If you are perplexed with the inflation-deflation debate that is being hotly contested in the investment community, then here is a cue from the world’s largest asset manager BlackRock that commands $10 trillion worth of assets under management (AUM). If BlackRock was a country, its AUM would be the third-largest GDP of the world, surpassed only by the US and China.

The behemoth asset manager has predicted a rough year for bond markets due to rising inflation and advocates for inflation-linked bonds and equities for positive returns. Moreover, it prefers alternative investments like private equity for its huge return potential.

BlackRock Investment Institute in its 2022 global outlook report states that the big change in 2022 will be central banks withdrawing some monetary support. Analysts at Blackrock expect Federal Reserve to kick off rate hikes but at the same time, it also expects central bankers to remain tolerant of inflation.

“We had flagged inflation- and now we are living with Inflation, and we see inflation settling at levels higher than pre-covid even as supply bottlenecks ease,” the report states.

Asset classes are entering a new market regime, unlike any in the past half-century. The next calendar year heralds a new regime by delivering global stock gains and bond losses for two consecutive years now, a first since 1977, the report mentions.

A unique confluence of events- the restart, new virus strains, supply-driven inflation, and new central bank frameworks- have created confusion as there are no historical parallels. Risks are rising as policymakers and investors might misread the current surge in prices, the report warns.

Highlighting the importance of net zero and sustainable development, the report states that climate change and the race for the world to reach net-zero emissions by 2050 play into the confusion. This transition will result in a supply shock contributing to higher inflation that will play out over decades. Navigating net zero is not just a long term story but it is a now story. Supply shocks are here, and the tectonic shift toward sustainable investing is already playing out.

While shifting to sustainable business practices will require current businesses to invest heavily, the new technologies and clean energy infrastructure may also create opportunities for investors.

How to thrive in this new market regime?

Answering the most pertinent question that plays in an investor’s mind persistently, the report states that BlackRock prefers equities in the inflationary backdrop of the strong restart. As a strategy, the asset manager is in favour of developed market stocks over emerging markets. They are underweight developed market government bonds, because they estimate yields gradually heading higher but staying historically low. There is a preference for inflation-linked bonds partly as portfolio diversifiers. As per the report, clearly, for big returns and diversification, asset manager strongly preferred alternative investments like private equities.

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