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Following a challenging September for both equities and fixed income, markets saw some relief in October. Global equities rallied, and some parts of the fixed income markets posted positive returns. Yet, volatility remained high as risk sentiment switched back and forth in hopes of a dovish pivot by central banks.
Instead, additional 75 bps rate hikes by the Federal Reserve and Bank of England in early November slashed such hopes and confirmed central banks' hawkish stance on policy tightening.
Still, markets once again quickly rebounded upon lower-than-expected October US CPI data and the potential of China’s gradual reopening, driven by the Chinese government’s incremental relaxation of Covid controls and measures to support the property market.
Global stock markets rallied against the recent market uplift and saw positive returns as of mid-November. Emerging markets turned the tables and outperformed their developing peers after the correction in October, mostly led by the rebound in Chinese equities and consequently other Asia ex-Japan (AxJ) markets. MSCI AxJ jumped from negative territory in October to become one of the top performers this month.
Fixed income markets also saw some relief. Bond yields retreated from decade highs as investors were given hope that inflation had peaked. Riskier parts of fixed income also rose as spreads tightened amid improving risk sentiment.
The multi-asset portfolios produced positive absolute returns in the month of October but slightly underperformed their respective benchmarks. Looking at 3-month and year-to-date performance, however, the portfolios still outperformed in relative terms.
Over the past month:
Within equities, developed markets were the main contributors, particularly with US and Canada supporting returns. As emerging market (EM) equities fell, BlackRock’s relative underweight in EM helped cushion some of the market downturns amid currency weakness and volatility surrounding China’s strict Covid-zero measures and a weak property sector.
Within fixed income, exposure to mid-to-long-term treasuries hurt performance as yields continued to be pushed higher amid hawkish Fed rhetoric. BlackRock’s relative underweight in EM debt, however, contributed positively to performance.
Within alternatives, BlackRock’s relative overweight to Gold hurt performance.
Considering the US October CPI print and China’s relaxation of its Covid-zero policies and stimulating packages for their real estate sector, BlackRock is adjusting its portfolio allocation to gently lean more into risk.
BlackRock has increased its allocation of the equity sleeve as it views the US CPI print in October as an inflexion point. Cooling down of goods inflation suggests easing of supply-chain issues.
Service inflation remains sticky but will be more responsive to monetary policy. Therefore, Blackrock has reduced its allocation in US minimum volatility and allocated it towards market-cap exposure.
With China’s potential exit from Covid-zero policies and rescue packages for its property sector, the rollout of stimulations indicate that the Central government is not ignoring growth concerns. Therefore, BlackRock is closing its underweight in Emerging market equities, which has been one of the major contributors to active performance year-to-date.
Within the fixed income sleeve, BlackRock has closed its underweight in mortgage-backed securities as its valuation appears attractive, with spread nearing the widest since Covid.
BlackRock has also reduced its underweight in EM corporate on the back of China’s policies supporting the real estate sector. These trades are funded by the 3-7 year US Treasury and its cash proxies (floater and ultrashort credit). Overall portfolio duration has increased by about 0.1 year.
Within the alternative sleeve, BlackRock has cut its allocation to TIPS as it sees softening inflation. It further cut allocation to Gold as it appears less attractive in the current rate environment.
Performance of the Equity portfolio produced positive absolute returns and slightly underperformed the benchmark, but outperformed in the past three months and year-to-date.
Over the past month, from an absolute perspective, the majority of the equity market rallied in October as investors speculated a dovish pivot by central banks. In relative terms, BlackRock’s overweight to DM, US, and Europe, in particular, contributed to performance. Exposure to EM suffered, but BlackRock’s relative underweight helped cushion against losses.
BlackRock views the US CPI print in October as an inflexion point. The cooling down of goods inflation suggests an easing of supply-chain issues. Service inflation remains sticky but will be more responsive to monetary policy. Therefore, BlackRock has reduced its allocation in US minimum volatility and replaced it with a market-cap exposure.
With China’s potential exit from Covid-zero policies and rescue packages for its property sector, the rollout of stimulations indicates the Central government is not ignoring growth concerns. Therefore, BlackRock is closing its underweight in Emerging market equities, which has been one of the major contributors to active performance year-to-date.
This is done by increasing its exposure to three tickers: EIMI (broad EM exposure); CEMA (EM Asia exposure); and ICHN (China exposure). BlackRock believes these tickers would benefit from the positive shift in Chinese policy. Since BlackRock's EM underweight was significant prior to this rebalance, it has trimmed its allocation in all other regional tickers and thematic exposures to fund its increased EM allocations.
Source: BlackRock, Performance commentary as of 31 October 2022. Reoptimisation date is 2 December 2022: This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) the iShares Funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisor know enough about their circumstances to make an investment decision.
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