Building a portfolio for rate hikes
- Jean Boivin heads the investment advisory unit of BlackRock, the world’s largest asset manager.
- He is also a former Deputy Governor of the Central Bank of Canada.
- Boivin tells Insider he’s cautious on stocks because the Fed hasn’t really changed course.
Everyone with money in the stock market seems to have an opinion on the Federal Reserve’s recent performance. Very few have experience of running a central bank themselves.
Jean Boivin, the head of the BlackRock Investment Institute, served as deputy governor of the Bank of Canada from 2010 to 2014, during which time the bank raised interest rates several times. He was discussed as a possible governor of the bank in 2020, but today remains at BlackRock, which has $8.49 trillion in assets.
So it’s with some insider understanding that he says the Fed is sticking to an aggressive plan to keep raising rates, and hasn’t made the kind of shift that would warrant a major price hike. actions. In fact, he says the Fed rejects the idea that it will eventually have to stop raising rates in order not to cause a recession.
“They completely reject the existence of a trade-off between inflation returning to 2% and the growth backdrop,” he told Insider in a recent interview. “But we are confident that the soft landing is a low probability and the trade-off will be acute. So insisting on bringing inflation back to 2% quickly will require a very significant slowdown.”
Investors reacted enthusiastically to the latest Fed rate hike and related remarks by Chairman Jay Powell, but Boivin says the trade-off between controlling inflation and supporting markets will make times tough for risky assets like stocks. shares. He currently has an “underweight” rating on developed market equities in particular, saying he would need a real dovish pivot from the Fed to change that rating – a pivot the Fed hasn’t provided the last week due to its commitment to fight inflation, projections of further rate hikes and rejection of potential compromises.
Until then, he is cautious on equities and says government bonds do not fully reflect the level of inflation we will face. He is overweight developed market credit.
“This is more of an investment grade call than a high yield one,” he said. “We would prioritize quality.
No matter what the Fed says, Boivin told Insider that it will ultimately have to make a choice between continued growth and above-target inflation. This means that investors should be cautious and should not expect a long-term bull market in stocks and bonds like the one they enjoyed from the early 1980s until recently.
“We’re either going to live with more inflation, which would be good for equities, bad for bonds, or we’re going to live with less inflation, but more damage to growth. And that’s going to be bad for equities. and good for bonds, but there’s really nothing in between.”
This means that rushing to buy market dips will not be an effective strategy. He says investors will need to be “agile” and switch from stocks to bonds or vice versa as fundamental conditions change, and instead of buying dips quickly, they should gradually add exposure.
Although Boivin is sympathetic to the Fed and doesn’t want to rack up criticism, he says his communications with investors leave something to be desired because he hasn’t done enough to explain that the sources of inflation today are unlike anything investors have faced in the past four decades.
“They communicate too much through the usual playbook of the past 40 years,” he said. “They haven’t adapted enough to the reality that this is caused by COVID shutdowns, to the fact that restarting demand is much easier than restarting supply.”