BlackRock Gets Ready to Rewind 2021 Playbook in 2022

(Bloomberg) -- Bonds get battered in run-it-hot economies. Stocks march higher. And it’s a good idea to hedge inflation, according to BlackRock Inc.

If those forecasts for 2022 sound like a replay of 2021 it’s no coincidence. The world’s biggest asset manager says markets are in a “new nominal” where equity is favored over fixed-income. Two consecutive annual losses for bonds and gains for stocks is an occurrence so rare it last happened almost 50 years ago. 

“This was the new nominal in action and marked the start of a regime shift,” BlackRock strategists including Wei Li and Scott Thiel wrote in a report published Monday. “We see the forces that drove stocks up and bonds down in 2021 to still be at play in 2022 as inflation settles at higher levels than pre-Covid.” 

Equities and inflation-linked bonds are BlackRock’s favorite asset classes in an era of inflation and rebounding economies. The outbreak of new Covid variants threatens to delay rather than derail a “powerful restart of economic activity,” the firm said in its outlook.

Strategists at the firm expect central banks to keep easy-money policies in place, even though they’ve pencilled in the Fed’s first post-pandemic rate increase in the second half of 2022. 

Even as bond yields march higher to match growth, it won’t be enough to remove a key pillar for rallying stocks -- low real rates. These inflation-adjusted yields have hit record lows this year because the market’s inflation expectations are rising faster than nominal yields, and that dynamic should continue, according to the report.

“We see real yields gradually rising, but remaining near historically low levels,” the strategists wrote. “Stocks can thrive, but bonds still suffer as the yield curve steepens.”

A gradual rate liftoff by the Fed won’t be enough to set back growth or undo gains in labor markets, BlackRock said. In Europe, policy makers are years away from raising borrowing costs, and they’ll likely boost asset purchases to take up the slack when pandemic programs are wound down.

“Major central banks are living with more inflation than they would have in the past,” the strategists wrote. “We see inflation settling at levels higher than pre-Covid whenever these supply bottlenecks ease.”

Major calls:

• Overweight U.S. Treasury Inflation Protected Securities (TIPS)
• Overweight developed-market stocks
• Overweight emerging-market local currency bonds
• Underweight developed-market bonds including U.S. Treasuries and euro-region debt
• Favor both Chinese stocks and government bonds as regulatory risks ebb

Among risks the strategists flag: a new vaccine-resistant virus strain that derails economies contending with high inflation. Another is a policy mistake, with central banks overdoing tightening measures and sacrificing growth in their zeal to stamp out consumer price pressures.

On the upside, Sino-American tensions could be defused as domestic priorities take precedence, the strategists predict. 

Yet Iran remains a geopolitical hot spot, amid a low likelihood of a nuclear deal with the U.S., according to the report.

President Joe Biden is likely to focus on managing the pandemic, implementing the administration’s spending plans, reining in high inflation and preparing for midterm elections. In China, the government’s attention will probably be taken up with reviving growth and party leadership including the likely re-election of President Xi Jinping.

©2021 Bloomberg L.P.