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BlackRock: Mega forces to drive allocations

Structural shifts and core longer-term themes are creating opportunities across sectors and regions today.
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As markets adjust to a new regime of higher-for-longer interest rates and today’s atypical business cycle, structural mega forces are now shaping the investment outlook.

“Mega forces are structural changes we think are poised to create big shifts in profitability across economies and sectors,” said Jean Boivin, head of the BlackRock Investment Institute (BII).

He pinpoints digital disruption like artificial intelligence (AI), the rewiring of globalisation driven by geopolitics, the transition to a low-carbon economy, ageing populations and a fast-evolving financial system.

Notably, the mega forces are not in the far future, but are playing out today. “The key is to identify the catalysts that can supercharge them and the likely beneficiaries – and whether all of this is priced in today,” added Boivin.

Getting more granular

BII believes that surging long-term US Treasury yields show markets are adjusting to a higher level tied to mega forces – namely, looser US fiscal policy, the large-scale reallocation of resources in the low-carbon transition, and geopolitical fragmentation rewiring supply chains.

As a result, many developed market economies are on a path of structurally weaker growth due to mega forces such as ageing populations.

“Long-term yields are more in line with our views, but we think equities still don’t fully reflect higher-for-longer policy rates,” added Wei Li, BII’s global chief investment strategist.

At the same time, stagnant economic activity in the US over the past 18 months and a lower growth trajectory is the overriding trend, rather than short-term job creation that BII sees as masking the broader trend since 2020 of only modest overall employment growth. “Labour supply has slowed as the population aged. We think the tight labour market reflects this supply constraint, not a strong economy,” explained Boivin.

As a result, BII suggests it is necessary to harness the sector and company impacts of these mega forces in this tricky macro environment.

The key, in BII’s view, is to identify the catalysts that can supercharge them, see how they interact with each other and uncover the likely beneficiaries not yet priced in by markets.

“We saw such a catalyst in AI earlier this year when we went overweight on our tactical six- to 12-month horizon,” added Li. “Our work finds the value of AI patents from public companies has surged, and it could suggest they’re submitting higher quality patents.”

This is not just about public markets. BII also finds that private markets make up a growing portion of firms filing for AI patents and may have more companies focused exclusively on AI.

Driving profitability

Meanwhile, other mega forces are boosting profitability across economies and sectors.

“We see potential across the energy system in the shift to a low-carbon economy, depending on the interplay of policy, tech and consumer and investor preferences,” said Boivin.

In line with this, healthcare, real estate, leisure and companies with products and services for seniors may stand to benefit in developed markets as people age.

In emerging markets (EM), BII sees these economies leading the way in digital payments in the future of finance.

In addition, some EMs could strike deals across divides in a fragmenting world and benefit from companies bringing production closer to home, while broader economic competition could spur global investment across tech, clean energy, infrastructure and defense.

Part of the Mark Allen Group.