BlackRock: Inflation spike and high bond yields? ‘Buy shares’ is the answer

Of Eleftheria Kourtali

BlackRock says it is absolutely bullish on stocks even after the strong release of international bond yields as it estimates that global growth is still strong and expects that central banks will eventually learn to live with inflation.

More specifically, as BlackRock points out, the investment bond of the international bond market, bond yields have skyrocketed due to rising inflation and aggressive comments from central banks. Leaps in yields often cause problems for stocks, but she believes the past is an imperfect guide to a world shaped by supply shocks. BlackRock predicts that central banks will quickly normalize their policies, without putting a brake on the economy. This will keep real returns low and support stock valuations. The inflationary scenario and the growth dynamics also favor the shares, as he estimates.

Yields on 10-year U.S. bonds hit a three-year high last week as data showed that inflation was still running at levels not seen since the early 1980s. shares of fast-growing technology companies, as BlackRock notes in the new strategy report. “We believe that fears of a further correction in equities are exaggerated. The interest rate hikes we expected are happening faster, but we do not see central banks raising policy rates beyond neutral levels, which neither stimulate nor restrict economic growth. “, as he characteristically notes.

Markets have valued a rapid rise in the Fed Fund interest rate to 3% next year, followed by a decline to 2.5% in five years. This is significantly higher than a month ago, shortly before the Fed raised interest rates and started talking aggressively about inflation. “We do not see the Fed raising interest rates that much. Even if they did, the level would still be historically low compared to previous growth cycles and the level of inflation,” he said.

BlackRock points out three very important fundamentals regarding stocks and their prospects.

First, as he points out, the strong re-opening of the economy provides a growth cushion for developed economies, especially in the US.

Second, high profit margins deserve attention. Developed market companies have managed to pass on the increased cost of inputs to consumers and keep labor costs under control – so far.

Third, BlackRock sees the economic impact of the war in Ukraine as leading to a decline in profitability even when analysts revise their estimates in general terms. But this is mainly about Europe. “We expect estimates for European companies to fall sharply as analysts begin to take into account the effects of the war. MSCI Europe companies are export-oriented and pump only half of their revenue domestically, mitigating the impact a bit. “This led us to reduce the overweight stance on European stocks earlier this month, and we prefer the US and Japanese stocks and we are generally in favor of risk,” BlackRock said.

What are the risks? First, central banks could cause a recession by raising interest rates too high in an effort to curb inflation. Second, inflation expectations could detach themselves from central banks’ targets and force them to brake. Third, companies could see margins shrinking amid escalating input costs and rising wage pressures.

BlackRock’s investment conclusion is therefore: “We prefer stocks in the current inflationary environment which is also characterized by the re-opening of the economy, as well as a historically low sum of interest rate hikes. bonds to rise further as investors demand higher premiums or additional compensation to maintain them amid high inflation and debt levels. ”