Cookie Settings

Positioning for a new regime

  • Our strategic asset preferences – a broad preference for equities over nominal government bonds and credit – have been positioned for a new market regime.
  • We see this regime driven by investors demanding greater compensation, or term premium, for the risk of holding government bonds and our expectation for higher inflation in the medium term.
  • It reinforces a significant asset reallocation in favour of equities and away from developed market (DM) nominal government bonds that has only just begun, in our view.

We are now in a fundamentally different market regime from the one we’ve seen over the past decade – one propelled by higher supply-driven inflation and a more muted cumulative central bank response to such inflation. This macro backdrop reinforces a significant asset reallocation in favour of equities and away from developed market (DM) nominal government bonds that our strategic asset preferences have already been positioned for.

The dislocations in markets so far in 2022 - driven by an adjustment to this regime shift, geopolitical concerns and by near-term confusion stemming from the unusual economic restart, a surge in inflation and new central bank frameworks – presents long-term investors with a potential opportunity to bump up equity allocations.

Confusion over the restart, supply-driven inflation and new central bank frameworks has been evident in markets this year. This confusion, alongside mounting jitters over the Russian-Ukraine standoff, has weighed on equity markets. The swift repricing in the path of short rates has sparked a surge in bond yields and triggered a rotation away from long-duration sectors such as tech that have dominated equity markets over the past decade.

For long-term investors, we see this selloff as a mispricing to exploit by adding to equity positions. We believe equity markets are not making the distinction between the repricing in the near-term path of policy rates – which has been sharp yet has a limited impact on long-term expected returns – and the muted change in long-run policy rate expectations – far more important for equity valuations and returns. Valuation gauges such as the equity risk premium – that consider both the outlook for interest rates and corporate earnings – suggest DM equities are still fairly, or even attractively, valued.

Equities attractively valued

BlackRock Investment Institute, with data from Refinitiv Datastream, March 2022.

The confusion gripping markets may persist over the near-term. On a strategic horizon of five years and beyond, we believe fundamentals will matter more, spurring us to take advantage of the recent selloff to add to our DM equity overweight. It is not strange that the central banks should want to get policy back to neutral and away from emergency measures – and do so quickly – as the restart does not require stimulus.

We believe central banks will ultimately choose to live with inflation. The unusual supply-driven nature of inflation means fighting such inflation aggressively with monetary policy will dent growth while doing little to address the underlying cause. This suggests a more muted policy response than seen historically that keeps real rates relatively low and supportive of risk assets. We expect supply-triggered inflation to last far beyond the restart. Why? We see the transition to reach net zero carbon emissions by 2050 completely rewiring the global economy and altering supply-demand patterns across sectors.

We believe bond markets are not fully pricing in higher medium-term inflation. We expect higher term premium to become a driver of higher nominal yields. This is also why we prefer and remain strongly overweight inflation-linked bonds. Our central case is for nominal yields to continue to rise. Yet they remain close enough to lower bounds to limit the effectiveness of DM government bonds as portfolio ballast.

Prefer equities over credit and government bonds

Hypothetical U.S. dollar 10 year strategic tilts, February 2022.

BlackRock Investment Institute. Views as of March 2022.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase.

Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

ESG Investment Statements

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

South Africa issue

Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Conduct Authority, FSP No. 43288.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. 

© 2022 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice of any kind.

We make no warranties, representations or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.

Although we make reasonable efforts to update the information on this site, we make no representations, warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.


Be the first to hear news and insights from Embark Group

Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.

  • Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.
  • This field is for validation purposes and should be left unchanged.