BlackRock Market Overview and Impact

Global markets experienced fluctuations in performance during April and May.

In April, concerns regarding persistent inflation and the crystallisation of a higher-for-longer interest rate environment triggered a selloff in global stock markets. In the US, the S&P 500 Index pulled back from record highs as robust economic data and sticky inflation led to a reevaluation of future monetary policy easing.

Fixed income markets also weakened as markets repriced yields higher alongside sticky inflation and tight labour market data across most developed economies.

In May, global markets rebounded amid bullish sentiment regarding artificial intelligence, strong corporate earnings and easing geopolitical tensions. Sovereign bond yields generally declined as moderating inflation raised hopes for interest rate cuts this year, resulting in positive returns for most fixed income asset classes. In the US, the S&P 500 Index reached fresh record highs, with Information Technology and Communication Services among the top performing sectors.

Fixed income markets offered investors a reprieve and rebounded amid a modest pullback in government bond yields. The fall in rates drove bond prices higher. Riskier parts of the fixed income market, namely corporate credit and emerging market debt indices also saw gains during the period.

Conservative, Balanced and Aggressive Model Portfolios

Performance Commentary

The models underperformed their respective benchmarks on a QTD basis as of end May 2024.

Broad equity exposures detracted on both absolute and relative basis. Japanese equities were one of the largest detractors. While currency depreciation is generally perceived as positive for equity markets, the Japanese yen reaching historical lows had weighed on sentiment, resulting in softer performance of Japanese equities over the period.

On the other hand, Chinese equities were a significant contributor over the period as the China market rallied in April. Positive corporate earnings and announcements of new share market reforms by the Chinese regulator collectively helped to restore investor confidence.

On the fixed income side, overall bond allocations posted negative returns from an absolute perspective but helped relatively. Long-term US Treasuries emerged as significant absolute detractors for the period as markets repriced yields higher. Performance was helped by the bounce back of the fixed income market in May amid a modest pullback in government bond yields as moderating inflation raised hopes for interest rate cuts this year.

Source: BlackRock, Morningstar as of 31 May 2024; Performance is based on USD total returns with income reinvested and net of total expense ratios but gross of transaction costs. Past performance does not guarantee future results.

*Inception date for Conservative, Balanced and Aggressive models is 31 Dec 2014.

** Using Bloomberg Global AGG/MSCI ACWI until 31 Dec 2017, Bloomberg US Universal/MSCI ACWI EUR/GBP Hedged to USD after 31 Dec 2017.

Reoptimisation Commentary

Overall, BlackRock is adding another 1% to their overweight in equities to reflect their broadly positive view on the backdrop, particularly for the US.

Across equities, they are staying overweight the US as they see the potential for continued outperformance driven by resilient corporate earnings. Within US equities, they are adding further to their overweight in technology. Growth stocks, led by technology, have continued to blossom even in the face of interest rate volatility, election uncertainty, and conflict in the Middle East. They expect the impact of the AI renaissance on capex spending and economic productivity to be a long-term structural tailwind for the US economy, further fortifying the country’s position as the economic growth engine of the world.

On the other hand, BlackRock is choosing to reduce their exposure to other developed markets. More specifically, they are maintaining an underweight to Europe as the near-term growth outlook looks relatively less favourable, and reducing their allocation to Canada where they are less positive on energy exposures. Additionally, while they remain favourable on Japanese equities, they are choosing to modestly reduce their overweight in favour of a slight overweight to emerging markets.

Emerging markets are buoyed by an upswing in earnings momentum and sentiment and could see an additional tailwind from a more accommodative stance from the Federal Reserve and EM central banks. BlackRock is also choosing to partially currency hedge their Japan exposure given an attractive hedging benefit from an interest rate differential with the US. Lastly, they are removing their minimum volatility exposure to reinforce their bullish view.

On the fixed income side, BlackRock is increasing allocations to investment-grade (IG) bonds and, to a lesser extent, long-term US Treasuries while reducing exposure to higher-yielding credit fixed income. They are keeping overall portfolio duration largely unchanged by utilising an interest rate hedged vehicle for IG bonds. Overall, they are using riskier fixed income allocations such as high-yield and emerging market bonds to fund their shift into equities and investment-grade bonds.

Within alternatives, BlackRock is keeping allocations to inflation-linked bonds and gold.

Very Aggressive Portfolio

Performance Commentary

The very aggressive model underperformed its benchmark on a QTD basis as of end May 2024.

Japanese equities detracted on both absolute and relative basis. While currency depreciation is generally perceived as positive for equity markets, the Japanese yen reaching historical lows has started to weigh on sentiment, resulting in softer performance of Japanese equities over the period.

On the other hand, Chinese equities were a significant contributor over the period as the China market rallied in April. Positive corporate earnings and announcements of new share market reforms by the Chinese regulator collectively helped to restore investor confidence.

Source: BlackRock, Morningstar as of 31 May 2024; Performance is based on USD total returns with income reinvested and net of total expense ratios but gross of transaction costs. Past performance does not guarantee future results.

*Inception date for Very Aggressive model is 31 Oct 2016.

** Using Bloomberg Global AGG/MSCI ACWI until 31 Dec 2017, Bloomberg US Universal/MSCI ACWI EUR/GBP Hedged to USD after 31 Dec 2017.

Reoptimisation Commentary

BlackRock is staying overweight in the US as they see the potential for continued outperformance supported by resilient corporate earnings. Within US equities, they are adding further to their overweight in technology. Growth stocks, led by technology, have continued to blossom even in the face of interest rate volatility, election uncertainty, and conflict in the Middle East. They expect the impact of the AI renaissance on capex spending and economic productivity to be a long-term structural tailwind for the US economy, further fortifying the country’s position as the economic growth engine of the world.

On the other hand, BlackRock is choosing to reduce their exposure to other developed markets. More specifically, they are maintaining an underweight to Europe as the near-term growth outlook looks relatively less favourable, and reducing their allocation to Canada where they are less positive on energy exposures. Additionally, while they remain favourable on Japanese equities, they are choosing to modestly reduce their overweight in favour of a slight overweight to emerging markets.

Emerging markets are buoyed by an upswing in earnings momentum and sentiment and could see an additional tailwind from a more accommodative stance from the Federal Reserve and EM central banks. BlackRock is also choosing to partially currency hedge their Japan exposure given an attractive hedging benefit from an interest rate differential with the US. Lastly, they are removing their minimum volatility exposure to reinforce their bullish view.

Source: BlackRock, Performance commentary as of 31 May 2024. Rebalance date is 26 Jun 2024.

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. Past performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

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