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BlackRock unit says it’s time for a new portfolio playbook, and reveals how to position

BlackRock’s ETF division says the investing environment has fundamentally changed, which has “profound implications” for portfolios looking ahead. In its 2023 investor guide, Blackrock’s iShares, one of the largest providers of exchange-traded-funds in the world, said the era of cheap money is over, and the higher-rates-for-longer regime is here to stay. “Elevated levels of inflation should prevent the Fed from easing aggressively, even if a recession takes hold,” Gargi Pal Chaudhuri, head of iShares investment strategy Americas at BlackRock, wrote in the Nov. 30 note. “Although markets continue to trade on the possibility of a Fed ‘pivot,’ we think central bank authorities will raise and then hold rates in restrictive territory throughout 2023 – waiting for the long and variable lags of monetary policy tightening to feed through into the economy.” This shift brings with it “profound implications for portfolio construction,” Chaudhuri said. “It is time to consider a new portfolio playbook.” She lists three ways investors can play this shift in markets. 1. Work your cash; buy bonds Chaudhuri said it was time to rethink the role of bonds, as a higher-rate environment sees fixed income yields rise. “This is likely to drive a shift back into fixed income, as it returns as an investable asset class,” she wrote. “The rapid shift higher in yields has created significant opportunities in high-quality, front-end fixed income exposures.” BlackRock also said investors can earn income in the “comparative safety” of cash-like instruments through ultra-short duration securities. 2. Reallocate away from growth stocks Growth stocks, such as Big Tech, were an investor favorite in an era of low rates. But this year, tech stocks have been among the worst-performing sectors . Many investors remain hung up on the question of when to get back into the sector, but Chaudhuri said could be misguided. “‘Dip-buying’ is often conflated with the question of ‘when do I buy tech again?'” she said. “This implicit question fails to recognize the regime shift that has taken place: the accommodative monetary policy that drove the decade-long outperformance of growth (and large-cap technology in particular) is over.” As a result, BlackRock favors taking a defensive position on a tactical basis, preferring stocks such as health care and energy producers, as well as small-cap stocks which it says are trading at the largest discount relative to large-cap equities since 2001. BlackRock isn’t alone in recommending investors go defensive ; Goldman Sachs recently said investors should continue to position themselves defensively going into 2023 as the stock market hasn’t yet hit its trough. In its 2023 outlook, Blackrock’s iShares added that value-style equities provide exposure to the real economy – embodying “a mature segment of the overall market – one that is more defensive in nature with higher earnings yields and less sensitivity to the U.S. consumer.” Infrastructure and agricultural producers are two such sectors, BlackRock said. 3. Live with inflation Inflation is set to stick around, given the continued strength coming from services and shelter, according to BlackRock. “Even as the Fed’s tightening begins to bite and economic activity begins to slow, we believe inflation will likely remain above the Fed’s 2% target due to the stickiness of prices within services and other key consumption basket components, like shelter,” Chaudhuri said. Investors should own inflation-linked bonds given this environment, BlackRock said. “After spending a few years in negative territory, [Treasury Inflation-Protected Securities] real rates have repriced higher and have regained their role of providing a potential ballast in a multi-asset portfolio,” it said.

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