japan has hiked and Australia remains hawkish.

Powell notes inflation is here to stay and we won’t see massive cuts going forward.

“In a world of structurally higher inflation, central banks are more constrained in their ability to come riding to the rescue,” he says.

Craig Vardy, Head of Fixed Income for BlackRock Australasia, agrees and is tipping more restrictive policy from the RBA.

“We think it looks like a shallow easing cycle once the RBA get going. That might look like 25bps in Q1 2025, another in Q2 and then Q3,” Vardy says.

He anticipates Australian yields will stay high, and government spending should continue to prop the economy.

“Australian growth next year could be anywhere around 2.2-2.5%, which is slightly below trend, but is still decent,” he says.

The key risks to the Australian economy include slowing global growth – including China – along with a fall in commodity prices.

In the wake of an uncertain market environment, BlackRock’s two big bets include the AI revolution and Japan.

When it comes to AI, BlackRock favours investments in the broader ecosystem like materials, utilities, and infrastructure rather than pure-play companies. In terms of Japan, Powell explains the country is presenting significant opportunities.

“It is going through a nominal GDP renaissance, it’s a fundamental change in the growth outlook for Japan,” he said, with Japanese corporations in the positive position of actually being able to increase prices.

Simultaneously, the Tokyo Stock Exchange and Japanese authorities are driving evolution in corporate governance. All this is to say he thinks it’s time to take a closer look at Japan.

The three themes for portfolio management going forward

Powell sees three key themes for portfolio management in the market outlook:

1) “Getting real”

We’re moving into an environment where central banks will be more constrained in their ability to use monetary policy to rescue the economy.

“We think that investors are going to be rewarded by spending proportionately more time looking at business leaders and companies, and less on central bank monetary policy,” says Powell.

He views it as a focus on ‘old fashioned investing’, where security selection is critical.

2) Leaning into risk

While the environment is looking more complicated, Powell cautions investors to keep risk, but be more targeted and specific about the risks they take in the portfolio. Consider which sectors to maintain or which to avoid and be granular in your approach.

3) Important to be dynamic

“With a more volatile backdrop, market conditions are going to be much harder to predict. What that means is that risks and opportunities from market volatility are going to be more commonplace,” says Powell.

Investors will need to be ready to act swiftly, taking a ‘hands off’ approach is not optimal in this sort of environment.

How BlackRock is positioning its portfolios (and three asset classes it has added)

Over the year, BlackRock has benefitted from a preference towards US equities and underweight positioning to Australia and other peers, but BlackRock Australasia’s Head of Multi-Asset Investment Strategy, Katie Petering, notes they are making selective changes.

To account for expected volatility, she is adding more diversification and ballast to the portfolios in the form of gold, global listed infrastructure and property.

“We like gold in the portfolio as an overall diversifier. It’s negatively correlated to risk assets and growth assets,” says Petering, who has found it additive to portfolio performance.

While global listed infrastructure sits in the growth part of the portfolio and has been funded from equities exposure, Petering likes its defensive properties, including the ability to offer protection from inflation.

She sees structural opportunities in property such as demand for data centres and aged care, and also notes valuations have been attractive.

Petering has also made structural changes in the portfolio, by trimming risk from the overweight position in US equities, and adding to its underweight in European and Australian equities. Note that despite the tweak, BlackRock still remain underweight in these areas.

She also said the team modestly increased the portfolio exposures to global fixed income – which were underweight. For Australia, the BlackRock team has reduced its exposure to Australian inflation-linked bonds.

Petering has also added other diversifiers into the portfolio, such as hedge funds for resilience.

Final recommendations to investors

Powell believes that investors should be considering what he terms ‘waves of transformation’. The AI trend is one example of this.

“Investors need to evolve our investing playbook in order to adapt to the more dynamic landscape,” he says.

“We think that leaning into risk is appropriate, but it is a different kind of methodology given higher volatility and higher complexity than during the great moderation period.”

In summary, BlackRock are encouraging investors to be selective in their choices – taking risks is fine where you know why and how you are taking those risks. The key words they use? Intentional and dynamic. We’re not living in a set and forget world.