Australia is in a new regime of structurally higher and more volatile inflation, according to BlackRock Investment Institute APAC chief investment strategist Ben Powell.
At a recent roundtable, he said this is a factor that must be considered in portfolios, adding that investors need a new investment playbook to adapt to the more volatile and difficult macroeconomic environment.
Powell said a key theme BlackRock sees for the year is “pricing the damage”.
“In 2022, it became clear that inflation was sticky and policymakers reacted to almost unprecedented tightening and rates and interest rates,” Powell said.
“This year, we are in between lightning and thunder. We’ve seen the lightning, so the thunder is coming. You don’t know exactly when, but it is coming.”
Silicon Valley Bank collapsed on 10 March, and Powell said this an example of what people should expect to see when monetary policy is quickly – and dramatically – tightened.
“These things can happen,” he said. “Coming into the year, that was our expectation, and that’s why we are underweight in developed market equities.”
He added this aligns with BlackRock’s broad thinking this year: economic lightning will create economic thunder.
“You don’t know exactly what form the unexpected can take, but having these sorts of things happen, when you raise the cost of money very dramatically and fast is quite normal.”
BlackRock multi-asset strategist Katie Petering said there are still concerns with the “transmission mechanism”, referring to interest rate rises.
The RBA board began increasing the cash rate last May, and it is now at 3.6 per cent.
“We have concerns about the transmission mechanism, particularly in Australia to the housing market into the consumer,” she said.
Australia has a much faster transmission mechanism of increased rate hikes because there is a lower proportion of the population on longer-term fixed-rate mortgages than similar developed markets like Canada and the UK. Perry said BlackRock is watching this “very, very carefully”. It also monitors the damage to the local economy from the COVID-19 pandemic.
“We think the RBA has really no choice but to continue to address that,” she said.
“We are seeing signs of business confidence weakening as well, particularly in residential construction and business investment.”
BlackRock Australasia’s iShares ETF and index investments specialist Tamara Stats said the fight against inflation must still be made.
“It looks as though rates are going to stay higher, possibly higher than where they are right now and for a little bit longer,” she said, adding that the markets and the investing journey have changed quite dramatically. “The regime is clearly different.”
