BlackRock: High inflation and interest rates are heralding a new world order – this is what investors are best advised to do now

After the corona crisis, the Ukraine war is causing a lot of uncertainty
High inflation and rising energy prices force Fed to act
BlackRock advises caution when choosing stocks – focus on quality

The market environment for investors is currently very difficult. The long-standing corona pandemic seems to be drawing to a close, and the war in Ukraine caused by Russia is causing new uncertainty on the international capital markets.

The mix of factors has already resulted in high inflation, skyrocketing energy prices and persistent supply shortages, all of which are weighing on the global economy. As a result, the US Federal Reserve has already abandoned the ultra-loose monetary policy that was originally intended to cushion the economic consequences of the COVID-19 crisis. The Fed had already raised the key interest rate by 0.25 percent in mid-March, but the Fed minutes also show that the next rate hikes are likely to be higher.

BlackRock’s Q2 2022 Market Outlook

As BlackRock strategist Tony DeSpirito explains in the Market Outlook for Q2 2022, rising interest rates are now beginning “a new world order” in which greater caution should be exercised in stock selection and value stocks will receive more attention. The investment age that prevailed after the global financial crisis in 2008, characterized by low to moderate economic growth coupled with low inflation and interest rates, is now over. The new order is now about to crystallize, so it is not yet possible to say exactly what it will look like. However, DeSpirito believes it will come with higher inflation. While BlackRock does not expect inflation rates to remain as high as they are now over the long term, they are also unlikely to return to the “below 2%” level where they settled in the years following the 2008 financial crisis . A level of three to four percent, on the other hand, is conceivable.

Entry opportunity in growth stocks

The difficult market environment has led to more volatility on the stock exchanges, and there are also large fluctuations within a single trading day. Shares were “arbitrarily” sold, as is often the case when there are major market swings. According to DeSpirito, “attractive entry opportunities” have arisen in some growth stocks in particular. Finally, some titles were punished more than their fundamentals would allow.

Quality and diversification required

On the other hand, the current uncertainties would once again emphasize the importance of good diversification in the portfolio, as well as a focus on quality. Companies with strong balance sheets and healthy free cash flows are sought after. These companies could react better to the difficult market conditions, since the high inflation will challenge the companies’ cost structures.

Here, according to DeSpirito, investors are asked to identify which stocks would be most affected by rising costs and which would have the pricing power to pass it on to their customers. After that, investors would have to ask themselves “how much of this is (or isn’t) reflected in stock prices.”

When selecting stocks, BlackRock looks for companies “with unique products or services, consistent cost advantages, or operating within consolidated and rational industry structures.” For example, software solution providers or industrial equipment manufacturers are potential beneficiaries of the trend that companies offering labor-intensive equipment or technology will attempt to offset their higher labor costs.”

According to the investment bank, rising inflation and the associated higher interest rates would reignite the debate about growth vs. value. While the phase after the global financial crisis was a challenging one, especially for value stocks, higher interest rates made it harder for growth stocks, which is why the value strategy became more attractive for investors again.

US stocks the secret winners?

The last point BlackRock addresses in the market outlook is the Ukraine war. Russia’s invasion of Ukraine is still causing a great deal of uncertainty, including in the markets. Europe is largely dependent on Russia’s oil and gas reserves. The sanctions now imposed on the country are causing already high energy and consumer prices to skyrocket. However, this situation may ultimately benefit US stocks as they will be less affected by the fallout from the Ukraine war compared to their European counterparts, taking the energy sector for example.

Ultimately, however, the current period of uncertainty particularly suggests that stock selection should be based on fundamentals. A well-designed portfolio could provide comfort and have a major impact on achieving long-term financial goals.

Editorial office finanzen.net

Image sources: Bacho / Shutterstock.com, Victor Moussa / Shutterstock.com