Bracing for volatility –

The Great Moderation, the four-decade period of steady growth and inflation, is over, in our view. Economies’ production capacity took a lasting hit in the pandemic. Central banks now face a starker trade-off: crush economic growth down to this capacity level or live with higher inflation. For now, the inflation side of this trade-off is still the sole focus. We expect higher macro and market volatility.

Implication: Be nimble. We’re tactically overweight investment grade credit on attractive valuations.

Living with inflation –

We think central banks will eventually confront the trade-off in its entirety. Once they see the cost to growth and jobs materializing, they’ll likely choose to take longer to bring inflation to target and give the economy a chance to rebalance as production capacity slowly recovers. That means inflation staying somewhat higher for longer – but is a better outcome, in our view, if inflation expectations stay anchored.

Implication: We are tactically underweight most DM equities having trimmed risk through the year. We remain strategically overweight equities.

Positioning for net zero –

We see the bumpy transition to net-zero carbon emissions shaping the new regime. We see a key role for fossil fuels in the transition – and we don’t think markets have fully priced in the transition yet.

Implication: Time horizon is key. We see tactical opportunities in selected energy stocks. Changing societal preferences are likely to give sustainable assets a return advantage for years to come, in our view.

source: Blackrock, link in first comment