July 2022

Global outlook –
Midyear 2022

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A critical juncture for markets
The historically unprecedented year-to-date selloff in stocks and bonds was the backdrop for
BlackRock Investment Institute Midyear Outlook Forum – the first in-person forum in 2-1/2 years.
Global equities vs. global bonds annual returns, 1977-2022

50%
1985
40%

30% 1999
2013
20%
2021 1982
Global equities

10%
2005
0%
2015
-10%
2018
-20% 2022
2002
-30% n 2022 year-to-date
n 2021
-40% n Historic annual returns
2008
-50%
-20% -10% 0% 10% 20% 30% 40%
Global bonds

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute with data from Refinitiv Datastream and Bloomberg, July 2022. Notes: The chart shows annual returns for global equities and bonds in U.S. dollar
terms from 1977-2021. Index proxies are the MSCI All-Country World index for equities (MSCI World before 1988) and Bloomberg Global Aggregate index for bonds (U.S. Aggregate
before 1991). Data as of 6 July 2022.

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Historic selloff in stocks and bonds
Policy confusion, the war in Ukraine and recession fears have roiled markets this year. We see
persistent inflation amid sharp and short swings in economic activity ahead, keeping markets volatile.
Global equities and bond total returns, 2022

Russia Energy
Hawkish central banks Fed hawkish
invades price China lockdowns Recession fears
and equity swoon shift
Ukraine surge

Investment forum
0%

-5%
Total return

-10%

-15%
n Global equities n Global bonds

-20%

-25%
Jan 22 Feb 22 Mar 22 Apr 22 May 22 Jun 22 Jul 22

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute with data from Refinitiv Datastream and Bloomberg, July 2022. Notes: The chart shows year-to-date to returns for the MSCI ACWI index and
Bloomberg Global Aggregate index for bonds since the start of the year. Data as of 5 July 2022.

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End of the Great Moderation
The pandemic upended an unusual period of mild volatility in output and inflation. That period – that
supported a sustained stocks-and-bonds bull market for decades - is over, we think.
Volatility of U.S. GDP and CPI, 1965-2022

n Real GDP growth

n Core CPI inflation
Std. deviation (percentage points)

0
1965 1975 1985 1995 2005 2015

Sources: BlackRock Investment Institute, U.S. Bureau of Economic Analysis and Labor Department, with data from Haver Analytics, July 2022. Notes: The chart shows the standard
deviation of the annualized quarterly change of U.S. GDP and the Consumer Price Index.

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A worsening trade-off
The Great Moderation is over – and no longer an option. No matter what the outcome, policymakers
face a worse mix of higher output or inflation volatility as the orange line shows.
Entering a regime of higher macro volatility

2023
economics
of inflation
Inflation volatility

Covid-19
shock and
aftermath

Great Moderation
Bull market for stocks and bonds

Output volatility

Sources: Blackrock Investment Institute, July 2022. Notes: The chart shows a stylized depiction of the volatility of U.S. inflation and output during the Great Moderation (1985-2019;
green line) and since the Covid-19 shock (2020 to now; orange line). The curves show potential combinations of output (x axis) and inflation (y axis) volatility that can be achieved when
central banks react to demand and supply shocks hitting the economy. Since the Covid-19 shock, the underlying volatility of demand and supply shocks has risen, as the orange line shows.
This means central banks now face starker trade-offs.

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 An unprecedented spending shift – still unresolved
The U.S. economy has seen its largest ever sectoral shift as spending moved from services to goods –
and it hasn’t normalized yet. This is behind the production constraints driving higher inflation.
Change in U.S. spending shares, 1960-2022 Share of U.S. spending on goods, 1999-2022

0.12 37%
Share of spending (percentage points)

36%

0.09
35%

34%

Share
0.06
33%

32%
0.03

31%

0 30%
1960 1970 1980 1990 2000 2010 2020 1999 2004 2009 2014 2019

Source: BlackRock Investment Institute and U.S. Bureau of Economic Analysis, with data from Haver Analytics, July 2022. Notes: The left chart shows the absolute quarterly change in the
share of nominal spending across 121 components of U.S. personal consumption expenditure that together make up overall consumer spending. The right chart shows the share of U.S.
personal consumer spending on goods, expressed as a percent of total nominal consumer spending.

