The scale of the artificial intelligence (AI) revolution, the energy transition and shifting geopolitics requires investors to adopt a “new investment playbook” and take a more active approach to risk.
This is according to Ben Powell, BlackRock’s Investment Institute chief investment strategist for Emea and Apac.
“The artificial intelligence revolution is potentially on an epic scale,” he said at a recent media briefing in Hong Kong, comparing it with the steam revolution, electrification and the information technology boom.
“We think that the concentrated performance of some of the AI stocks that we’ve seen all over the world, but particularly in the US, is a feature, not a bug,” Powell said.
“This is exactly the kind of thing you would expect to see in a more dispersed market, where we think having a more active approach can pay dividends.”
The recent market enthusiasm for AI has enabled a handful of the largest US technology companies, most notably the so-called ‘Magnificent Seven’, to drive most of the returns in US equities over the past year.
This widening gap between the winners and losers in the equity market calls for active investments, according to Elaine Wu, BlackRock’s head of Apac investment and portfolio solutions.
“We’re leaning into quality in general, and there are two ways that you can do this,” she said.
“You can lean into quality by taking an active investment approach, such as long-only equity where you’re investing in sectors such as AI technology, healthcare, or even luxury goods sectors that will continue to see decent growth.”
“Another way to invest in quality is to use the quality index, which screens for US mid-large cap companies with high return on equity, low leverage and stable earnings,” she added.
BlackRock recently launched its actively managed Global Unconstrained Equity (Glue) fund in Hong Kong and Singapore.
High conviction on Japan
Aside from being overweight AI names and US equities, Powell flagged Japanese equities as the firm’s “highest conviction equity call”.
Belinda Boa, BlackRock’s head of active investments for Apac, revealed that the firm has “super high conviction” in Japan as a region.
She cited the expansion in manufacturing in the region, increased tourism activity and the shift from decades-long deflation to inflation.
When it comes to inflation in Japan – which has experienced many false starts over the past several years – Boa expressed some confidence, expecting that the country’s inflation projections will be confirmed, “if not increased”.
As such, she expects the Bank of Japan will have the necessary confidence to start normalising rates and monetary policy.
Japanese equities have rallied some 50% since the start of 2023 until the first quarter of 2024 saw a minor correction and market consolidation.
Commenting on the volatility in Japan, Boa said she is “not too concerned about the short-term movements of the equity markets” since BlackRock’s view on Japanese equities “is far more structural”.
“We think that the shareholder reforms which started on the back of ‘Abenomics’ in 2013 are only just starting and will accelerate from here,” she said.
These reforms coupled with inflation, is so important for both companies and households due to the change of behaviours, she explained.
After having had to save money due to declining prices for decades, corporations are able to increase prices, which will feed into earnings and eventually capital expenditure and shareholder returns in the form of dividends and buybacks.
“Shareholders are being rewarded,” she said. “It’s not just because of what we’re seeing in terms of inflation and the impact that it has on corporate behaviour, but also because the government and shareholder reforms are really taking hold and accelerating.”
Boa also expects that BlackRock’s global investor base will start looking at Japan as an allocation for diversification purposes as well as its structural story.