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Why Blackrock says you shouldn’t buy the share market dip

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Structural economic changes and new central bank policies will continue to hamper returns.

The era of low inflation and supportive governments for share markets is over, meaning there is unlikely to be a quick bounce in share prices, Blackrock argues.

According to the latest industry report by Blackrock, the period of "the great moderation" saw steady economic growth and inflation, which was supportive for investors.

But this backdrop is no more.

Instead, markets will be more volatile as governments look to fight inflation at the cost of economic growth.

As such, Blackrock says they are adjusting their investment plans.

"We could go back to the volatility seen in the 1970s," the report said. "This regime is not necessarily one for 'buying the dip'. Policy will not quickly step in to stem sharp asset price declines."

Macro backdrop is no longer conducive for a bull run

For many investors out there this could be the first time they experience a period of a prolonged downturn.

Blackrock argues since the 1980s, the markets have been well supported by governments as inflation was mostly demand driven.

But due to a combination of factors including the war in Ukraine, supply shocks and even the inflationary pressures of reaching net-zero, the economy is now facing supply side pressures.

In response, though, the central bank will continue to lift rates.

"Central banks are rushing to raise rates to contain inflation that's rooted in production constraints. They are not acknowledging the stark trade-off: crush economic growth or live with inflation," the report argues.

In this rapidly rising interest rate world, Blackrock argues central banks, including the US Federal Reserve, are likely to choke off the restart of economic activity and will only change tactics once they see evidence that it is damaging the economy.

"We see this driving high macro and market volatility, with short economic cycles."

This will flow onto impacting your investments.

"Equities would suffer if rate hikes trigger a growth downturn. If policymakers tolerate more inflation, bond prices would fall. Either way, the macro backdrop is no longer conducive for a sustained bull market in both stocks and bonds, we believe," the report continues.

But it's not all bad news for investors

While Blackrock argues that we will enter a more volatile period, it will also create opportunity for investors – as long as they remain nimble.

Adjusting to the new world, Black says it sees value in equities and inflation-linked bonds over nominal bonds.

"We see inflation trending higher over the medium term than markets expect. And we see central banks ultimately living with inflation and not hiking rates as much as markets are pricing in – a likely boost for equities over the long run."

It is also pointing out that in this current environment, investors will need to continue to change their strategic allocations.

"We are reducing risk and believe portfolios will need to be more nimble to adapt to frequent macro and policy shifts that cause mis-pricing," Blackrock concludes.

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