Even before the US Federal Reserve raised interest rates on Wednesday, the US stock market continued the sharp decline that has characterized it in recent months. The S&P 500 has already entered bear market territory this week (down more than 20% from its peak), and joined The NASDAQ has been there for a long time (down more than 31% from January) and the Dow Jones index is not far behind (down 17% from its peak).
But BlackRock, the world’s largest $ 10 trillion investment fund, does not see a buying opportunity and believes stock market recovery is unlikely to happen in the near future. Blackrock writes that although U.S. stocks have suffered the biggest losses in the first half of the year since the 1960s at least, “we are not buying the statements because it is time to buy stocks after the stock market slump.” At 22%, the sharpest decline in the index in the same period since 1962, then lost 23% .An even sharper decline was recorded only in 1932, when the index lost 35%.
The fund listed three reasons: “Valuations have not really improved in light of rising interest rates and weakened earnings forecasts, there is a risk of over-tightening the Fed, and pressure on profit margins has increased.” According to BlackRock economists, “A steeper policy of raising interest rates justifies lower stock prices and we see a risk that the Fed will raise interest rates too high – or at least markets believe it will and that is why we are neutral about the stock market in six to 12 months.”
Pink: High inflation will last a long time
These pessimistic estimates are in line with the fund’s CEO, Larry Fink, who said earlier this month that Fed does not have the tools to deal with global supply chain disruptions, one of the main causes of world price increases – alongside the war in Ukraine. multi.
Blackrock listed three reasons why exposure to the stock market should be reduced in the coming year. The first is because they think the companies have not updated their valuations enough for the future. “Valuations have not really improved after taking into account lower earnings forecasts and a faster rate of interest rate hikes. Higher interest rates increase the expected discount rate – making future cash flows less attractive,” they explained.
The second reason is the damage to the companies’ profit margins as a result of the energy crisis (in light of the war in Ukraine which led to a significant rise in gas and oil prices, RW) which will hurt growth, along with rising labor costs that will hurt profits. Earnings at 10.5% this year. “It’s too optimistic, in our opinion. Shares could fall further if pressures on profit margins increase. A decline in expenses, such as labor costs, has fueled the increase in profit for decades. So far, labor costs have not risen much, but we are seeing significant, or inflation-adjusted, wage increases to entice people to return to work. This is good for the economy – but bad for company margins, “the investment fund explained.
Finally, BlackRock Investment Institute experts noted that markets believe the Fed will tighten countries too much, at least in the near term, in part due to signs of sustained inflation, such as the recently released Consumer Price Index.
“We see central banks around the world ultimately choosing to live with inflation instead of raising interest rates to a level that will hurt growth. This means that inflation will remain at the global level probably higher than pre-Corona levels. We think the Fed will raise interest rates quickly, “However, the total interest rate hikes will be historically low, although there is a growing risk that the Fed will tighten its policy excessively – as the markets expect,” the investment fund explained.
However, they noted what could lead to a change in the world of equities for them: “We do not expect a sustained rise in markets until the Fed explicitly recognizes that rapid interest rate hikes will hurt growth and employment rates. If it recognizes you, it will be a signal for us to move Positive for stocks. “
Bridgewater: Stocks are junk, down 25%
Blackrock’s estimates are in line with remarks made by Ray Dalio, founder of Breadwater, the world’s largest hedge fund. In an interview with CNBC, Dalio said that in his opinion the Federal Reserve will not be able to raise interest rates to a high enough level to provide a real return to investors. “If interest rates rise by 3% or 4%, it will not be enough to compensate for the inflation rate,” he explained.
Dalio, who has previously said that “cash is junk”, repeated this in an interview, but also referred to the stock markets. “Of course cash is still junk. Do you know how fast you lose cash buying power?” Andrew Ross Sorkin asked at the World Economic Forum in Davos, “but stocks are even more junk. When there are problematic dynamics in global markets as is happening now, everyone is in the long In stocks. Everyone wants everything to go up, and the Federal Reserve wants everything to go up. So what did they do? They distributed money and credit and fed the fever. I think we are facing an environment of negative real returns. “It can not work that way.”
Greg Jensen, a senior executive at Dalio’s hedge fund, was even sharper. “If the Fed stays on the current track of sharp interest rate hikes, stocks may fall another 25 percent,” he said in an interview with the Financial Times. He added that inflation is not disappearing, which could force the Fed to continue raising interest rates, probably more than what is expected on Wall Street.
“Jensen also explained the hedge fund’s bet against American and European corporate bonds and said it was based on the fund’s perception that inflation would be much more stubborn than the Federal Reserve now expects, which would ultimately force the central bank to accelerate interest rates.” We are in a completely different world and approaching a slowdown. To reduce inflation to a 2% target, the Fed can rely heavily on a portfolio-selling strategy, which could ‘crack the economy’ and probably crack it as well. [החברות] The weaker in the economy, “he said.
Blackrock: Prefer inflation-linked bonds
BlackRock decided to reduce the general bias in equities while noting that from a strategic point of view they are still “overweight” in equities, adding that in terms of investment, “we are now maintaining a low weight in US bonds, and are overweight in inflation-linked bonds.”
The investment fund added that “from a strategic point of view we are underweight in nominal government bonds, with a preference for short-term bonds – and see returns climbing higher and higher. We maintain underweight in the long run, as we see investors demanding higher compensation. For holding government bonds against the background of rising inflation and debt levels. “Instead, we prefer inflation-linked bonds as an asset for diversifying risk in an investment portfolio at a time of higher inflation.”
Another area addressed in BlackRock is credit. While in the long run the fund prefers to take a risk in equities and against the background of rising interest rates are in a credit-deficient weight, tactically, they upgraded their position to neutral in BlackRock, while for emerging markets denominated in local currency they even increased weight based on attractive valuations and . “In our view, a large risk premium compensates investors for the risk of inflation,” Blackrock explained of the decision.
Finally, the fund noted that they believe that non-traditional return channels, including private credit, have the potential to add value and diversity to a portfolio. “Our neutral view of the field is based on an initial allocation that is much larger than most investors hold. Many institutional investors are left with a lack of investment in private markets because we believe they overestimate liquidity risks,” Blackrock explained, noting that private markets are an asset. A complex that is not suitable for all investors.
Dalio: Bitcoin is a small part of the portfolio
Dalio, for his part, said that on such days he avoids holding fixed income products (Fixed Income – investing in debt funds or debt products that generate cash flow against savings), but invests in inflation-hedged assets such as stock and commodity pricing.
“There are assets worth holding while tightening and there are assets to hold during relief. In both cases, at the moment, we do not want to hold debt assets but prefer hedged assets for inflation,” Dalio said recently in an interview with Australian Financial Review.
In an interview with CNBC, Dalio even said that Bitcoin is a part, albeit a small one, of its investment portfolio. “I think a blockchain is great. But let’s call it digital gold. I think it’s something that has a small place in relation to gold and other assets, in the shadow of the need for diversity and finding a replacement for gold,” he explained.
3 The reasons why BlackRock does not buy stocks
1 . Profit margins are small and inflation threatens them
2. Risk of over-tightening the Fed and interest rate hikes are too high
3. Valuations are not cheap given the rise in interest rates