BlackRock says global markets have become more volatile and will remain so for some time. The world’s largest asset manager says the era of steady growth and low inflation is over: “We think traditional portfolios, hedges and risk models will no longer work.” “The Great Moderation, a long period of steady growth and low inflation, is over in our view,” BlackRock Investment Institute said in an Aug. 1 report. “Investors are bound for a market roller coaster in a new regime of increased volatility.” According to BlackRock, three investment pitfalls that are likely to trouble investors in this volatile market, and urged investors to avoid them. And the asset manager also indicated what to do. stop following books like ‘buying the dip’ Markets have recently rallied on hopes that the US Federal Reserve is about to reverse course and ease policy, after falling into bearish territory in early this year because of hot inflation, Fed tightening and recession fears. “In our view, this optimism is misplaced. All of this calls for professional investors to shift their portfolios more quickly,” BlackRock analysts wrote. The asset manager said an investment bias is “public enemy No. 1” for investors, and that’s inertia. Investors are reluctant to take risks or “make them too small to affect performance”. “It will be costly, in our view, to follow playbooks such as ‘buy the dip’ or make slow and minimal changes,” BlackRock wrote. Don’t Overvalue Your Assets Investors should “clearly” clear their portfolios rather than “over-deliberate”, says BlackRock. “People with this bias overvalue their assets. The longer they hold them, the higher the price they ask to give them up,” the asset manager said. That bias can cause investors to hold positions even after an investment strategy “has been developed,” he said. “This can hurt performance. Positions often produce higher returns earlier in their life, we find.” Don’t let losses cloud your judgment When investors feel stinging losses, as many do now, they are more likely to hold losing positions too long or sell winning positions too soon, BlackRock said. “Both stocks and bonds have racked up declines not seen since the 1970s this year,” BlackRock analysts said. “Behavioral finance finds that people feel the pain of loss twice as much as they experience an equivalent gain as pleasurable.” BlackRock, meanwhile, said investors are finding it tempting to sell winning positions too early because of a “reluctance to take on more risk just for marginal gains.” What BlackRock is doing instead BlackRock says the new era of volatility requires “a review of portfolios” and says it has been de-risking its positions this year. The firm managed nearly $10 trillion in assets at the end of the first quarter. Here’s what BlackRock said it’s doing: Adding quality to portfolios: It’s been downgrading developed-market stocks and upgrading investment-grade bonds. Inflation position: BlackRock likes inflation-linked bonds because it says markets are underestimating inflation overall. “Large spending swings and output constraints are driving inflation. The constraints are rooted in the pandemic and have been exacerbated by the war in Ukraine and China’s blockades,” he said. Position for climate goals: BlackRock said markets have not fully priced in what many expect will be a global transition to more environmentally friendly energy sources. Over time, companies that are better prepared for this transition are likely to be more valued, Blackrock said. “Climate risk is investment risk, and the narrowing window for governments to achieve net zero goals means investors need to start adapting their portfolios today. The net zero journey is not just a story of 2050; it’s history now,” its analysts. he wrote. Investors can invest not only in green energy companies, BlackRock said, but also in carbon-intensive industries with “credible” transition plans, or those that supply materials for such a transition. BlackRock likes sectors like technology and healthcare, which it said would benefit most from an energy transition. He also said there are tactical opportunities in select energy stocks.
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