BlackRock's Investment Institute has reiterated its earlier stance on the "illusion of diversification," emphasizing that investors now need dynamic strategies and alternative approaches. The institute maintains a risk-on preference for AI-related themes and favors unique allocations as portfolio "ballast."
The recent surge in long-term bond yields is partly driven by growing market concerns over loose fiscal policies and deteriorating fiscal outlooks. Earlier this month, Japan's 30-year government bond yield hit a record high, climbing over 100 basis points year-to-date. The uptick was triggered by Japan's fiscal spending plans and signals from the Bank of Japan hinting at a potential rate hike this week. Central banks in countries like Australia and Canada have also shifted their policy tone, either signaling an end to rate cuts or suggesting possible hikes.
BlackRock highlights the divergence in monetary policies between the U.S. and other economies as a key risk for next year. While the U.S. exhibits strong growth and inflation, its central bank remains relatively dovish, whereas other economies face weaker data but more hawkish stances. Despite internal disagreements among Federal Reserve policymakers, BlackRock believes U.S. monetary policy remains overly accommodative.
If investors demand higher risk premiums for holding long-term bonds, yields could climb further, making short-term bonds more attractive in the current environment. A rebound in U.S. employment or business confidence could reignite inflationary pressures, reigniting tensions between monetary policy and debt sustainability. This makes upcoming U.S. economic data—especially October's delayed jobs report—critical. The report may show job losses, reflecting delayed government layoffs. As Fed Chair Jerome Powell noted last week, data volatility is likely due to collection challenges during the government shutdown.
With diversification becoming increasingly difficult, BlackRock advocates for dynamic strategies. Investors should seek truly unique return sources, such as private markets and hedge funds, to generate alpha in this challenging landscape.
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