The set-it-and-forget it portfolio? Forget it, says the senior strategist for North America at BlackRock.
Investing in the second half of 2023 and beyond will require more effort from investors and advisers than in the past, Kurt Reiman said in an interview this week. There are opportunities in areas like treasury bills and short-term bonds, dividend stocks, AI, even the auto industry. But exploiting them will require investors to look beyond strategies that worked well for the past 30 or 40 years. Mr. Reiman spoke to The Globe and Mail about the second half outlook from BlackRock, a global investing giant.
Q: We had a year of everything going up in 2021, a year of almost everything going down in 2022 and now a year of uncertainty so far in 2023. What’s your big picture summary of what to expect in the second half of 2023 and into 2024?
A: The first thing is that we don’t expect the macroeconomic environment to be one that helps broad asset class returns. We’re pivoting to opportunities within asset classes as opposed to focusing on just broad asset classes. An example is that we are stressing quality within both stocks and bonds. We’re emphasizing sectors like health care and autos and looking at certain countries, especially in fixed income, like Brazil and Mexico.
Q: Something that hits home in the outlook is the view that inflation will be sticky, and that central banks will not be able to lower rates to where they were before the pandemic. Can you explain your thinking?
A: We think inflation is largely a result of production and supply constraints stemming from labour shortages, energy transition and geopolitical fragmentation. This is a very different environment than the one where investors built wealth over the past 30 to 40 years. We expect that central banks are going to keep interest rates higher for longer, and we don’t expect them to come to the rescue in the event of a recession.
Q: The outlook declares that because rates will remain elevated, “income is back.” How should investors get in on this?
A: I think one way would be just looking at what you can find on the front end of the yield curve [treasury bills and short-term bonds]. There is an opportunity that we haven’t seen in a couple of decades: You can generate around 5 per cent. With inflation having declined this year, this 5-per-cent yield is not just high in nominal terms, it’s also positive in real terms. So that means it compensates investors for inflation.
Q: What about getting income from the stock market via dividends?
A: Canadian stocks offer an above-average dividend yield relative to what you find in other developed markets.
Q: How do you see strong risk-adjusted rates of return for cash fitting into a portfolio?
A: Cash plays a role in a portfolio as a source of dry powder that investors can use to fund opportunities that they see as they emerge. And, on top of that, the income you can get from cash is higher than what we’ve seen in many years. So, you’re getting paid to wait. What I would caution against, though, is abandoning asset allocation to load up on cash. In doing so, you surrender the risk premium – the opportunity of earning a return above cash and being compensated for the volatility and the risk that you take.
Q: The outlook notes the sharp divergence in performance between sectors, and it talks about how getting “granular” in building a portfolio is likely to be more important than broad asset class returns. Is it correct to read this as saying that index investing may not be the best way forward?
A: The broad indexes are important building blocks. But instead of maybe just hewing to an index, you make deviations. In fixed income, it’s a preference for shorter maturity government bonds, inflation-linked bonds, investment-grade bonds over high yield and emerging market fixed income. Within stocks, it’s a preference for sectors like health care and autos, and a preference for Japan within the developed world. And, a preference of emerging markets over developed markets.
Q: Autos? I cannot remember the last time somebody suggested the auto industry was an exciting investment opportunity.
A: When we look at some of the traditional manufacturers, they’re trading at forward price-to-earnings multiples of somewhere between five to six, which is well below the historical average.
Q: Investors are often counselled to take a long-term view with their portfolios. But in the outlook, it says that navigating potential returns will mean eyeing short-term opportunities. Do investors and advisers need to be more hands-on with portfolios?
A: What’s different is that, even on a strategic horizon over a longer term where maybe you’re saving for retirement or a philanthropic objective, you’re going to have to be more nimble. You’re going to have to get more granular and make more frequent changes to a portfolio in order to achieve our objectives. A set-it-and-forget it mindset worked over the past 30 to 40 years, but it’s not the strategy that we think is going to lead to successful outcomes over the next five to 10.
Q: The mid-year outlook mentions the idea of harnessing mega forces in today’s world. What are these forces, and do any stand out for investment potential?
A: We’ve defined five mega forces: artificial intelligence, aging demographics, the future of finance [new competitors for banks], fragmenting geopolitics and the low-carbon transition. The big one that is quite in fashion today is artificial intelligence. Many have expressed concerns about the valuation of companies that are tied to the AI wave. But we don’t see their valuations as being stretched, given that rises in expected profitability have kept pace with the rise in the prices of the companies that are involved in the AI supply chain.
Q: Thoughts on how investors can exploit the AI trend?
A: You can look to thematic exchange-traded funds as a way to pursue this.
Q: BlackRock has filed a prospectus to launch a bitcoin ETF in the U.S. market. It’s understood you can’t directly comment on this fund right now, but where does crypto generally fit into the thinking about mega forces and also in investor portfolios?
A: We have thought about the role of cryptocurrencies in a portfolio and concluded that because there’s no cash flow, they’re very hard to value. There’s not necessarily an implied allocation to cryptocurrencies that we would say warrants an ongoing slice within a portfolio. But it is an area that investors are looking to fill in portfolios, and they’re looking to do it in a way that is more liquid and easier to transact.
Q: Parting thoughts for investors?
A: We are saying investors need to be more nimble and they have to look below the hood in asset classes to find opportunities because there won’t be this broad uplift to asset classes where mistakes make you money. It’s about doing your homework and being more disciplined.
This interview has been edited for length and clarity.
Rob Carrick