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BlackRock, the world’s largest asset manager, said Monday that it expects financial markets to continue to be volatile as central banks attempt to temper inflation, and it has reduced its exposure to developed market equities and upgraded its holdings of investment-grade credit.

“The Great Moderation, a period of steady growth and inflation, is over,” BlackRock vice-chairman Philipp Hildebrand and his team said in a mid-year outlook.

“Instead, we are braving a new world of heightened macro volatility – and higher risk premia for both bonds and equities.”

BlackRock said it was now underweight U.S., European and British equities given its worsening economic outlook, while holding onto neutral positions in Japanese, Chinese and emerging market stocks.

Over all, investors should no longer expect both equities and fixed income to rally in tandem, as had been the case over the past 20 years, BlackRock strategists said.

The “Goldilocks option is now off the table,” said Wei Li, global chief investment strategist at the BlackRock Investment Institute.

“Attractive valuations” had prompted the asset manager to upgrade its view on investment-grade credit. BlackRock also shifted its view on British gilts to overweight, making them their preferred nominal government bonds, given what it sees as “unrealistically hawkish” market expectations of future rate hikes by the Bank of England given slowing economic growth.

Fund flows suggest that investors have remained bullish this year despite a bear market in the S&P 500 and the worst first half of a year for U.S. bonds in modern history, BlackRock noted.

“That’s an important idea to keep in mind, that investors aren’t actually capitulating away,” said Gargi Chaudhuri, head of iShares investment strategy, Americas.

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