BlackRock
Updated 24 Mar 2023
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

As inflation and interest rates rise, investors will need to adjust to a new normal, but certain types of company can thrive in all conditions.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The Global Financial Crisis ushered in an era of low interest rates, which brought about real strength in asset prices. However, the easy money era came to an abrupt halt in 2022 as higher inflation forced central banks to raise rates quickly. This has proved a tough backdrop for financial markets. As investors make their ISA choices for the year ahead, they will need to ask: is the world a different place today?

The past decade has been defined as ‘the great moderation’, a period of low interest rates, low inflation and rising asset prices. Central banks and governments have supported growth, and money has been almost ‘free’ enabling businesses and consumers to borrow at extremely low cost.

However, this period is at an end. Supply chain disruption caused by the pandemic started to push up inflation in late 20211. Mounting geopolitical tensions and in particular, the war in Ukraine, have driven commodity prices higher,2 creating more inflationary pressure. Prices have been rising at 8-10% across much of the developed world for the past six months.3

Central banks have been forced to take action, raising rates across the board. This has put an end to the ‘free money’ era. The question for investors is what happens when this current crisis is over and there is a return to a more normalised inflationary environment.

A different era

Central banks predict that inflation will start to moderate over the next six months4 as supply chain pressures resolve and the worst effects of commodity price rises come out of the figures. However, the Bank of England believes that inflation will average at above 5% for 2023 and will remain structurally higher, with a similar picture in the US and Europe.5

This means that there is unlikely to be a reversion to the ultra-low interest rate environment for the foreseeable future. It is possible that the Federal Reserve and other central banks will keep rates higher even when inflation appears to have peaked to prevent any resurgence. While rate rises may be curbed by weakening economic growth, a return to zero interest rates looks implausible. This affects the type of assets that do well.

Geopolitical tensions

A new geopolitical world order is coming more clearly into view. COVID-19 and Russia’s invasion of Ukraine have accelerated fragmentation and the emergence of competing geopolitical blocs. Relations between China and the US were already worsening and the Ukraine crisis has deepened the fissure. The BlackRock Geopolitical Risk Indicator is above its historic average, meaning investors remain attentive to geopolitical risks.6

This creates a different type of environment, one where countries no longer trade freely and there is increasing nationalism on areas such as technology or green energy expertise. The CHIPS and Science Act, passed in the US in August 2022, aims to improve US semiconductor research and manufacturing.7 Outside of this Act, the US will simultaneously focus on cutting off support for Chinese chip manufacturers and designers.8 It is symptomatic of a broader fracturing of China/US trading relationships and an end to any sharing of intellectual property.

Sustainable investment

The climate has become an emergency – from global warming, to biodiversity loss, to water scarcity. There are now real world effects for companies that do not manage environmental risks effectively. At the same time, there are significant opportunities for companies that appear to have the solutions to these crises. Incorporating sustainability analysis into investment decision-making is therefore becoming more important.

Increasingly, companies that score badly on ESG (environmental, social and governance) metrics are likely to face growing regulatory problems and greater barriers to doing business. Around 90% of the world’s GDP is generated by countries whose governments have set a net zero targets. Policymakers around the world are enacting legislation to encourage progress.9

ESG: The environmental, social, and governance (‘ESG’) considerations discussed herein may affect an investment team’s decision to invest in certain investment opportunities from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Investment considerations

This is a new era and ISA investors will need to adjust. The end of free money makes it a more difficult environment for fast-growing companies that require a lot of capital, or companies with high levels of debt. It tends to favour cash generative companies or those paying a dividend. This may alter the balance in stock markets after a period when technology stocks have done very well.

However, there are certain universal truths on investing that won’t change: good companies with strong balance sheets, run by capable management teams with a focus on sustainable growth will thrive in the longer-term. This is the type of company the BlackRock investment trust managers are seeking out, with the aim of delivering capital growth and income for ISA investors in the year ahead.

1 https://www.imf.org/en/Blogs/Articles/2022/02/17/blog-supply-disruptions-add-to-inflation-undermine-recovery-in-europe IMF, 17 February 2022.
2 https://www2.deloitte.com/uk/en/insights/economy/russia-ukraine-war-inflation-impact.html Deloitte, 18 July 2022.
3 Inflation Rate - Countries - List | World (tradingeconomics.com) Trading economics, 28 December 2022.
4 https://www.ft.com/content/457f5404-54c7-456e-b388-88e170d14b07 FT, 3 November 2022.
5 https://www.britishchambers.org.uk/news/2022/12/bcc-economic-forecast-long-road-to-recovery-after-over-a-year-of-recession#:~:text=Inflation%20likely%20to%20have%20peaked%20at%2011%25&text=0%25%2C%20thanks%20in%20part%20to,to%201.5%25%20in%20Q4%202024 British Chambers, 8 December 2022.
6 BlackRock Geopolitical Risk Dashboard: https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/geopolitical-risk-dashboard - 28 December 2022
7 https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it McKinsey - 4 October 2022
8 https://www.reuters.com/technology/us-aims-hobble-chinas-chip-industry-with-sweeping-new-export-rules-2022-10-07/ Reuters – 10 October 2022
9 https://www.gov.uk/government/speeches/net-zero-economic-opportunities#:~:text=Today%2C%20over%2090%25%20of%20global,took%20on%20the%20COP%20Presidency. Gov UK – 23 September 2022

For more information on BlackRock’s range of investment trusts, please visit www.blackrock.com/its

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

MKTGH0123E/S-2647933

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