As 2021 heads to a close, BlackRock is warning investors: Buckle up for persistent inflation through the next year.
The world’s largest ETF issuer by assets laid out its view of the global economy heading into the new year in a Monday morning webinar and outlined some of its strategies to adjust to what it calls a new reality for financial markets.
BlackRock expects monthly readings of around 6% annualized inflation in the U.S. to decline over the medium term, but inflation beyond the Federal Reserve’s 2% core target is likely here over a longer run. The firm cited the dynamics of virus-driven stops and starts and structural issues in the supply chain system as main drivers, along with persistent strength in housing prices.
Gargi Chaudhuri, BlackRock’s head of iShares Investment Strategy, said investors need to build multi-asset portfolios to offset the new inflation reality. These can include holdings in inflation-linked bonds, along with asset classes like diversified commodity baskets and real estate that can ride prices toward higher returns. Equities in companies with high market power are also an option, as they can pass the cost of inflation on to customers with less penalty.
Equities Over Bonds, Despite Risks
Wei Li, BlackRock’s global chief investment strategist, said the combination of persistent inflation and its expectations that the Fed won’t cut off support entirely for the economy sets up another year of growth for equities and low real yields on the fixed income side.
However, the uncertainty of the pandemic, geopolitical tension and other global factors are giving Li pause on making big risk-on calls, particularly as data surprises continue both on the upside and downside.
“Confusion is only natural, both for policymakers as well as for markets, as we adapt to this new reality,” she said.
Resiliency In Net Zero
Chaudhuri also argued that ESG-focused ETFs and other climate-friendly investments can add relative confidence into portfolios at a time when much of the world agrees that herculean amounts of effort and capital will need to be invested to stave off a full-blown environmental crisis.
Investors can get that exposure through broad ESG ETFs, or in thematic funds like the iShares Self-Driving EV and Tech ETF (IDRV), she said. That and similar products such as the Global X Lithium & Battery Tech ETF (LIT) stand to benefit from about $15 billion worth of electric vehicle spending in the $1.2 trillion U.S. infrastructure bill passed this summer, along with the downstream demand for lithium and other materials needed to make electric cars and charging ports.