BlackRock: "No 2008 Redux, But Recession Coming"

BlackRock says central banks are likely to continue their efforts to rein in inflation and sees opportunities in short-term government bonds for income and emerging market equities.

BlackRock, the world's largest asset manager, has warned that a recession is coming.

The firm's Investment Institute has said that while the current financial situation is not as dire as the banking crisis of 2008, it is evidence of financial cracks resulting from the fastest interest rate hike campaigns since the early 1980s.

"The market gyrations of the past week are not rooted in a banking crisis, in our view, but rather are evidence of financial cracks resulting from the fastest interest rate hike campaigns since the early 1980s," the BlackRock Investment Institute said in a statement. "Markets have woken up to the damage caused by that approach – a recession foretold – and are starting to price it in."

According to BlackRock, the financial cracks are unlikely to deter central banks from trying to get inflation back closer to their targets.

The firm believes that markets have slashed their expectations of interest rate paths, expecting central banks to come to the economy’s rescue by cutting rates as they used to do in episodes of financial stress.

However, BlackRock thinks this is misguided and expects major central banks to keep hiking rates in their meetings in coming days to try to rein in persistent inflation.

"We see significant opportunities in short-term government bonds for income –even as yields have fallen recently. We also prefer emerging market equities over developed markets, where we stay underweight. This is not a 2008 redux, and we stand ready to seize opportunities as the damage of rate hikes becomes priced in," the BlackRock Investment Institute added.

The firm is the world's largest asset manager, with US$8.6 trillion in assets under management as of December 31, 2022.

The warning from BlackRock comes as U.S. bond yield curves have inverted, which suggests a recession is looming because it’s a sign of a tight credit market and weak economic growth.

Meanwhile, the International Monetary Fund (IMF) said on April 11 that global growth is expected to be around 3% in five years, which is the lowest medium-term forecast in a World Economic Outlook for over 30 years.

BlackRock's Investment Institute expects the European Central Bank (ECB) and Federal Reserve to go as far as possible to distinguish their inflation-fighting campaigns from measures to deal with bank troubles and safeguard the financial system.

It sees significant opportunities in short-term government bonds for income, even as yields have fallen recently. It also prefers emerging market equities over developed markets, where it stays underweight.

While BlackRock's warning may sound ominous, it is worth noting that the firm does not believe the current financial situation is a repeat of the banking crisis of 2008.

Instead, it sees the current situation as a recession foretold, brought about by the fastest interest rate hike campaigns since the early 1980s.