General Investing Powered by BlackRock® | October 2023 Reoptimisation

BlackRock Market Overview and Impact

Q3 brought a reversal in the rally that we saw during the first half of the year with both global equities and bond markets ending the quarter in negative territory. The main catalyst being higher interest rates. Despite inflation trending lower in the US, macroeconomic data released during the period painted a picture of a relatively resilient economy, a strong labour market, and inflation still above central bank targets. Thus, policymakers continued to reinforce a "higher for longer" policy stance.

The US Federal Reserve (Fed) hiked another 25 basis points (bps) in July, and opted for a hawkish pause in September, keeping the door open for future hikes and prompting markets to price out rate cuts into June 2024. The European Central Bank (ECB) also continued to tighten policy, choosing to raise rates twice over the quarter.

After a strong July, global equities struggled to keep their gains in August and September amidst fears over rising rates. Conversely, Japanese equities stayed positive over the quarter from optimism over firmer growth and inflation due to easier monetary policy and a weaker currency. A sharp rise in oil prices also propped up UK equities in September, due to its large tilt towards the energy sector. Meanwhile, the Chinese property sector debt woes remained in the spotlight and weighed on sentiment despite new stimulus measures being announced.

Most fixed income assets also sold off with rising bond yields, keeping volatility elevated. Government bond yields were pushed higher driven by fiscal sustainability concerns as well as the realisation that the Fed was unlikely to pivot in the near-term. High yield credit markets outperformed as the quarter ended with spreads broadly flat. Meanwhile other riskier parts of fixed income, such as emerging market debts, realised modest losses.

Conservative, Balanced, and Aggressive Model Portfolios

Performance Commentary

The core models posted negative returns in September and Q3, underperforming their respective benchmarks.

Over both the month and quarter, key developed equity exposures such as an allocation to the US weighed on returns. On a relative basis, BlackRock’s underweight in emerging markets supported active performance in the midst of increasing market volatility driven by concerns over China.

Fixed income exposures also detracted as long-term US Treasuries and mortgage-backed securities dragged down performance. On the other hand, exposures to floating-rate bonds and short-term US Treasuries helped.

Source: BlackRock, Morningstar as of 30 Sep 2023; Performance is based on USD total returns with income reinvested and net of total expense ratios but gross of transactions costs. Past performance does not guarantee future results.

Inception date for Conservative, Moderate 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

BlackRock is maintaining a modestly risk-on positioning by keeping an overweight to equities.

Within equities, they are keeping a small overweight to the US as broad analyst sentiment and earnings momentum continue to improve. They are adding to US technology to reduce the portfolio’s underweight to the sector given positive growth potential.

BlackRock is also optimistic on Japan as the macro backdrop remains supportive for growth and, consequently, corporate earnings. They believe stock buybacks and other shareholder-friendly actions should continue to attract foreign flows. They are therefore increasing their allocation to Japan and taking down exposure to Europe, where they have seen a significant deterioration in earnings momentum since the previous rebalance. Tighter policies and higher energy prices are likely headwinds to European economic growth.

Elsewhere in developed markets, BlackRock is increasing energy exposures by adding to Canadian equities on the back of higher oil prices and supply constraints.

Lastly, they are adding back to emerging markets as earnings momentum and broad analyst sentiment have rebounded but choosing to stay underweight overall given a weaker growth trajectory and a lacklustre policy response in China.

On the fixed income side, BlackRock is adding modestly to high yield bonds to bring it from an underweight to neutral, supported by improving spread momentum. Yet, they are reluctant to increase any further as overall credit spreads remain tight and growth uncertainty is still elevated.

They are also increasing their allocation to emerging market debt (hard currency) as spreads remain above long-term averages. Meanwhile, they are trimming an allocation to 3-7 year US Treasuries as they expect medium-term rates to be impacted by a higher-for-longer policy stance from the Fed. Their overall portfolio duration is neutral.

Within alternatives, BlackRock is keeping an allocation to Treasury Inflation-Protected Securities (TIPS) to protect against more persistent inflation. They are also maintaining exposures to gold for diversification purposes, while their allocation to REITS has been trimmed to fund the equity overweight.

Very Aggressive Portfolio

Performance Commentary

The equity model delivered negative absolute returns in September and Q3 but outperformed its benchmark for both periods.

Over both the month and quarter, most developed equity exposures weighed on returns, led by allocations to US and Europe, which sold off after a strong year-to-date rebound. Adding back to Japan equities also proved slightly additive to performance over the quarter. BlackRock’s underweight in broad emerging markets supported performance.

Source: BlackRock, Morningstar as of 30 Sep 2023; Performance is based on USD total returns with income reinvested and net of total expense ratios but gross of transactions costs. Past performance does not guarantee future results.

Inception date for Equity model at 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 keeping a small overweight to the US as broad analyst sentiment and earnings momentum continue to improve. They are adding to US technology to reduce the portfolio’s underweight to the sector given positive growth potential.

BlackRock is also optimistic on Japan as the macro backdrop remains supportive for growth and, consequently, corporate earnings. They believe stock buybacks and other shareholder-friendly actions should continue to attract foreign flows. They are therefore increasing their allocation to Japan and taking down exposure to Europe, where they have seen a significant deterioration in earnings momentum since the previous rebalance. Tighter policies and higher energy prices are likely headwinds to European economic growth.

Elsewhere in developed markets, BlackRock is increasing energy exposures by adding to Canadian equities on the back of oil price rises and supply constraints.

Lastly, they are adding back to emerging markets as earnings momentum and broad analyst sentiment have rebounded, while still staying underweight in emerging markets and neutral in China given weaker growth trajectory.

Source: BlackRock, Performance commentary as of 30 Sep 2023. Rebalance date is 12 Oct 2023.

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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