FOR PUBLIC DISTRIBUTION IN THE U.S., CANADA, LATIN AMERICA, HONGKONG, SINGAPORE AND AUSTRALIA. FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS IN OTHER PERMITTED COUNTRIES. Damage already clear U.S. new home sales during policy rate tightening cycles, 1972-2022 Theme 1 Pricing the 25% esal 0% damage se omh ew n-25% Recession is foretold as central Our approach to tactical investment in 2022 1972 banks race to try to tame inflation. views is driven by our view of market 1980 1977 It’s the opposite of past recessions: participants’ risk appetite – which is ange Loose policy is not on the way to based on the uncertainty of the Ch-50% help support risk assets, in our macro environment and other inputs 2004 view. That’s why the old playbook of –and by our assessment of what simply “buying the dip” doesn’t damage is in the price, especially -75% apply in this regime of sharper equity earningsexpectations and 0 12 24 36 48 trade-offs and greater macro valuations. Months volatility. The new playbook calls We expect them to stop hiking and for a continuous reassessment of activity to stabilize in 2023. We find Chart takeaway: The slide in housing sales this year is already how much of the economic steeper than past mega Fed hiking cycles, such as in the 1970s and damage being generated by central that earnings expectations don’t yet banks is in the price. price in even a mild recession. For early 1980s –as well as the unwind of the mid-2000s U.S. housing that reason, we stay underweight boom. That damage is building. In the DM equities on a tactical horizon for U.S., it’s most evident in rate- now. Source: BlackRock Investment Institute and U.S. Census Bureau, with data from Refinitiv Datastream, sensitive sectors. Surging November 2022. Notes: The chart shows how quickly in months sales of new family houses changed during mortgage rates have cratered sales Yet we stand ready to turn more policy rate tightening cycles between 1972 and 2022. The colored, labeledlines highlight 2022 and the of new homes. See the chart. We positive as valuations get closer to years when housing sales fell most quickly. also see other warning signs, such reflecting the economic damage –as as deteriorating CEO confidence, opposed to risk assets just responding to hopes of a soft delayed capital spending plans and We don’t think equities are fully priced consumers depleting savings. In landing. It’s not just about pricing for recession. But we stand ready to turn Europe, the hit to incomes from the the damage: We could see markets energy shock is amplified by look through the damage and positivevia our assessment of the tightening financial conditions. market risk sentiment improve in a way that would prod us to dial up our market’s risk sentiment or how much The ultimate economic damage risk appetite. But we are not there economic damage is in the price. depends on how far central banks yet. go to get inflation down. 55 2023 outlook 5 2022 midyear outlook BBIIIIMM1122U/M1222U/M--26121472617935--55/16/16