June 9, 2023

  • All eyes are on the Federal Reserve to see how high Jerome Powell raises interest rates.
  • BlackRock’s Gargi Chaudhary expects a 75 basis-point hike, and thinks rates won’t be cut until 2024.
  • He says investors should buy high-quality stocks in defensive sectors, as well as inflation-linked bonds.

Permanent supply chain disruptions range from a decline in technical stocks to a mounting one European energy crisisThe market has seen its fair share of disruptions in 2022 But so far, none of these headwinds have quite matched the path of destruction left in the wake of rising inflation.

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

With Federal Reserve Chair Jerome Powell down down In his determination to control inflation at last month’s Jackson Hole meeting, Chowdhury believes that a 75-basis point rate hike Looks likely at the September FOMC meeting. Although some investors have priced in a 100-basis point hike, a rate hike of more than 75 basis points could excite markets rather than convey the intended signal of reassurance.

“They want to be assertive but not panicky,” he explained, also pointing out that the Federal Reserve typically wants to allow for the time it takes for its policy actions to unwind across the economy. That means the full extent of the central bank’s monetary tightening measures — including its current one Balance sheet reduction – and their impact on potentially dampening consumer demand or inducing a recession won’t be felt for at least the next few months.

Don’t expect a rate cut until at least 2024

Given the central bank’s hawkish stance, Chowdhury feels that there is virtually No chance that rate will be cut Anytime in 2023.

“In the past, it was not the right move to ease too quickly after the policy was introduced,” he explained.

“Then when and if the economy slows down — and we’ll obviously start to see signs of that in the data — that’s when they’ll start cutting rates, and I would imagine that the dot plot shows that happening in 2024,” Chowdhury continued, adding that he expects 2025. Expect to cut rates by at least 50 basis points in

Buy high-quality defensive stocks and front-end bonds

With higher rates likely to endure for at least the next year, Chaudhary believes investors will continue to see certain “pockets of weakness” in the real economy.

“I think it becomes difficult for some parts of the market – particularly some sectors of the equity market – but it also creates pockets of value for the fixed income market,” he said. In the coming months, he urged investors to prioritize protecting their portfolios from increased volatility.

Within fixed income, Chowdhury emphasized that attractive opportunities for investors lie in short-term bonds, which currently have a high carry, meaning investors will earn an attractive return simply by buying and holding these front-end assets. because The yield curve is inverted At this point, investors can actually earn higher yields on short-dated bonds than long-dated bonds, while also accepting lower exposure to interest rate risk.

Specifically, Chowdhury advises investors to consider short-term bonds such as 1-, 2-, and 3-year U.S. Treasuries, 1- to 5-year investment-grade corporate bonds and front-end inflation-linked bonds.

In terms of equity allocation, Chowdhury advises investors to take a defensive position by buying high-quality assets that are more resilient to downturns. “Low or minimal volatility stocks give you worse protection, which reduces your risk in the portfolio,” he explained.

Among the highest quality assets by sector Healthcare And Pharmaceutical industry, as both are traditionally more resistant to economic downturns and have stronger cash flow generating capabilities. Chowdhury recommended those two industries instead of consumer staples, a sector that traditionally fares well during recessions but may not necessarily outperform in this particular high-inflation environment, which he said could erode 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 bit better next year even if inflation continues,” Chaudhry said.

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