BUILDING
PORTFOLIO
RESILIENCE

A construction crane

We see two broad categories of market risks: known risks, like runaway inflation, economic growth slowdown or recession, or the outcome of a major election, and ‘unknown risks’ – Black Swan events that cannot be anticipated by markets. The outbreak of the Covid-19 pandemic in 2020 was one notable example of an ‘unknown risk’, but the category spans unpredictable events like large-scale cyber or terrorist attacks and natural disasters, among others. So, how can investors position for the known and the unknown?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.

INFLATION AND GROWTH IN FOCUS

With central banks aggressively hiking interest rates to tackle stubbornly high inflation, we see a risk of economies slowing and even contracting, leading to volatility in stock and bond markets. We think that portfolio allocations need to become more granular (through exposure to specific countries, sectors, factors or themes, for example, rather than just broad regional indices) and nimble (being prepared to make changes to portfolio allocations as market conditions and risks evolve at speed). In this volatile environment, we advocate building resilience into portfolios through stocks and bonds.

Video

Watch Karim Chedid, Head of iShares EMEA Investment Strategy, and Ursula Marchioni, Head of BlackRock Portfolio Consulting in EMEA, discuss how investors can build portfolio resilience.

Karim Chedid: I’m Karim Chedid, Head of Investment Strategy for iShares EMEA. After decades of steady economic growth and inflation, we believe we’re now in a new economic regime, where growth and inflation are likely to fluctuate more than in the past. We expect this will lead to heightened market volatility - that is, larger and more frequent swings in stock and bond markets.

 

How are we positioning in this environment? We look to build portfolio resilience across asset classes, including stocks, bonds, and commodities. In corporate bonds, we prefer ‘investment grade’ exposures that focus on companies with strong credit ratings. With inflation likely to remain above historical levels over the medium term, investors may look to manage this risk through inflation-linked bonds, which pay coupons linked to the level of inflation. In commodities, gold can boost all-weather resilience as a portfolio diversifier: over the long term, the precious metal is virtually uncorrelated to global stocks and is negatively correlated to government bonds. Diversification may not fully protect you from market risk.

 

For all-weather resilience in stocks amid volatile markets, we look to defensive style factors and sectors – which focus on companies and industries that tend to be less affected by slowing economic growth and more resilient to inflation. We like the minimum volatility style factor, which aims to minimise the size and frequency of changes in the value of investments through exposure to companies that tend to be less volatile than the broader stock market. We also favour exposure to beneficiaries of long-term trends, like sustainability.

 

I’m now joined by Ursula Marchioni, Head of the BlackRock Portfolio business for EMEA, for more on portfolio construction in the current environment.

 

Ursula Marchioni: Thanks Karim. Indeed, investors have had to navigate uncharted territories since the beginning of 2022. The higher economic volatility and weaker growth Karim referred to, coupled with the unfolding of the climate transition, will be with us for years. This calls for structural changes to investment portfolios, aimed at dealing with greater uncertainty for a prolonged period of time: in short, we will have to transform the way in which we construct portfolios, blending asset classes – like stocks, bonds, and commodities – and different types of investment products.

 

While certainly not trivial to navigate, this environment presents an exciting opportunity as our response now may lay the foundation for portfolio outcomes in the years to come.

 

So how do we think about this big crossroads at BlackRock? In our view, the new regime means that portfolio allocations with a longer time horizon will need to be back in focus. From a historic period of great stability, when choices around stocks vs. bonds, or sectors, or countries, could be stable at the core of a portfolio, we are moving to an environment where these will need to be more frequently adjusted, in order to build more resilient portfolios and capture opportunities.

 

Against this backdrop, we see five key principles for highly effective investors to consider as they prepare portfolios for the new regime:

 

Frequently review portfolio allocations, incorporating uncertainty into return expectations to create more risk-aware portfolios

 

Consider the impact of the climate transition – it is underway now, and will continue to shape investment outcomes across all asset classes

 

Prepare for different market scenarios, and consider 'what if' scenarios to understand how profits and losses could materialise

 

Know how product choices can affect a portfolio’s exposure to economic factors like interest rates and inflation. We believe these factors will be the main drivers of volatility and portfolio outcomes moving forward.

 

And as always, we believe effective investors may look to:

 

Actively identify areas of inefficiency in terms of the products they choose to implement their investment views – to simplify complexity and increase control and flexibility.

 

As an asset manager, BlackRock’s fiduciary role includes helping clients navigate risks and uncertainty. Explore our webpage, BlackRock.com, or reach out to your local representative for more on how we can help you build a more resilient portfolio to weather the uncertainty ahead.

 

Thank you for joining.

BUILDING RESILIENT PORTFOLIOS

Investors may be able to manage downside risk through varied, adverse conditions by building all-weather resilience into their portfolios. Resilient portfolios take measured risk accounting for uncertainty, hold diverse exposures, and adapt to changing market conditions over the long term. This covers both known and unknown risk.

Explore the tabs below for implementation ideas on how to build portfolio resilience through stocks, bonds, and commodities.

NAVIGATE OUR RANGE

For all-weather resilience in equities, we believe defensive factors and quality sectors may provide ballast in volatile markets, and also favour exposure to beneficiaries of long-term secular growth trends, like sustainability.

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.

We believe government bonds can play a part in building resilience, with a focus on shorter duration exposures, and in corporate bonds, we prefer an ‘up in quality’ approach through ‘investment grade’ exposures that focus on companies with strong credit ratings. With inflation likely to remain above historical levels over the medium term, investors may look to hedge against this risk through inflation-linked bonds.

Reference to individual investments mentioned in this communication is for illustrative purposes only and should not be construed as investment advice or investment recommendation.

Gold may boost all-weather resilience as a portfolio diversifier: the precious metal has near-zero correlation over the long term to global stocks and a negative correlation to government bonds.

 

Source: BlackRock, August 2022

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.