According to BlackRock, a global recession is just around the horizon as central banks raise borrowing prices aggressively to manage inflation, and this time it will unleash more market turmoil than it ever has before.
According to the largest asset manager in the world, the global economy has already left behind an era of consistent growth and inflation that lasted for four decades and entered a period of increased instability. This new regime of increased unpredictability is likely to remain in place for the foreseeable future.
According to a paper titled 2023 Global Outlook written by a team of BlackRock strategists headed by vice chairman Philipp Hildebrand, this indicates that authorities would no longer be able to support markets to the same extent that they did during previous recessions.
"As central banks compete with one another to rein in inflation, a recession is expected to follow. It's the complete opposite of the recessions of the past "They said. "In contrast to what investors have been used to expecting, central bankers will not rush to the aid of the economy in this new system when growth slows down. The potential loss to equity prices has not yet been factored in."
According to BlackRock, investors will need more dynamic strategies to navigate the volatility that lies ahead as a result of the possibility of limited policy support. These strategies will involve more frequent portfolio changes and will require investors to take a more "granular view on sectors, regions, and sub-asset classes."
"Regime characterized by higher levels of macro volatility"
The strategists said that strategies that were successful in the past would not be effective in the present. "In this new environment of more macro volatility and more pronounced trade-offs, the old playbook strategy of simply "buying the dip" does not apply. We do not anticipate circumstances that will support the continuation of a concurrent bull market in stocks and bonds of the sort that existed over the preceding ten years."
Wall Street firms such as Morgan Stanley, Bank of America, and Deutsche Bank, among others, have issued warnings that US stock prices might fall by more than 20% in 2023 as a result of an economic slowdown and liquidity issues brought on by the Federal Reserve's interest rate rises.
David Solomon, the CEO of Goldman Sachs, believes there is only a 35% probability that the economy of the United States will escape entering a recession.
According to BlackRock, early warning indicators of an impending economic downturn include a slowdown in the property market, delays in the plans of corporations for investments, a fall in the savings of consumers, and a deterioration in the confidence of CEOs.
However, according to the experts, the stock market has not yet taken into account the possible severity of the next economic slowdown.
They continued by saying, "We do not believe that stocks are completely priced for recession." "Earnings forecasts for corporations have not yet adequately accounted for even a mild economic slowdown. Because of this, we will continue to maintain strategic underweight in developed market stocks."
The S&P 500 index, which is comprised of large-cap US stocks, has increased by more than 12% since reaching a 23-month low in October. This increase was primarily driven by expectations that the Federal Reserve will slow the pace of its interest-rate increases in response to a recent retreat in inflation.