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Labor shortages are the key production constraint
Reduced labor supply – see the participation rate on the left – and skills mismatches make it more
difficult to fill job vacancies as the chart on the right shows.
U.S. labor participation after downturns U.S. unemployment and vacancy rates

4
8
n Covid shock
n Global financial crisis n Latest (May 2022)
Percentage point difference from start of shock

3
n 2001 n 2020-Present
7
n 1953-1990 n Other cycles
2
6
1

Job vacancy rate, %

5
0

4
-1

-2 3

-3
2

-4
0 1 2 3 4 5 6 7 1
2 4 6 8 10 12 14
Years since shock
Unemployment rate, %

Source: BlackRock Investment Institute and U.S. Bureau of Economic Analysis, with data from Haver Analytics, July 2022. Notes: The left chart shows the change in the U.S. labor force
participation following past downturns. The right chart shows the distribution of the monthly U.S. job vacancy rate and the unemployment rate over each decade since 1960.

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Production constraints dominate the new regime
The restart gives a glimpse of how other structural supply shocks – including the rewiring of global
supply chains and the net-zero transition – may play out over the long term.
Trade openness, 1870-2020 Labor shifts needed for transition

70 3%
Agriculture,
forestry and
other
60 Other low-carbon mining
2%
Renewables
50
1%
Services
Trade openess index

Contribution
40
Interwar
deglobalization 0%
Gas
30 Oil and petroleum
Transportation
-1% Coal
20
Manufacturing
10 -2%
Construction

0
1870 1895 1920 1945 1970 1995 2020 -3%

Source: BlackRock Investment Institute and U.S. Bureau of Economic Analysis, with data from Haver Analytics, July 2022. Notes: The left chart shows the sum of world exports plus imports,
divided by world GDP. The pink shaded area highlights the period between the first and second world wars when trade integration fell materially. The right chart shows the estimated
contribution of different sectors to the global change in employment between 2020 and 2052 as a result of the green transition, in IMF simulations using the G-cubed macroeconomic
model; see the IMF World Economic Outlook 2020, chapter 3.

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The upshot: higher risk premia ahead
Policymakers face tougher trade-offs in the new regime. Reining inflation comes at much greater cost
to growth. Preserving growth comes with much higher inflation. Result: higher risk premia.
A worsening trade-off for central banks

Higher term premium

Living with inflation
Risk of deanchored inflation expectations
2023
economics
of inflation
Covid-19
shock and
Inflation volatility

aftermath
2023
economics
of Inflation 2022
politics of
Inflation Higher equity
risk premium
Great Moderation Fighting inflation
Bull market for stocks and bonds Risk of recession

Output volatility

Sources: Blackrock Investment Institute, July 2022. Notes: The chart shows a stylized depiction of the volatility of U.S. inflation and output during the Great Moderation (1985-2019;
green line) and since the Covid-19 shock (2020 to now; orange line). The curves show potential combinations of output (x axis) and inflation (y axis) volatility that can be achieved when
central banks react to demand and supply shocks hitting the economy. Since the Covid-19 shock, the underlying volatility of demand and supply shocks has risen, as the orange line shows.
This means central banks now face starker trade-offs. They can try to rein in inflation, but this comes at a cost of higher output volatility- the Fighting inflation outcome on the bottom right.
Or they can try to dampen fluctuations in output at a cost of more inflation volatility – the Living with inflation outcome on the upper left. For illustrative purposes only.

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Midyear 2022 investment themes - back to a volatile future

Bracing for volatility – The Great Moderation, the four-decade period of steady growth and inflation,
is over, in our view. Central banks are rushing to raise rates to contain inflation that’s rooted in production
constraints. They are not acknowledging the stark trade-off: crush economic growth or live with inflation. We see
this driving a new regime of higher macro and market volatility, with short economic cycles.

Implication: We see higher risk premia across the board and think portfolio allocations will need to become more
granular and nimble.

Living with inflation – We are in a world shaped by supply unlike any we have seen in recent
decades. For all the noise about containing inflation, we see policymakers ultimately living with some of it once
the cost on growth and jobs becomes clearer – and is acknowledged.

