BlackRock Investment Institute raised U.S. short-term government bonds as well as Chinese and other emerging market stocks to “overweight” on Tuesday, saying investors were realizing that the U.S. Federal Reserve may have to become more aggressive in its campaign to subdue inflation.
Macroeconomic data in recent weeks has pointed to a resilient economy with inflation stubbornly far from the Federal Reserve’s 2% target.
“Now bond markets are waking up to the risk the Fed hikes rates higher and holds them there for longer,” BlackRock said in a research note.
BlackRock said it was boosting its allocation of Treasuries on its six- to 12-month horizon to take advantage of higher yields. To balance that adjustment, it is said it was reducing its exposure to investment-grade credit.
BlackRock also said it was going “overweight” on Chinese and other emerging-market stocks – a bet on China’s economic recovery after Beijing jettisoned its strict “zero COVID” policy in December.
The investment management company said it prefers emerging markets over domestic equities due to “China’s powerful restart, peaking EM rate cycles and a broadly weaker U.S. dollar.”
BlackRock also warned that geopolitical risks related to China have increased, and that risks remain related to regulatory intervention.
China’s blue-chip CSI300 Index has climbed 7% so far in 2023, outperforming the S&P 500′s 4% recovery.
Treasury yields rose further on Tuesday after data showed that U.S. business activity unexpectedly rebounded in February, reaching its highest level in eight months.
“Credit spreads have tightened sharply along with stocks pushing higher, reducing their relative attraction. We remain moderately overweight and still think highly rated companies will weather a mild recession well given stronger balance sheets compared with before the pandemic,” BlackRock said.
The Fed will release minutes from its Jan. 31–Feb. 1 meeting on Wednesday, which will be evaluated for any new signs of how high the U.S. central bank is likely to ultimately raise rates.