BlackRock’s 2023 Global Investment Outlook and the Impact for Dividend Investors

Introduction

BlackRock, the world’s largest asset management firm, recently published their 2023 Global Investment Outlook report outlining their investment playbook going forward.

A company of this size, exposure, insight and influence in the investment world is worth following and understanding where their investment managers and research staff believe that investors should focus on.  Their iShares suite of ETFs and their Closed End Funds (CEFs) hold trillions in assets around the world. While there is no way to know if their projections are correct, as none of us know the future, it is worth a thought exercise reviewing their projections and how it relates to our own portfolio and investment focus.

BlackRock (BLK) is my favorite dividend investment, as I discussed in this previous post.  I hold shares of the company as well as am an investor in many of their ETFs and CEFs, including DGRO, BME, BST, and BDJ.

BlackRock’s 2023 Global Investment Outlook

BlackRock’s 2023 Global Investment Outlook covers three overarching themes and certain drivers and views that their research team believes that investors will need to consider going forward.  I wanted to review these items from the dividend growth investor’s perspective to identify opportunities to invest in or focus our portfolio to take advantage of these themes.

Theme 1 – Pricing The Damage

Summary: The damage that inflation has done to the economy, and the upcoming damage that the central banks are causing around the world due to their increased interest rates to tame inflation, has not been fully priced into the equity markets.  Lower housing demand due to higher rates, lower consumer and corporate spending, and higher debt payments will affect corporate earnings going forward and BlackRock does not believe the valuations of companies has taken this into account.  In the past central banks could lower interest rates to combat the economic downturn but in this instance they will not as their primary focus is taming inflation

Takeaways: Housing and interest rate sensitive companies’ earnings will likely go down, and this includes companies such as home builders Toll Brothers (TOL) and K.B. Home (KBH), home improvement companies such as The Home Depot (HD) and Lowe’s (LOW), car manufacturers like General Motors (GM), Ford (F), and Toyota (TM).  Consumer Discretionary stocks such as Starbucks (SBUX), Target (TGT), Nike (NKE) and McDonalds (MCD) will likely have lower earnings as consumers are pressured to spend less.

Theme 2 – Rethinking Bonds

Summary: With interest rates rising to combat inflation, bonds are finally paying a reasonable yield.  BlackRock favors short term U.S. Treasury debt and Agency Mortgage Backed Securities to provide an alternative source of income.

Takeaways:  With U.S. government debt paying 4% or more, this makes the alternative investments (stocks) less attractive and will potentially lower demand for these assets and therefore lower the prices to increase the yield investors are willing to accept.   This will potentially affect dividend paying stocks.  An alternative for investors is to shift some funds into short term U.S. Treasury bills, short term corporate debt, or inflation-linked bonds such as I-bonds.  For mortgage backed securities, one could consider Mortgage REITs such as Arbor Realty Trust (ABR) and Blackstone Mortgage Trust (BXMT).

Theme 3 – Living with Inflation

Summary:  The government response to the COVID pandemic sent trillions of dollars into the economy which increased demand for goods and services.  These goods and services were limited by worker shortages, supply chain constraints, and such.  These factors led to the inflation that we are seeing now.  Government officials originally claimed that inflation would be transitory, but BlackRock is warning that inflation is here to stay for a while more.  The consensus inflation targets, shown below in the chart, may not come to pass and we may have persistent inflation for a while.

Takeaways:  Investors will need to consider the ramifications of dealing with inflation for a longer time period than most of us have been considering in the past.  Inflation-linked bonds such as I-bonds and TIPS might find a place in our portfolios.  For equities, we will need to focus on companies that can grow their dividend to match or beat inflation consistently to maintain our purchasing power.   Some high dividend growth companies to consider:  American Tower (AMT), NextEra Energy Partners (NEP), Brookfield Asset Management (BAM), Visa (V), Mastercard (MA), and Microsoft (MSFT), all of which have a 5 year dividend compound growth rate (CAGR) of 10% or more, which will help keep up or beat inflation.

Tactical Views: A New Playbook

Summary: Blackrock recommends keeping a nimble approach to investing and to be ready to adjust to changes in the economy.  They like short-term fixed income and for equities they like Healthcare, Energy, and Financials in the current environment.

Takeaways:  There are some really great dividend growth companies in the sectors listed in the report.

