BlackRock experts: How investors should position themselves in a possible recession

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• Inflation level will remain higher than politically desirable
• Not expected to cut interest rates quickly
• Protect your portfolio even if inflation persists

The coming recession will be different from past recessions as central banks attempted to use monetary tightening to bring inflation down to the 2% target level, BlackRock analysts write. Therefore, rate cuts might not protect risky assets either. Observed moderate wage increases and the slight decrease in inflation are not the much-vaunted signs of a “soft landing” for the economy in 2023.

tightening monetary policy and persistent inflation

A BlackRock team led by global investment strategist Wei Li sees inflation dynamics slowing as energy prices soften and spending patterns normalize, but not to the extent politically desired. “Even if a recession is imminent, we believe that we will live with inflation,” they summarize, emphasizing the importance of breaking new ground in portfolio composition.

So far, the investment strategy of many investors has been geared towards the central banks again significantly lowering the key interest rates in the near future when inflation figures are falling. However, it is very unlikely that this will happen as interest rate hikes have induced the recession in favor of a politically motivated inflation cut. So longer-dated government bonds may not be investors’ answer to protect their portfolios. In addition, an underweight in US stocks and shares in other industrialized countries is recommended.

Investment recommendations from BlackRock strategists

BlackRock strategists warn against underestimating the duration of inflation despite slowing inflation momentum. Although inflation in the USA has weakened, the experts state, hopes that inflation has peaked and that the interest rate hikes will end are premature. Rather, chief strategist Scott Thiel assumes that key interest rates will increase to five percent in the first half of 2023, with inflation leveling off at around three percent in the longer term. The recommendation of the BlackRock experts is therefore: Invest in short-term government bonds as well as corporate bonds, inflation-linked securities with investment grade ratings and asset-backed securities.

“It is a platitude to state that the uncertainty with regard to the coming year is high. This applies to 2023 as well as to any other year. Although this time there does seem to be a difference, namely the greatly increased probability of so-called tail risks, i.e. more extreme ones turns”. This is what the German BlackRock capital market strategists Ann-Katrin Petersen and Martin Lück write in their market outlook for 2023, pointing to the geopolitical risks determining the global economy. Their US colleagues also assume that the global economy is in a phase of significantly increased stability and that the years of stable growth are now a thing of the past.

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