Implication: We cut risk further tactically and cut DM equities to underweight – but are looking for a dovish pivot
by central banks to turn more positive. We remain strategically overweight equities. We tactically upgrade global
credit to overweight on what we see as contained default risks.

Positioning for net zero – We see the bumpy transition to net-zero carbon emissions shaping the
new regime. We see a key role for fossil fuels in the transition – and we don’t think markets have fully priced in the
transition yet.

Implication: Investors can be both bullish on commodities and sustainable assets. Changing societal preferences
are likely to give sustainable assets a return advantage for years to come, in our view.

The opinions expressed are as of July 2022 and are subject to change at any time due to changes in market or economic conditions.
Strategic implications refer to long-term views, tactical implications refer to asset views on a 6-12 month horizon.

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 BRACING FOR VOLATILITY

Sustained macro volatility implies higher risk premia

A higher macro volatility regime will sustain a higher market volatility regime, we believe. We expect
higher risk premia for both bonds and equity – and don’t see this as a buy-the-dip environment.
U.S. equity and GDP volatility and regimes shaded, 1970-2022

S&P 500

20%
Volatility

10%

0%
GDP

10%
Volatility

5%

0%
1970 1980 1990 2000 2010 2020
Sources: BlackRock Investment Institute, with data from Haver Analytics, July 2022. Notes: Volatility is calculated as the annualized standard deviation of monthly changes in the S&P 500
over a rolling 12-month period, using a Markov-Switching regression model in the same manner we did in our 2017 work. Given the severity of macro volatility during the Covid-19 shock,
we calculate four vol regimes. We show only the intermediate, high and extreme volatility regimes in the gray bands, the rest of the periods are regimes of low volatility. These lines plot the
average volatility level during each regime based on a broader sample from 1960 to 2022. We use the same regime methodology for U.S. GDP based on annualized quarterly data as of Q1
2022.

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 LIVING WITH INFLATION

Pivoting to live with higher inflation

Central banks face an imbalance between demand and production capacity. Overtightening will weigh
sharply on growth in the near-term – but we believe central banks will ultimately live with inflation.
U.S. GDP and possible scenario

110
3. We see it ultimately
n GDP pivoting to live with higher
n Pre-Covid trend 2. We see the Fed initially inflation
n Estimate of production capacity slamming the brakes

105
Index end 2019 = 100

100

1. Production capacity 4. Production capacity gradually

well below demand recovers part of the hit
sustained during the Covid
shock.
95

90
2019 2020 2021 2022 2023

Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, with data from Haver Analytics. Note: The chart shows the path of U.S. GDP (in orange) together with a stylized
indication of how we expect it to evolve in coming quarters. The orange and yellow arrows indicate that we expect the Federal Reserve to tighten financial conditions to the extent that U.S.
activity falls (orange arrow), before it changes course by easing policy to allow activity to recover somewhat (yellow arrow). The chart also shows estimates of U.S. production capacity - how
much it could normally produce while keeping inflation at 2% - based on a projection of pre-Covid trend (pink line) and our estimate of where it currently lies based on current core PCE
inflation (green line). The future values of the green line indicate that we see productive capacity partially recovering towards its pre-Covid level. Forward looking estimates may not come to
pass

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 LIVING WITH INFLATION

Unprecedented debt caps central banks’ ability to raise rates

Debt levels surged to fund the pandemic fiscal response. Sensitivity of high debt levels to higher rates
makes it harder for central banks to raise rates – and more tempting to live with inflation.
U.S. net debt interest payments and scenarios, 1990-2025

n Net interest payments

n Rates at 3.75% in five years
n Rates at 2.75%
n Rates at 1.75%
Percent of GDP

1
1990 1995 2000 2005 2010 2015 2020 2025

Sources: BlackRock Investment Institute, OECD and International Monetary Fund, with data from Haver Analytics, July 2022. Notes: The chart shows projections for U.S. net interest
payments based on different interest rate scenarios on a five-year horizon. The scenarios are calculated based on IMF projections of U.S. debt and hypothetical calculations of debt interest
costs based on different assumptions for the path of interest rates as indicated in the legend. Forward looking estimates may not come to pass.

