BlackRock, ASB's newly appointed investment partner and the largest asset manager in the world, says the post-pandemic recovery will look "very different" to that which followed the global financial crisis of 2007-2008.
ASB recently announced a broad-ranging partnership with BlackRock, which includes the insourcing of its chief investment officer and portfolio management functions across ASB's entire suite of investment funds. BlackRock will manage asset allocation and currency decisions across all ASB's investment portfolios, including the ASB KiwiSaver Scheme, ASB Investment Funds and ASB Portfolio Series, as well as supporting ASB's active and index tracking manager selection with research across asset classes.
David Griffith, ASB's new Portfolio Manager and Head of Investment Strategy for BlackRock's Multi-Asset Strategies & Solutions (MASS) Group based in Sydney, says today's picture is quite different from the post-GFC environment.
"Back then, we had an investment landscape of de-leveraging, sluggish growth, low inflation, and constant policy support," he says. "That support helped herald a decade-long bull market in both risk assets (like equities) and bonds.
"Ample fiscal and monetary support mean today's picture is quite different, and we expect US growth to be back above its pre-Covid-19 trend by the end of the year. We see any bond yield rises in this cycle driven by inflation, rather than policy hikes, creating a unique environment we have called the 'new nominal'— which appears likely to be constructive for equities."
Griffith says the 'new nominal' is about government bond yields being less sensitive to higher inflation expectations and actual inflation, keeping nominal long-term yields low and real (inflation-adjusted) yields negative. In 2021, BlackRock says the rise in long-term yields has been mainly driven by higher market pricing of inflation, with real yields remaining pinned well into negative territory.
"What matters for risk assets, including equities, is the expected path of policy rates. We believe the market has been too eager to read hawkish intent into the Fed's statements where there may be none.
"BlackRock expects the Fed to start normalising policy rates in 2023, a much slower pace than market pricing for lift-off in 2022 indicates. As a result, BlackRock looks for opportunities arising from any turbulence to increase risk. We see potential for cyclical shares and regions to benefit from a broadening re-start."
Griffith also believes climate change will have an effect on the investment world: "We view climate risk as investment risk, and we think this has material implications for constructing portfolios.
Market prices do not reflect the coming changes yet, he says, suggesting that assets positioned to benefit may have higher returns during the transition.
"For example, certain commodities, such as copper (electric vehicles and charging stations) and lithium (batteries), will see increased demand from the drive to net zero.
We think it's important to distinguish between the near-term drivers of commodity prices –notably the economic re-start –and the long-term transition that will likely drive some of these prices.
"Crude oil prices are a case in point. Recovering demand, coupled with a lack of investment in new supply, is pushing up prices. But this may be short-lived as the transition to net zero progresses.
"There is no clear roadmap for the transition to a net-zero carbon emissions world. We know the starting point and desired end point – but we don't expect the journey to be smooth. We see a transition to a low-carbon economy improving the outlook for growth and risk assets relative to a 'do nothing' scenario."
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