A new report from BlackRock says investors should continue to expect volatility as slower economic growth and changes in trade policy spur complicated macro signals, recommending low volatility investment strategies and defensive stocks over the near term.
BlackRock’s Spring Investment Directions report, released Thursday, notes long term investment opportunities remain attractive, including AI which continues to be a “durable theme” seeing support from capital expenditures and lower compute costs. The report also recommended investors look “beyond duration” and should consider adding things like inflation-linked bonds, gold and infrastructure to their portfolio.
“For Canadian and U.S. allocation, we believe investors may be well served to modestly add to defensive exposures and look for attractive entry points to enduring themes. Abroad, international equities can offer the twin benefits of lower valuations and increased diversification,” the report said.
Uncertainty in U.S. trade policy has raised the risk of a material slowdown, the report notes, as tariffs are likely to drive inflation higher over the near-term. Despite the U.S. administration’s responses to market swings and more recent moves toward de-escalatory rhetoric, the report says a resolution will likely be required to reduce volatility. Going forward, proposed tax cut extensions in the U.S. and deregulation could be a tailwind for growth.
Meanwhile the Canadian economy has seen a reversal from the fourth quarter, according to the report, with softer consumer and business optimism figures and weakening activity.
The report says more uncertainty is expected for the Canadian equity market going forward, as its performance “has remained largely tethered to changes in U.S. trade announcements.”
Canada was not included in the list of nations receiving U.S. reciprocal tariffs and United States-Mexico-Canada Agreement (USMCA) exemptions where not revoked, the report noted. However economic data is showing a pullback in strength with a drop in employment in March, softening retail sales and sticky inflation.
“Broadly, we expect risk assets to continue to trade on headlines in the near-term and remain data-dependent to gauge the impact of trade developments on economic growth,” the report said.
BlackRock said in the report that investors with shorter time horizons or lower risk appetites should consider looking at the “low volatility factor to help filter out market turmoil.”
Despite tariff uncertainty, the report said the growth prospects of the AI theme that drove markets higher in 2023 and 2024 appear to remain intact.
“In our view, software’s structural AI advantage, combined with its resilience to potential tariffs, makes it one of the more compelling areas of the equity market,” the report said.