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 LIVING WITH INFLATION

Higher corporate leverage adds to rate sensitivity

Debt servicing costs for corporates – that had gradually declined in an era of low interest rates – are
also at risk of rising sharply as rates climb. This adds to the pressure to live with inflation, in our view.
U.S. corporate credit, 2000-2022 U.S. corporate debt service costs 2000-2022

90 20
n Debt service ratio
n Ratio if interest rates 100 basis points higher
n Credit to non-financial corporates
n Ratio if interest rates 200 basis points higher

18

80

Debt service ratio (%)

Percentage of GDP

16

70

14

60 12
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020

Sources: BlackRock Investment Institute, BIS, Bank of America/Merrill Lynch, with data from Haver Analytics. Notes: The charts show credit to non-financial corporates as a share of GDP
(orange line, left hand chart) and debt service costs as a share of borrowing (yellow line, right hand chart). In the chart on the right, the green and orange lines show projected levels of debt
servicing costs based on different scenarios of higher corporate borrowing costs.

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 POSITIONING FOR NET ZERO

A bumpy transition will contribute to the new regime

Commodities prices have spiked as demand from the restart clashed with tightening supply. We see
the war and the transition keeping prices high and see a key role for fossil fuels in the transition.
Global capex expenditure in oil and gas, 2010-2025

3,000
USD billion, nominal

2,000

1,000

0
2010-15 2015-20 2020-25 (expected)

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, Wood Mackenzie, June 2022. Notes: The chart shows global capex expenditure in the oil and gas
sector from 2010-2015 and from 2015-2020, as well as projected capex expenditure for the period 2020-2025.

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 POSITIONING FOR NET ZERO

Transition pricing in progress

We are seeing green sectors post better relative returns to brown sectors – and think it has room to
run.
Relative returns of green vs. brown sectors, 2016-2025

10%
n Green repricing
n Brown repricing

5%
Relative returns

0%

-5%

-10%
2016-2019 2020 2021-2025 expectation

Past performance is no guarantee of current or future results. Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, with data from the Center for
Research on Security Prices, Feb. 1, 2022. Notes: To estimate climate-driven repricing, we attribute historic returns to two drivers: cashflow news and discount rate (DR) news. We then
identify the DR news associated with climate change using carbon emission intensity (CEI) as a proxy. To isolate the DR component of returns, we apply the standard decomposition
formula of Campbell (1991) using a standard factor model of expected returns (which embed well-known predictors such as value, momentum and quality). Attribution to climate scores is
then given by forecasting regressions of DR news on a measure of CEI. Sector returns are MSCI US Sector index- weighted averages of stock-level returns. Green represents the technology
sector, the most “green” in our work, whereas the utilities sector is the most “brown” in the repricing. The 2016-2019 bars represent the total repricing over this period; and the 2021-
2025 expectation is the cumulative repricing we expect over that period.The estimate is highly uncertain and is based on factors including risk premia effects in other long-run transitions
such as demographic trends, market pricing of green bonds and investor survey data on how much return they would be willing to give up to for more sustainable assets. See Sustainability:
the tectonic shift transforming investing of February 2020 for details.

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Snapshot of our views – July 2022
Latest directional views
Strategic view Tactical view
We are overweight equities in our strategic views of five years or longer. We expect central
banks to ultimately live with some inflation and look through the near-term risks. Tactically, we
Equities cut DM equities to underweight as we see activity stalling as central banks appear set to
overtighten policy. Historically elevated corporate profit margins are at risk from rising input
costs.
We are underweight public credit on a strategic basis on a view of a further rise in long-term
rates, and prefer credit exposure in private markets. Tactically, we upgrade credit to
overweight. Relatively healthy corporate balance sheets mean credit could weather stalling
Credit activity better than equities - with wider spreads providing a valuation cushion. We
overweight local-currency EM debt on attractive valuations and potential income. A large
risk premium compensates for inflation risk.

