BlackRock just put out its global outlook report for the fourth quarter. And since it’s the world's biggest asset management company with almost $10 trillion under its belt, you might be curious about where it sees the economy and markets headed next – and where it’s putting its clients’ money. I’ve carefully read over the 26-page slide deck (twice), so you don’t have to. Here’s what you need to know…

What does BlackRock think about the economy?

1. Inflation and economic growth are going to be more volatile.

The asset manager thinks the “Great Moderation” is over – a time of easier investing starting in the 1980s when US economic growth and inflation levels didn’t vary all that much. That flew out the window with Covid and its aftermath: growth collapsed with the world in lockdown, while governments and central banks tried to jumpstart the economy with record stimulus. The result? New-found volatility (or variation) in both economic growth (red line) and inflation (yellow line), making for a much bumpier economic road ahead. That’s going to create a tougher environment for central banks to navigate, and make life a lot harder for investors.

Source: BlackRock global outlook report – Q4 2022 update.

2. The Federal Reserve (the Fed) will learn to live with higher inflation

BlackRock says Americans haven’t quite yet returned to their pre-pandemic ways: roughly 1% fewer of them are working or trying to find work, and they’re spending over 3% more of their income on everyday goods. From an inflationary standpoint, that’s a double whammy. For one thing, a shortage of job seekers means employers are competing for workers, which drives up wages and forces firms to push up prices as a result. For another, when consumers spend more money, it fuels a rise in the price of goods. Ergo, the only way the Fed can bring inflation down toward its 2% target is by causing a big recession – i.e. by hiking interest rates enough to slow the economy right down, potentially putting more people out of jobs so they can’t afford to spend as much.

BlackRock estimates the US economy (red line) would need to shrink by as much as 2% to bring inflation down to the Fed’s target by mid-2023. But they also think that the tradeoffs associated with such a slowdown – particularly the impact on unemployment – will prove too much for the Fed to stomach. That could mean the Fed (and central banks elsewhere in the same predicament) will decide to live for a while longer with some above-target inflation to soften the blow to the economy.

Source: BlackRock global outlook report – Q4 2022 update.

3. Americans will fare better than the Europeans and British across the pond.

BlackRock does expect a recession in the US, but says it won’t be as intense as the ones bound for Europe and the UK. Europe's purchasing managers’ index (yellow line, left-hand chart) is about four points below the US’s. Simply put, that means European manufacturing companies are seeing their businesses deteriorate faster than their US counterparts. What’s more, energy costs consume a bigger chunk of the European economy (yellow line, right-hand chart), making Europe a lot more vulnerable to spikes in energy prices than the US. And as for the UK, BlackRock says its government will keep spending more and earning less, making for a nasty recession.

Source: BlackRock global outlook report – Q4 2022 update.

Where does BlackRock see opportunities in this market?

With stormy seas ahead, you might assume BlackRock is just sitting on excess cash and waiting for the tide to turn – but that’s not the case. While the economy is uncertain, the firm expects there’ll be winners and losers over the coming months and years. And knowing that no one – not even BlackRock – can perfectly predict what the market will do next, the firm is diversified into a range of different asset classes to capitalize on potential short and long-term opportunities.

See, institutional investors like BlackRock usually take a two-pronged approach to building portfolios for their clients. There’s strategic asset allocation, where they pick a mix of investments they think will do well in the long run, slicing up the pie in a way that keeps risks lower and returns steadier over time. Then there’s tactical asset allocation, where they adjust that mix slightly from time to time to take advantage of shorter-term opportunities – while still staying true to their overall long-term strategic plan. So here’s what BlackRock is doing with stocks and bonds in each case:

1. The stocks picture.

Tactically (i.e. over the next six to 12 months), BlackRock plans to hold slightly less in US, European, and UK stocks than usual. The firm sees stocks having more room to fall in the near term – at least while the Fed and other central banks are still aggressively hiking interest rates. Interestingly, the asset manager is less pessimistic about Japanese stocks (you can read why I’m a fan of those here), whose companies have a lot more spare cash, and whose central bank is still keeping interest rates low. BlackRock is also less bearish on stocks from China and other emerging markets – you can check out the Vanguard FTSE Emerging Markets ETF (ticker: VWO; expense ratio: 0.08%) if you fancy a dabble in those.

Strategically (i.e. for the next ten years or so), BlackRock likes stocks in general, but prefers stocks from advanced economies, rather than from emerging markets. Over time, it expects the world’s larger central banks to ease off on rate hikes, and accept higher inflation for longer. That might be good for company profits, and the iShares MSCI World ETF (URTH, 0.24%).

2. The bonds picture.

Tactically, BlackRock generally likes bonds more than stocks. Bond prices have come down a lot, which has driven up their yields – the income bondholders receive as a percentage of the price they paid for the bond. On that front, investors would prefer to risk lending money to quality companies with strong balance sheets (i.e. buying their bonds) compared to buying government bonds from big economies with large debts. That being said, they also see bargains with emerging-market bonds priced in local currencies: look to the iShares JPMorgan EM Local Currency Bond ETF (LEMB, 0.3%) on that front.

Strategically, BlackRock likes bonds overall, but sees more opportunity in inflation-linked bonds, which do better when there’s… well, inflation. And it still prefers company bonds over government bonds from a risk-versus-reward standpoint. You can check out the iShares Global Corp Bond UCITS ETF (CORP, 0.2%) for a global spread of higher-quality company bonds, or the iShares Global Inflation Linked Government Bond UCITS ETF (IGIL, 0.2%) for inflation-linked government bonds from around the world.

Last but not least, BlackRock sees an uneasy global transition to “net zero” carbon emissions in the years ahead creating additional opportunities for investors. You can read what Theodora has to say about sustainable investing over here.