How can investors find returns in an increasingly fragmented world of modest growth and high interest rates? This is the kind of equation that the experts at the BlackRock Investment Institute (BII) like to tackle. At the head of this think tank of the American fund, the former deputy governor of the Central Bank of Canada, the economist Jean Boivin, remains optimistic. In a report published Tuesday, December 5, the BII identifies several “mega forces”: these long-term trends, independent of the gloomy macroeconomy, which can usefully guide investment.
L’Express: The BlackRock Investment Institute announces 2024 as a very uncertain year for the global economy. Isn’t this the case every year?
Jean Boivin: The month of December is often conducive to this type of prophecy, I have observed it throughout my career. But this time we have entered a different context from the forty years preceding the shock of 2020. It contrasts with the remarkable period of growth and reduction of inflation in developed countries which prevailed since the 1980s, and which we call it “The Great Moderation.” This phase was made possible thanks to the increase, year after year, in production capacities. Economic cycles were above all dictated by fluctuations in demand.
Today, the determining factors of the new regime we face come from the constraints weighing on production. I identify three main ones: demography – with the aging of the population -, the fragmentation of the global scene and the ecological transition. So many developments which will increase business costs. In this environment, central banks will face a more difficult trade-off between inflation and growth. We don’t know how they will navigate.
How do you see interest rates evolving?
Rates will remain higher on average than at the start of the 2000s. However, financial markets continue to behave as if it were possible to return to the previous situation. However, even if inflation falls occasionally, central banks will have to keep control of monetary tightening if they want to keep it close to their target of 2%, due to the structural factors which push prices upward and on which they cannot act. Beyond central bank key rates, in a more volatile, more uncertain environment, the premium required for long-term bonds will be greater.
Have the financial markets adapted to this new situation?
A considerable adjustment has taken place in 2023. The year began with a rate of 3.5% for 10-year US government bonds; they rose to 5% in October. But it was enough for inflation to fall for rates to moderate. This very strong long-term reaction to short-term news shows that the markets maintain a cyclical reading of the situation.
Is this context likely to last?
Yes. Many analysts question the likelihood of a soft landing versus a hard landing for the economy. In our opinion, this is not the right framework. The pandemic has created a huge hole in business. There is no landing because in reality, the economy has not taken off again. Growth is very weak. For 2024, we do not necessarily anticipate a recession, which is already good news, but we do expect an adjustment due to higher interest rates.
However, investment prospects are not blocked. Over the past forty years, the macroeconomic environment has driven most of the returns. This will not be so obvious in the future. But those who know how to be agile will have a better chance of standing out. Today, central banks do not know what they will do in six months. The investor must therefore regain control of his portfolio.
Where are these opportunities located?
We have defined what we call “mega forces”, that is to say major trends which will manifest themselves over several years, with an impact on all asset classes and in all regions. These trends are expected to evolve over time. This is the case of artificial intelligence (AI) which will ultimately increase productivity at the macroeconomic level. In a first phase, we can focus on AI producers and companies manufacturing microprocessors. Secondly, it will be necessary to closely monitor the concrete applications of AI. The clearest for us is in the health sector. Other areas will emerge as winners.
What other trends have you identified?
We are observing a fragmentation of the world, after decades of evolution in the opposite direction, that of integration. Today, geopolitics influences asset allocation. When it comes to emerging markets, for example, we believe that the analytical framework should be more about geopolitics than macroeconomics or company balance sheets. The vote of countries in the UN Security Council makes it possible to identify those which have the possibility of being multi-aligned, without having to take a firm position with one pole or another. They are the ones who will score points in the coming years. Their advantage stems from geopolitics more than their economic fundamentals.
The ecological transition constitutes another strong trend. It requires an enormous effort for companies to adapt. Investors are less attentive to this aspect, because they mainly look at innovations. We also see opportunities in the transformation of the financial sector, with corporate debt which will rely less and less on the banking system. This opens the way to private debt.
Slowdown in growth, real estate crisis, downgrade of sovereign debt rating by Moody’s on Tuesday : what is your view on China?
In the short term, it is the crisis of confidence among Chinese consumers and investors, in a context of high debt, which is undermining growth. In the longer term, the situation in China provides an illustration of the “mega forces” that we have identified. Tensions between China and the United States are at the heart of geopolitical fragmentation and will persist. The aging of the population also acts as a long-term constraint on growth because the labor market becomes tighter. In terms of investment, this fuels the appeal of the health sector for example.
The year 2024 will be full of elections around the world. With what economic implications?
These elections are being held in a context where large-scale decisions have been taken in recent years to manage the pandemic, and the consequences of which are still being felt. It will be interesting to see how the parties position themselves in relation to these issues, particularly that of debt. In the United States, if rates remain around 4.5% to 5%, the annual cost of the debt will represent around 14% of budgetary expenditure, i.e. more than Medicaid [NDLR : le système d’assurance santé].
We are already seeing center-left parties adopting more conservative positions, advocating greater budgetary rigor. Are people ready to take up the subject of public debt and translate it into their vote? These polls will tell us.
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