We are strategically underweight nominal government bonds, with a preference for short-
dated maturities. We stay firmly underweight long-dated bonds as we see investors
Govt demanding higher compensation amid rising inflation and debt levels. We prefer inflation-
bonds linked bonds instead. Tactically, we are also underweight as we see the direction of travel for
long-term yields as higher – even as yields have surged in 2022. We prefer inflation-linked
bonds as portfolio diversifiers amid higher inflation.

Tactical granular views - highlights

Developed market Underweight • We cut DM equities to underweight on a worsening macro picture and risks to
equities corporate profit margins from higher costs.

• We upgrade global credit to overweight. The asset class is our preferred way to add
Global credit Overweight duration to portfolio. Valuations are very appealing after the rise in yields and
widening in spreads. Relatively healthy corporate balance sheets suggest credit may
weather stalling activity better than equities.

UK gilts Overweight • We upgrade UK gilts to overweight as we see market pricing of policy rates as
unrealistically hawkish in the near-term with activity poised to slow sharply.

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 TACTICAL VIEW

Downgrading DM equities to underweight

We see risks to corporate earnings as the backdrop worsens and to profit margins from higher costs.
The year-to-date equity decline reflects rate pricing rather than poor earnings prospects, in our view.

U.S. CEO confidence and earnings, 1990-2022 S&P 500 vs. U.S. two-year yields, 2022

80 60% 5000 0.0%

n CEO confidence (6-month lead) n S&P 500
n Change in forward EPS estimates (right) n U.S. two-year yield (inverted, right)

70 40%

12m change in earnings estimates

U.S. two-year yield

4500 1.5%

S&P 500 index

60 20%
CEO confidence index

50 0%

40 -20% 4000 3.0%

30 -40%

20 -60% 3500 4.5%

1990 1995 2000 2005 2010 2015 2020 Jan 22 Mar 22 May 22

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, May 2022. Notes: The left chart shows the Conference Board CEO Confidence Index and the year-on-year
change in 12-month forward aggregate earnings estimates for the MSCI USA Equity Index. The right chart shows the year-to-date price move for the S&P 500 equity index and the yield of
the U.S. two-year Treasury.

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 TACTICAL VIEW

Upgrading global credit to overweight

Corporate cash buffers remain abundant and widening spreads have made valuations attractive, in
our view. Credit is our preferred way of taking risk and adding duration given the yield surge.
Share of global fixed income assets yielding over 4%, 1999-2022

100%

75%
Share

50%

25%

0%

US Treasury US Municipal Global Credit Global High Yield US Agencies

Emerging Market US MBS US CMBS Euro Periphery Euro Core

Sources: BlackRock Investment Institute, with data from Bloomberg, July 2022. Notes: The bars show market capitalization weights of assets with an average annual yield over 4% in a
select universe that represents about 70% of the Bloomberg Mulitiverse Bond Index, a broad gauge of fixed income securities. Euro Core is based on French and German government
bonds indexes. Euro periphery is based on an average of government debt indexes for Italy, Spain and Ireland. Emerging markets combine external and local currency debt.

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 TACTICAL VIEW

A tougher trade-off for DM central banks

Market pricing of monetary policy in Europe - particularly the UK - is unrealistically hawkish, in our
view, in light of a looming recession, driving our upgrade of UK Gilts to overweight.
Policy rates and implied pricing, July 2022 Consumer confidence, 2015-2022

104
3%

102

2%
100
Interest rate

Index level
1% 98

96

0%
94

-1% 92
U.S. UK Euro area 2015 2016 2017 2018 2019 2020 2021 2022

Current Neutral Market pricing in a years' time U.S. Euro area UK

Sources: BlackRock Investment Institute, Bank of England, OECD with data from Haver Analytics and Refinitiv Datastream, July 2022. Notes: The left chart shows current policy rates in the
UK, euro area and the U.S., our estimate of the neutral rate – the level of interest rates that neither stimulate nor restrict activity – and market-implied pricing of interest rates in a years’ time
based on overnight index swaps. Data as of 4 July 2022. The right chart shows the OECD’s consumer confidence indicator for each region/country.

