'Buy-the-dip' playbook won't work anymore, BlackRock says

BlackRock's new investment playbook for 2023 calls for more frequent portfolio changes, taking into account each investor's "appetite'' for risk as well as whether pricing accurately reflects the economic damage wrought by higher inflation.

The world's largest money manager, which had $7.96 trillion at the end of the third quarter, said Wednesday that the new market regime is not like others in the past. How investors adjust their portfolios shouldn't be, either.

Central banks will continue to raise rates to try to tame inflation, with a recession foretold, the manager said in its 2023 Global Outlook.

"It's the opposite of past recessions: Loose policy is not on the way to help support risk assets, in our view. That's why the old playbook of simply 'buying the dip' doesn't apply in this regime of sharper trade-offs and greater macro volatility," the institute said.

Right now, from its most defensive stance, BlackRock is favoring credit and short-term government bonds.

But economic damage — most evident, in the U.S., in rate-sensitive sectors — is building, so the institute's 2023 outlook included some tactical suggestions for portfolios dependent on positive turning points.

If asset prices better reflect the economic damage, or BlackRock's sentiment toward the risk becomes more positive, the institute said investors should become overweight stocks and short-term government bonds, neutral on credit and underweight long-term government bonds.

In a scenario when both economic damage is priced in and risk sentiment is more positive, BlackRock recommends portfolios be especially overweight and underweight credit and government bonds.

But even while investors remain in a defensive position, there are stocks to invest in. BlackRock said it still sees opportunity in the health-care sector, which will inevitably expand as populations age. There's opportunity in some cyclical sectors, too, BlackRock said. The institute likes energy stocks because, although earnings are coming off historic highs, tight supply could hold up prices. It favors financial companies over other sectors, too, because higher interest rates will boost bank profitability.

Gargi Pal Chaudhuri, managing director and head of iShares investment strategy, Americas at BlackRock, said during the Nov. 30 presentation that she expects investors seeking nimbleness for the coming year will continue to turn to ETFs for their liquidity.

The BlackRock Investment Institute's strategic view, which it defines as the investment horizon beyond the coming six to 12 months, is still positive for U.S. markets. In the long-term, it remains overweight equities, even more overweight credit while underweight short- and long-term government bonds.