December 8, 2022

  • All eyes are on the Federal Reserve to see how high Jerome Powell will be in raising interest rates.
  • Gargi Chaudhuri expects BlackRock to raise 75 basis points, and believes that interest rates will not be reduced until 2024.
  • It says investors should buy high-quality stocks in defensive sectors, as well as inflation-linked bonds.

From persistent supply chain bottlenecks to tech stocks crashing to escalation European energy crisisThe market faced its fair share of turmoil in 2022. But so far, none of these headwinds has matched the impact of the devastation left in the wake of hyperinflation.

That’s according to Gargi Chaudhuri, head of investment strategy at BlackRock’s iShares Americas unit, which currently manages about $2.13 trillion in assets. “Inflation will continue to be front and center in what moves the markets,” she told Insider in a recent interview.

With Federal Reserve Chairman Jerome Powell double On his determination to tame inflation at last month’s Jackson Hole meeting, Choudary believes that a Raising the interest rate by 75 basis points Looks likely at the September FOMC meeting. Although some investors have priced in a 100 basis point hike, a rate hike in excess of 75 basis point could upset the market rather than convey the intended confirmation signal.

“They want to appear assertive but not panicked,” she explained, also noting that the Fed wants to allow a lag in the time it generally takes for its policy actions to flow downward throughout the economy. This means that the full extent of the central bank’s monetary tightening measures – including its current ones reduce the balance sheet Its effects on consumer demand potentially slowing or causing a recession that will not be felt for at least several months to come.

Don’t expect price cuts until at least 2024

Given the central bank’s hawkish stance, Chaudhry believes that there is practically No chance to lower prices Anytime in 2023.

“In the past, loosening the policy too quickly after lifting it was not the right course of action,” she explained.

“Then when and if the economy slows down — and obviously we’ll start to see signs of that in the data — then they start cutting rates, and I would imagine the dot chart shows that happening in 2024,” Chaudhry continued, adding that she expects an interest rate cut not to. below 50 basis points by 2025.

Buy high quality defensive stocks and forward bonds

With interest rates still rising for at least the next year, Chaudhry believes that investors will continue to see certain “pockets of weakness” in the real economy.

“I think that becomes more difficult for certain parts of the market – especially certain sectors of the stock market – but it also creates pockets of value for the fixed income market,” she said. In the coming months, she urged investors to prioritize keeping their portfolios safe from increased volatility.

Within fixed income, Chowdhury emphasized that the attractive opportunities for investors lie in bonds of shorter duration, which currently have high interest rates, which means that investors will get an attractive return just by buying these forward assets and holding on to them. Because of The yield curve remains inverted Currently, investors can earn higher returns on short-term bonds than those with longer maturities, while at the same time taking on less exposure to interest rate risk.

Specifically, Choudhury recommended investors consider short-term bonds such as 1, 2 and 3-year US Treasuries, 1- to 5-year investment-grade corporate bonds, and inflation-linked bonds.

As for stock allocations, Chowdhury advised investors to take a defensive stance by buying high-quality assets that are more resilient in the face of a recession. “Stocks with lower or lower volatility give you more downside protection, which reduces risk in the portfolio,” she explained.

At the sectoral level, high-quality assets are located in Health Care And the Pharmaceutical industriesBoth have traditionally been more resistant to economic downturns and have strong cash flow generating power. Choudary recommended these two industries rather than core consumer goods, a sector that traditionally performs well during recessions but may not necessarily outperform in this high inflation environment, which she said could reduce the company’s profit margins.

“Healthcare is more attractively priced and will still give you that quality, which means those companies are likely to do a little better even if inflation continues into the next year,” Chowdhury said.

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