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 TACTICAL VIEW

Sticking with our underweight to U.S. Treasuries

We see yields on long-term U.S. Treasuries rising further as term premium is restored. U.S. Treasuries
have also provided less portfolio diversification since 2021 – denting a major reason to own them.
U.S. 10-year yield breakdown, 2016-2022 U.S. Treasury returns on equity down days

4
0.5

3 2000-2007
0.4 2008-2020
2021 and 2022

Daily bond return (%)

2
0.3
Yield (%)

1
0.2

0
0.1

-1 0

-2 -0.1
2016 2018 2020 2022 0% to -1% -1% to -1.5% Over -1.5%
Size of daily equity drop
Yield Term premium Risk-neutral yield

Past performance is no guarantee of current or future results. Sources: BlackRock Investment Institute, New York Federal Reserve, with data from Refinitiv Datastream, July 2022. Notes:
The left chart shows the New York Federal Reserve’s breakdown of the U.S. 10-year Treasury yield into the risk-neutral yield that measures the change in interest expectations and the term
premium - the compensation demanded for bearing the risk of holding a government bond to maturity. The chart shows that most of the move higher in yields between mid-2020 to June
2022 has been due to rising rate expectations while the term premium has remained relatively suppressed. More information on the NY Fed model available here:
https://www.newyorkfed.org/research/epr/08v14n1/0807rose.html. The right chart shows the average daily move of the Bloomberg U.S. Treasury index on days the S&P 500 fell
between 0-1%, 1% to 1.5% and more than 1.5%.
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 TACTICAL VIEW

We stay overweight global inflation-linked bonds

The pullback in breakeven inflation rates suggests markets may be underappreciating that price
pressures are likely to persist, particularly in Europe, as high energy costs prove sticky.

U.S. vs Germany breakeven inflation rates Energy burden as share of GDP, 1970-2022

3 12

10 EU
9.8%

8
Breakeven rate (%)

Share of GDP (%)

6
U.S.
5.1%
1 4

2
n U.S. n Germany

0 0
2012 2014 2016 2018 2020 2022 1970 1980 1990 2000 2010 2020

Sources: BlackRock Investment Institute and BP Statistical Review of World Energy

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream. July
2022. Notes: The chart shows 10-year breakeven inflation rate pricing for the U.S.
and Germany (as a proxy for the euro area).
2021, with data from Haver Analytics, June 2022. Notes: The chart shows the cost of
oil, gas and coal consumption in the European Union and U.S. as a share of GDP. We
use regional energy prices, converted to U.S dollars, and divide by GDP in U.S. dollars.
Data for 2022 are based on IMF’s latest GDP forecasts and the year-to-date average
of daily commodities prices (expressed in U.S. dollars).

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 TACTICAL VIEW

Still overweight EM local currency debt

An attractive combination of yields and carry supports EM local debt, in our view. EM local debt
performance this year has been largely driven by the move lower in DM government bonds.
U.S. vs. EM policy rates, July 2022 Global vs. EM debt, year-to-date performance

8% 6.0%

6% 0.0%

Total return
Interest rate

4% -6.0%

2% -12.0%

0% -18.0%
U.S. Emerging markets Jan 22 Mar 22 May 22 Jul 22

Current policy rate Implied rate in 24 months' time EM local debt Bloomberg Global Aggregate Index

Past performance is no guarantee of current or future results. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, July 2022. Notes: The left chart shows the
current policy rate (red square) and the market-implied pricing of central bank rates in 24 months’ time (yellow square) for the U.S. and across emerging markets using interest rate
forwards. We use the J.P. Morgan GBI-EM Global Diversified index for EM and use a weighted average based on constituent weights as of 4 July,2022. For the U.S., we use the the
Bloomberg U.S. Treasury (all-maturity index). The right chart shows the year-to-date peformance of EM local debt and the Bloomberg Global Aggregate Treasuries index.

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Signposts to change our views
Our conviction is that portfolios will need to change more quickly in a regime of higher volatility. We
lay out the factors that could make us tactically change our views
Signposts

Positive
Asset Signpost

Decisive dovish pivot from central banks acknowledging the trade-off. Supply bottlenecks
Equities and credit ease more quickly, relieving some inflation pressures and taking pressure off central banks.
Valuations will likely determine the preference between equities and credit.
Dovish pivot as inflation expectations remain well anchored or yields reach levels that make
Govt. bonds
them attractive in a whole-portfolio context.
Supply-driven inflation not receding, and goods inflation stays elevated while services
Inflation-linked bonds
inflation picks up.

