AFMC - 2024 Midyear Global Outlook: Waves Of Transformation

2024-07-12 12:00:00 ET

Summary

• We see a new wave of investment into the real economy, transforming economies and markets.
• We look for investments that can do well across scenarios and lean into the current most likely one.
• We stay dynamic and ready to overhaul asset allocations when outcomes can be starkly different.

The world could be undergoing a transformation on par with the Industrial Revolution - thanks to a potential surge in investment in artificial intelligence ((AI)), the low-carbon transition and a rewiring of global supply chains. But the speed, size and impact of that investment is highly uncertain. And it comes against an unusual economic backdrop post-pandemic: sticky inflation, higher interest rates, weaker trend growth and high public debt. We think taking risk by leaning into the transformation and adapting as the outlook changes will be key.

The new regime of greater macro and market volatility has taken hold, shaped by supply constraints like shrinking working-age populations. The result? Higher inflation and interest rates amid weaker growth relative to the pre-pandemic era - and elevated public debt.

But now investment opportunities transcend the macro backdrop. We see waves of transformation on the horizon, driven by five mega forces - or structural shifts. We see three of them spurring major capital spending: the race to build out AI, the low-carbon transition and the rewiring of supply chains. The size, speed and impact of that investment is highly uncertain, but we think it could transform economies and markets like past technological revolutions. Together with BlackRock's portfolio managers, we designed five starkly different scenarios to assess the near- term outlook, recognizing it could quickly change.

Before the pandemic, low inflation allowed central banks to slash interest rates and make massive asset purchases to buoy the economy. That boosted the financial economy - and helped drive gains across bonds and stocks. In this new regime, the real economy matters more. Our first theme is Getting real. We see the biggest opportunities in the real economy as investment flows into infrastructure, energy systems and technology - and the people driving them.

We think companies may need to revamp business models and invest to stay competitive. For investors, it means company fundamentals will matter even more. The gap between winners and losers could be wider than ever, in our view....

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