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. The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market Philipp Hildebrand Jean Boivin volatility is playing out. A recession is foretold; central banks are on Vice Chairman — Head —BlackRock course to overtighten policy as they seek to tame inflation. This keeps us BlackRock Investment Institute tactically underweight developed market (DM) equities. We expect to turn more positive on risk assets at some point in 2023 –but we are not Wei Li there yet. And when we get there, we don’t see the sustained bull markets Global Chief Investment Strategist — of the past. That’s why a new investment playbook is needed. BlackRock Investment Institute Alex Brazier We laid out in our 2022 midyear outlook This new regime calls for rethinking bonds, Deputy Head —BlackRock Investment why we had entered a new regime –and are our second theme. Higher yields are a gift to Institute seeing it play out in persistent inflation and investors who have long been starved for output volatility, central banks pushing income. And investors don’t have to go far up policy rates up to levels that damage the risk spectrum to receive it. We like short- Vivek Paul economic activity, rising bond yields and term government bonds and mortgage Head of Portfolio Research — ongoing pressure on risk assets. securities for that reason. We favor high- BlackRock Investment Institute grade credit as we see it compensating for Central bankers won’t ride to the rescue recession risks. On the other hand, we think when growth slows in this new regime, long-term government bonds won’t play their Scott Thiel contrary to what investors have come to traditional role as portfolio diversifiers due to Chief Fixed Income Strategist — expect. They are deliberately causing persistent inflation. And we see investors BlackRock Investment Institute recessions by overtightening policy to try to demanding higher compensation for holding rein in inflation. That makes recession them as central banks tighten monetary foretold. We see central banks eventually policy at a time of record debt levels. backing off from rate hikes as the economic damage becomes reality. We expect Our third theme is living with inflation. We inflation to cool but stay persistently higher see long-term drivers of the new regime such than central bank targets of 2%. as aging workforces keeping inflation above Contents What matters most, we think, is how much pre-pandemic levels. We stay overweight First words 2-3 Investment views 8-9 of the economic damage is already reflected inflation-linked bonds on both a tactical and Summary 2 8 strategic horizon as a result. Tactical in market pricing. This is why pricing the New regime plays 3 Strategic 9 damageis our first 2023 investment theme. Our bottom line: The new regime requires a out Case in point: Equity valuations don’t yet new investment playbook. It involves more New playbook 4 Regime drivers 10-12 reflect the damage ahead, in our view. We frequent portfolio changes by balancing Aging workforces 10 Themes 5-7 A new world order 11 will turn positive on equities when we think views on risk appetite with estimates of how Pricing the damage 5 12 the damage is priced or our view of market markets are pricing in economic damage. It Faster transition Rethinking bonds 6 risk sentiment changes. Yet we won’t see also calls for taking more granular views by Living with inflation 7 Private markets 13 this as a prelude to another decade-long focusing on sectors, regions and sub-asset View summary 14-15 bull market in stocks and bonds. classes, rather than on broad exposures. 2 22 22002223 mioutldyooeakr outlook BBIIIIMM1122U/M1222U/M--26121472617935--22/16/16