China equities Greater elderly vaccination and a more forceful policy response to support the economy.

Negative
Asset Signpost

Higher inflation, hawkish policy and poor corporate earnings lasting beyond our tactical
Equities and credit
horizon.

Govt. bonds Knee-jerk rallies in bonds and a low term premium despite volatile growth and inflation.

Inflation-linked bonds Outright recession drives inflation lower.

Source: BlackRock Investment Institute, July 2022. Notes: This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of
future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in
particular.

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 STRATEGIC VIEW

We prefer equities over credit, government bonds

We stay overweight inflation-linked bonds, equities and private credit. We have cut our long-running
underweight to government bonds, in large part due to less unattractive valuations.

Hypothetical U.S. dollar 10-year strategic views vs. equilibrium, July 2022

Inflation-linked bonds

Developed market equity

Chinese government bonds

Emerging market equity

Income private markets

Growth private markets

DM high yield and EM debt

Global IG credit

DM governments

Underweight Neutral Overweight

g Current n Previous
This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise - or even estimate - of future performance. Source: BlackRock
Investment Institute, May 2022. Data as of 11 April 2022. Notes: The chart shows our asset views on a 10-year view from an unconstrained U.S. dollar perspective against a long-term
equilibrium allocation. Global government bonds and EM equity allocations comprise respective China assets. Income private markets comprise infrastructure debt, direct lending, real
estate mezzanine debt and U.S. core real estate. Growth private markets comprise global private equity buyouts and infrastructure equity. The allocation shown is hypothetical and does not
represent a real portfolio. It is intended for information purposes only and does not constitute investment advice. Index proxies: Bloomberg Barclays US Government Inflation-Linked Bond
Index, MSCI World US$, Bloomberg Barclays China Treasury + Policy Bank Total Return Index, MSCI EM, Bloomberg Barclays U.S. Credit index, JP Morgan EMBI Global Diversified Index,
Bloomberg Barclays Global Credit Index, Bloomberg Barclays Global Aggregate Treasury index. We use BlackRock proxies for private market assets because of lack of sufficient data. These
proxies represent the mix of risk factor exposures that we believe represents the economic sensitivity of the given asset class.. The hypothetical portfolio may differ from those in other
jurisdictions, is intended for information purposes only and does not constitute investment advice.

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 BRACING FOR VOLATILITY

A pro-equities stance over the long-term

Over a strategic horizon, we see central banks choosing to live with inflation – a backdrop that favors
equities over bonds. We see higher term premium in long-dated bonds pushing yields higher.
A worsening trade-off for central banks

Higher term premium

Living with inflation
Risk of deanchored inflation expectations
2023
economics
of inflation
Covid-19
shock and
Inflation volatility

aftermath
2023 – and
beyond:
economics 2022
of Inflation politics of
Inflation Higher equity
risk premium
Great Moderation Fighting inflation
Bull market for stocks and bonds Risk of recession

Output volatility

Sources: Blackrock Investment Institute , July 2022. Notes: The chart shows a stylized depiction of the average volatility of U.S. GDP and CPI inflation in standard deviations. The Great
Moderation period runs from 1985-2019 and the Covid-19 shock period runs from 2020 to now. For illustrative purposes only.

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 STRATEGIC VIEW

Ample “dry powder” gives private markets a buffer

Private markets are not immune to higher volatility. Yet “dry powder” can provide financing options
relative to public markets to tide over near-term market stress and tap into structural trends.

Private markets ‘dry powder’, 2000-2022

3
Dry powder ($ trillion)

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022-YTD

Private Equity Real Estate Infrastructure Private Debt

Sources: BlackRock Investment Institute, with data from Preqin, July 2022. Data as of June 30, 2022. Notes: Dry powder is committed capital that has not yet been called for investment.
Private markets are not suitable for all investors.

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 STRATEGIC VIEW

Positioning for a volatile future

Our strategic views have been positioned for the new regime. A higher volatility regime means even
strategic allocations will likely have to be more dynamic than before.

