is making the case that 2024 will be the year for active investing strategies across stocks and bonds—and that quality companies will especially outperform the market.
The coming year will be characterized by structurally weaker growth, inflationary pressure, and interest rates that will remain stubbornly above prepandemic levels, said Wei Li, BlackRock’s global chief investment strategist, at a media briefing on Tuesday on the 2024 outlook.
This new environment “clearly comes with risks,” she said. “We do not want to take unintended macro risk. But the flip side of this is that the reward…for being active and selective in this environment is greater as well.”
Jean Boivin, head of the BlackRock Investment Institute, the in-house research arm of the world’s biggest asset manager, said the macro environment is one where investors will “need to steer portfolio outcomes more deliberately in grabbing the wheel.”
But as more than 20 years of data from the S&P Indices vs. Active report—better known as Spiva—has shown: successful active management is rare.
That doesn’t deter Tony DeSpirito, BlackRock’s global chief investment officer of fundamental equities, who focuses on “bottoms up” analysis, or stockpicking, while still being “macro aware.”
“When I think about my degree of excitement for the market, I think returns, probably in line with long-term historical averages,” he said. “But when I think about the opportunity for alpha [outperformance], that’s where I get really excited—the most excited I’ve been in 20 years actually.”
DeSpirito said we are no longer in a trending market, but rather “a windshield-wiper market.”
“Last year it was all about energy. This year it’s all about technology. And so we’re in this ever-changing market,” he said. “That’s a good environment for stock-picking.”
DeSpirito also manages the $6.6 million active
BlackRock Large Cap Value exchange-traded fund,
which launched in May. Over the past three months, the fund has delivered total returns of 4.4%, outperforming 98% of its category peers, according to Morningstar.
DeSpirito said it’s important to invest in quality companies. “In some ways, I feel like a broken record,” he said. “But the point of the matter is that in most environments, quality is the way to go, particularly from a risk-adjusted return perspective. Really, the only time when that’s not true is when you’re coming out of a recession in that period of fast economic acceleration. That’s not where we are today. And so I do think adding quality, adding resiliency is important.”
He noted that looking back, when the Federal Reserve stops hiking rates, all stocks work well in that environment, but quality stocks work better than average. “Low-beta, quality stocks work best and that’s true one year out, two years out, and three years out, historically.”
What does that mean from a stockpicker’s point of view? It means finding good businesses that are profitable, have high gross margins and a high return of capital, and that those margins and the return on capital are stable. Another element is good balance sheets.
“That’s what helps protect you in any kind of downturn, and in today’s environment where rates have been repricing up, having that quality balance sheet, that strong balance sheet helps immunize you from higher rates,” said DeSpirito.
It’s also important to pay attention to price. “We’re in a marketplace where there’s a really wide divergence of valuations for various stocks—it’s about as wide as you ever get,” said DeSpirito. “So I do think in terms of protection, being sensitive to the price you pay is going to be extremely important.”
BlackRock said there is about $8.3 trillion in money-market funds, which is sitting on the sidelines.
“We do want to put cash to work, but with cash yielding 5%, we’ve got to think about how to do that selectively,” said Li. “Long-term parking in cash is the cardinal sin of portfolio construction. That’s the definition of cash drag, and actually cash tends to underperform equities and bonds over the long term especially during periods after peak rates.”
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