Home > BlackRock: Why Buying the Dips Is a Bad Idea Now

NewsJune 16, 2022

BlackRock: Why Buying the Dips Is a Bad Idea Now

The outlook for profits, valuations and the Fed are dispiriting, says a study from the asset manager.

Catch a falling knife, anyone?

Throughout the long bull market, buying the dips was a great idea. Confident that any stock drop was temporary, investors scarfed up bargains and waited for the inevitable rebound. But today, we are in a bear market.

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There’s no immediate upside with things so lousy, BlackRock Investment Institute reasoned in a report. So stay away. “U.S. stocks have suffered their biggest year-to-date losses since at least the 1960s. That’s ignited calls to ‘buy the dip,’” Wei Li, the group’s global chief investment strategist, wrote in the note. “We pass, for now.”

In the view of the research shop, a unit of the world’s largest asset manager, stocks have further to fall. More mayhem awaits because profit margins are shaky, valuations remain too high and the Federal Reserve could tighten too much.

Profits. Margins have advanced smartly in recent years, and as of the first quarter stand at a nice 12% level. But Li explained that higher energy prices and labor expenses should eat into profit margins—and the market isn’t seeing the threat. “Consensus earnings estimates don’t appear to reflect this” higher cost impact, she warned.

Li pointed to the rosy outlook analysts have for earnings estimates in 2022, per Refinitiv data: 10.5% growth. “That’s way too optimistic,” she commented. Consumer demand should cool, which will hurt companies’ ability to pass along their higher costs, she declared.

Further, according to the BlackRock report, the nascent rotation of consumer spending back to services from goods will pick up speed and sap profitability even more. Services make up most of the economy, whereas S&P 500 earnings are evenly split between services and goods.

Valuations. To BlackRock, stocks are still too expensive for their own good. “Equities haven’t cheapened that much,” Li wrote. Even now, she went on, investors haven’t awakened to the prospect of lower earnings or rising interest rates.

Certainly, multiples have come down, just not enough to reflect what BlackRock regards as the distasteful current reality: The S&P 500’s price/earnings ratio has slid to 21.5, from 37 a year ago, by the reckoning of Birinyi Associates. Historically, it averages around 15.

The Fed’s actions. The danger is that the central bank will jack up rates too high and touch off a recession, something that has happened in the past. Fed Chair Jerome Powell has vowed to deliver a “soft landing” for the economy, but skepticism abounds about the prospects for such a daunting task.

BlackRock’s note indicated “a growing risk that the Fed tightens too much, or

that markets believe it will, at least in the near term.” The Fed likely will elevate risks and keep them too high, Li speculated. In her estimation, “the Fed will quickly raise rates and then hold off to see the impact. The question is when this dovish pivot will take place.”

The problem confronting forward-looking investors is knowing when to start buying again. That is, when the bottom has truly been plumbed, and people aren’t overpaying for a plummeting asset.

Jones Trading’s macro strategist, Dave Lutz, has a checklist for when “capitulation” has been reached. That means investors have given up on the market, and it has no place to go but up. On this list, for instance, is higher volatility than exists now. The CBOE Volatility Index is currently at 29.6; Lutz wants to see at least 38.

One touch point for Lutz is the sentiment at the Fed’s annual August conclave in Jackson Hole, Wyoming. “Will they be discussing layoffs?” he says. That could indicate a looming recession.

His checklist gives him “a general feel of when it’s time to put a toe back in the water,” Lutz says.

Sovereign Wealth Funds Reap Benefits of Pandemic Dislocation

Direct investments by sovereign wealth funds rise to record level in 2021.

By Michael Katz

Sovereign wealth funds took advantage of opportunities created by the COVID-19 pandemic and made a record number of direct investments in 2021, according to a report from the International Forum of Sovereign Wealth Funds, a global network of sovereign wealth funds from more than 40 countries.

The IFSWF’s annual review of sovereign wealth fund investments found that the number of direct investments jumped to 429 in 2021 from 316 in 2020, and that the average number of deals was 60% higher than any of the previous five years.

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“The COVID-19 pandemic fundamentally changed the global economy and the investment environment,” IFSWF Chief Executive Duncan Bonfield said in a statement. “Our data reveals that sovereign wealth funds have been foresighted and looking to generate robust long-term returns by taking advantage of the effects that the pandemic has had on a range of secular megatrends.”

Investments in global technology and consumer goods accounted for more than one-third of the value of all direct investments at $25 billion, according to the report, which says that total direct investments by sovereign wealth funds hit $71.6 billion last year, up from $67.8 billion in 2020. In addition to investing in digital technologies, the funds also deployed more capital into hard assets, directly investing $15.5 billion in infrastructure in 2021, almost twice the $8.1 billion invested just the previous year, and the highest amount invested since the IFSWF database began in 2015.

The review also found that the sovereign wealth funds invested $14 billion in domestic markets among 46 deals in 2021, $1 billion more than in 2020, though the number of deals were down from 54 a year earlier.

“Due to the pandemic, sovereign funds deployed 19% of all capital towards direct investments in their local markets over the last two years, as opposed to an average of approximately 13% in the previous five years,” the report says.

The report also says that over the past several years sovereign wealth funds have been looking to increase their allocations to unlisted assets, such as private equity. It also notes that it is often assumed that this increased allocation comes at the expense of listed equity allocations.

“However, this appears not to be the case,” says the report. “Rather, sovereign wealth funds are seeking to generate real durable value by backing less mature companies, rather than simply recycling existing wealth, and boosting returns by occasionally making contrarian bets in times of market dislocation.”

The report also says that infrastructure assets play an important role in diversifying sovereign wealth funds’ portfolios.

“With typically low volatility and reliable cash flows, infrastructure investments provide returns with a low correlation to other asset classes,” says the report. “Many institutional investors have allocated to the asset class as a substitute for fixed income due to stubbornly low interest rates.”

The pandemic has also had various effects on infrastructure, according to the report. For example, sub-sectors such as passenger-linked transport assets had very difficult years in 2020 and 2021, while at the same time other sub-sectors, such as digital infrastructure and renewables, had good years.

According to IFSWF data, the digital infrastructure subsector, which includes telecom towers and data centers, attracted the most capital among infrastructure, drawing $6.55 billion from across eight deals. Meanwhile, the highest number of deals involved renewable infrastructure, with sovereign wealth funds conducting 11 deals worth a total of $4.4 billion.