Evolution of our strategic views, 2019-2022

Overweight

Inflation-linked bonds

Global equities
Neutral
Underweight

DM government bonds

Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22

Source: BlackRock Investment Institute, July 2022. Notes: The chart shows how our strategic investment views for U.S. Treasury Inflation-Protected Securities, global equities and DM
nominal government bonds for a U.S. dollar investors on a 10-year horizon have evolved since February 2020.

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Tactical granular views: equities
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction
Region View Commentary

We cut DM stocks to underweight on a worsening macro picture and risks to corporate profit margins from higher costs.
Developed markets Central banks appear set on reining in inflation by crushing growth – increasing the risk of the post-Covid restart being
derailed.

We are underweight U.S. equities. The Fed intends to raise rates into restrictive territory. The year-to-date selloff partly
United States
reflects this. But valuations have not come down enough to reflect weaker earnings prospects.

We are underweight European equities as the fresh energy price shock in the aftermath of the tragic war in Ukraine puts the
Europe
region at risk of stagflation.

UK We are underweight UK equities following their strong performance vs. other DM markets thanks to energy sector exposure.

We are neutral Japan stocks. We like still-easy monetary policy and increasing dividend payouts. Slowing global growth is a
Japan
risk.

We are neutral Chinese equities. Activity is restarting, but we see 2022 growth below official targets. Geopolitical concerns
China
around China’s ties to Russia warrant higher risk premia, we think.

We are neutral EM equities on the back of slowing global growth and not compelling enough valuations. Within the asset
Emerging markets
classes, we lean toward commodity exporters over importers.

Asia ex- We are neutral Asia ex-Japan equities. China’s near-term cyclical rebound is a positive yet we don’t see valuations compelling
Japan enough to turn overweight.

Underweight Neutral Overweight n Previous view

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective, July 2022. This
material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied
upon as investment advice regarding any particular fund, strategy or security.
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Tactical granular views: fixed income
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction

Asset View Commentary

We underweight U.S. Treasuries even with the yield surge. We see long-term yields moving up further as investors
U.S. Treasuries demand a greater term premium. We prefer short-maturity bonds instead and expect a steepening of the yield
curve.

Global inflation-linked We are overweight global inflation-linked bonds and now prefer Europe. The pullback in euro area breakeven
bonds rates since May suggests markets are underappreciating the inflationary pressures from the energy shock.

European government
We are neutral European government bonds. We think market pricing of euro area rate hikes is too hawkish.
bonds

We upgrade UK gilts to overweight. Gilts are our preferred nominal government bonds. We believe market pricing
UK Gilts
of the Bank of England’s rate hikes is unrealistically hawkish in light of deteriorating growth.

We are neutral Chinese government bonds. Policymakers have been slow to loosen policy to offset the slowdown,
China government bonds
and yields are no longer attractive relative to DM bonds.

We upgrade investment grade credit to overweight on attractive valuations. Strong balance sheets among higher
Global investment grade
quality corporates suggest IG credit could weather a weaker growth outlook better than equities.

We are neutral high yield. We prefer up-in-quality credit exposures amid a worsening macro backdrop. We find
Global high yield
parts of high yield offering attractive income.

Emerging market – We are neutral hard-currency EM debt. We expect it to gain support from higher commodities prices but remain
hard currency vulnerable to rising U.S. yields.

Emerging market – We are modestly overweight local-currency EM debt on attractive valuations and potential income. Higher yields
local currency already reflect EM monetary policy tightening, in our view, and offer compensation for inflation risk.

We are neutral Asia fixed income amid a worsening global macro outlook. Valuations are not compelling enough
Asia fixed income
yet to turn more positive on the asset class, in our view.

Underweight Neutral Overweight n Previous view

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective, July 2022. This
material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied
upon as investment advice regarding any particular fund, strategy or security.
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BIIH0722U/M-2272752-30/32
 Get BlackRock Investment
Institute content:

blackrock.com/BII
Social content for a U.S. audience:

BLKInsights app

@blackrock

The Bid podcast

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BlackRock Investment Institute
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