General Investing Powered by BlackRock® | February 2024 Reoptimisation

BlackRock Market Overview and Impact

In the final quarter of 2023, global markets experienced a strong upturn, effectively reversing the fears of recession and rising rates that had dominated the first three quarters. This made for another year of volatility in the markets.

Stocks rallied sharply in the last two months and bonds reversed heavy losses as moderating inflation made investors hopeful over a soft landing and central bank rate cuts in 2024. Global equity and bond indices finished the year in positive territory, with global stocks meaningfully outperforming bonds.

US stocks rallied in Q4 following signals from the Fed that interest rates have peaked. The Nasdaq index had one of its strongest years on record from excitement over the potential for AI, propelling US equities to near all-time highs by year-end. Softer inflation figures also drove European shares higher over the last quarter.

Within emerging markets, Chinese equities bucked the broad rally and ended the year in negative territory, as ongoing concerns over China growth and the property crisis weighed on sentiment.

Fixed income markets rebounded across Q4, reversing losses from the first three quarters of 2023. This was driven by a steep fall in government bond yields as investors priced in monetary policy easing over 2024. The US 10-year Treasury yield fell from 4.57% at the end of Q3 to 3.87% at the end of Q4.

Credit markets, including both high yield and investment grade bonds, also staged an impressive rally as spreads tightened. Emerging market debt indices performed strongly over the quarter and full calendar year as well.

Conservative, Balanced, and Aggressive Model Portfolios

Performance Commentary

The core models posted positive returns in 2023, but slightly underperformed their respective benchmarks. Over the last quarter of the year however, returns were broadly in line with benchmark, with slight outperformance from the balanced model.

Over the year, broad equity and bond allocations contributed to absolute performance – optimism over a soft landing towards the end of the year reversed recession and rising rate fears in the first three quarters. BlackRock’s decision to overweight equities in the last two rebalances was rewarded as global stocks meaningfully outperformed bonds in 2023.

Within equities, US exposures remained the most significant contributor from an absolute standpoint. Tactically adding US technology exposures in October helped as the market turned around and rallied amid a dovish pivot by the Federal Reserve.

Relative to the benchmark, BlackRock’s overweight positions in Japan and Canada saw positive contributions. Conversely, their underweight positions in Europe modestly detracted. Their minimum volatility and REITs (real estate investment trusts) exposures also detracted from active performance.

On the other hand, BlackRock’s underweight to emerging market exposures – driven by increasing market volatility over growth concerns in China – proved to be additive to active performance in 2023.

On the fixed income side, corporate bonds – both investment grade and high yield – led absolute returns, followed by mortgage-backed securities. Dialling up high yield exposures in the last two rebalances helped.

US Treasury exposures broadly underperformed credit as yield levels remained elevated, but long-term Treasuries rallied in Q4 as yields saw relief upon rate cut expectations towards the end of the year. Lastly, emerging market bonds (hard currency), which BlackRock increased exposures to in Q4, helped active performance.

Maintaining their allocation to gold remained an effective portfolio diversifier as markets experienced heightened volatility year-round.

Source: BlackRock, Morningstar as of 31 Dec 2023; 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 maintaining a modest risk-on positioning through an overweight to equities.

Within equities, BlackRock is staying overweight to the US, as broad analyst sentiment and earnings growth expectations continue to look strong relative to other regions. Within US equities, they are maintaining a small overweight to US technology given that they expect positive growth potential in the sector.

They are also rotating from ESG to a broader US index, for more precise exposures relative to benchmarks and better active risk control given heightened dispersion across markets (greater variance in returns across different stocks).

Elsewhere in developed markets, BlackRock is staying favourable on Japan, where they have a modest overweight, as the macro backdrop remains supportive for growth and monetary policy stays accommodative.

BlackRock is staying underweight in emerging markets more broadly, but have chosen to split exposures into emerging markets ex-China and China. Given divergent performance across the two, they believe this can offer more flexibility in implementing emerging market views. Lastly, they are positioning to minimum volatility, as they expect market volatility to return.

On the fixed income side, BlackRock is maintaining a nearly neutral portfolio duration, as they see contradictory forces in markets keeping interest rate volatility elevated. They prefer holding more in short to medium-term fixed income exposures, given attractive yield levels and the anticipation of the Fed recalibrating rates lower later in the year.

In the credit space, BlackRock prefers investment grade over high yield due to solid fundamentals of investment grade issuers and an expected increase in default rates of riskier issuers. They are keeping emerging market debts close to neutral, with a small tilt towards government debt.

Within alternatives, BlackRock is removing their allocation to REITs given challenging fundamentals and limited diversification benefits against equity, while keeping an allocation to TIPS (Treasury Inflation-Protected Securities) as inflation levels are likely to stay above central bank targets for the foreseeable future. They are also maintaining exposures to gold as they believe the asset can provide diversification amid heightened geopolitical risk.

Very Aggressive Portfolio

Performance Commentary

The very aggressive model posted gains for both Q4 and FY 2023.

US exposures remained the most significant contributor from an absolute standpoint. Tactically adding US technology exposures in October helped, as the market turned around and rallied amid a dovish pivot by the Federal Reserve.

Relative to the benchmark, BlackRock’s overweight positions in Japan and Canada saw positive contributions. Conversely, their underweight positions in Europe modestly detracted. US minimum volatility stocks also delivered less upside compared to market cap stocks.

On the other hand, maintaining an underweight to emerging market exposures – driven by increasing market volatility over growth concerns in China – proved to be additive to active performance in 2023.

Source: BlackRock, Morningstar as of 31 Dec 2023; 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 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 staying overweight to the US as broad analyst sentiment and earnings growth expectations continue to look strong relative to other regions. Within US equities, they are maintaining a small overweight to US technology given that they expect positive growth potential in the sector.

They are also rotating from ESG to a broader US index, for more precise exposures relative to benchmarks and better active risk control given heightened dispersion across markets. 

Elsewhere in developed markets, BlackRock is staying favourable on Japan, where they have a modest overweight, as the macro backdrop remains supportive for growth and monetary policy stays accommodative.

BlackRock is staying underweight in emerging markets more broadly, but have chosen to split exposures into emerging markets ex-China and China. Given divergent performance across the two, they believe this can offer more flexibility in implementing emerging market views. Lastly, they are positioning to minimum volatility as we expect market volatility to return.

Source: BlackRock, Performance commentary as of 31 Dec 2023. Rebalance date is 02 Feb 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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