Healthcare – Amgen (AMGN), Bristol Myers Squibb (BMY), Johnson & Johnson (JNJ), and Abbvie (ABBV), among others

Energy – while not my favorite sector, companies like Exxon Mobil (XOM), Chevron (CVX), and Energy Transfer (ET) should meet dividend investors needs

Financials – financials tend to do better in rising interest rate environments, such as Bank of America (BAC), JP Morgan Chase (JPM), Bank OZK (OZK), Morgan Stanley (MS), and Canadian Banks such as TD Bank (TD), Bank of Montreal (BMO), and Bank of Nova Scotia (BNS).

Strategic Views: A New Strategic Approach

Summary: Blackrock believes that the old approach of a 60/40 stock/bond portfolio may not deliver the needed return for investors going forward and are recommending a 80/20 split might provide a better return as the traditional correlation between stocks and bonds has been broken.

Takeaways:  This is a positive for equity investors as there should be increased demand for quality equities.  A broad-based dividend growth ETF such as SCHD, DGRO, or VYM will capture this new focus on equities in the portfolio.  Additional names such as the Dividend Kings and Dividend Aristocrats will provide quality names to research.

Regime Driver: Aging Workforce

Summary: The aging workforce is going to cause varied outcomes going forward.  There will be less workforce participation, as shown below, and lower production and economic growth, which will provide a headwind for the economy, but the aging population will also increase the demand for healthcare related industries.

Takeaways:  Industries that cater to an aging population should continue to have tailwinds going forward.  Healthcare names such as those listed in the sections above, but also medical facilities such as Medical Properties Trust (MPW), Omega Healthcare (OHI), and National Health Investors (NHI), and medical device companies such as Stryker Corp (SYK) and Abbott Labs (ABT).  

Regime Driver: A New World Order

Summary: Instead of the global supply chain that we have built over the past 40 years, BlackRock sees a more fractured supply chain, with regional focus and collaboration instead of global sourcing.  This will set up regional powerhouses that will compete with each other and potentially increase the costs associated with sourcing materials and supplies.  This will lead to more volatility and potential conflicts in the future

Takeaways: Investors now need to take a focused look at supply chains and how their companies source products throughout the world.  As companies try to bring their product development closer to home, there can be opportunities identified including warehouses and industrial facilities, such as STAG Industrial (STAG), Prologis (PLD).  Additionally, region specific ETFs will give access to the various industrial centers around the world while giving the investor the chance to avoid certain areas of conflict, such as Russia and China.  

Regime Driver: Faster Transition

Summary: BlackRock sees the transition to clean energy as accelerating as government policy, technology, and societal preferences continue to push for these forms of energy.   Recent policies such as the U.S. Inflation Reduction Act and Europe’s transition away from Russian Oil will provide substantial investment capital and focus to these industries.

Annual projected investment in green energy is set to increase dramatically over the next decade and beyond, as shown below.

Takeaways: Green energy companies that are ready and able to take on large projects that are needed to facilitate this transaction are good ideas.  Governments around the world do not have the capacity or the knowledge to develop these technologies and infrastructure, so private companies will be tasked with the development and ongoing maintenance.  Some of the best include NextEra Energy (NEE) and their subsidiary NEP, Brookfield Asset Management (BAM) and their subsidiaries (BEPC, BIPC), Atlantica Infrastructure (AY), and Cleanway Energy (CWEN).

Private Markets: The Long View on Infrastructure

Summary: There is a $15 trillion gap between the current investment in infrastructure and the projected need over the next 20 years.  This provides an opportunity for quality infrastructure companies to benefit from this increased demand.  This includes roads, bridges, airports, shipping terminals and other required needs.  The type of investments needed will come with long term contracts to run and maintain these assets.

Takeaways:  While most investors do not have access to private markets, we can participate in the infrastructure push by investing in top quality companies such as Brookfield Infrastructure (BIPC), Hannon Armstrong (HASI), and Blackstone (BX).

BlackRock’s 2023 Global Investment Outlook Summary:

BlackRock’s 2023 Global Investment Outlook provides a window into the potential changes that we as investors need to consider.  The Outlook is broad enough to show trends and focus areas.   As dividend investors, there are plenty of companies to invest in that will be net beneficiaries of these trends.

Ultimately there is no way to know the future, but the trends identified are reasonable and are backed by global insights, research and data and can be used to gather ideas of where we might want to invest going forward.   Wholesale changes to our investment plan or companies is not recommended but these macro trends can provide one additional point of view and data point when we are researching the companies we are putting our next dollars to work in.