What is expected in AI, and a warning to investors: Blackrock’s forecast for the rest of the year

“The key for the coming years will be active investment, accurate identification of physical bottlenecks, and a willingness to quickly adapt the portfolio to the extreme scenarios created by the struggle between scarcity and abundance,” write in Blackrock. At the center of the forecast is the question of whether the artificial intelligence revolution is capable of jump-starting the global economy, and especially that of the United States.

Problems on the way to heaven

Blackrock emphasizes that the road to “abundance” is paved with acute shortages. The massive surge in demand for AI collides with hard physical supply constraints: shortages of electricity, transmission networks, data centers, chips, memories, critical raw materials and skilled labor. In addition, the transition from “just in time” supply chains to a fortified “just in case” model makes production more expensive and compounds inflation.

The economists of the Investment Institute identify six critical macroeconomic decisions that are currently embedded in investment portfolios, including the costs of AI, the direction of interest rates, the existence of government debt and geopolitical bottlenecks (such as fear of blocking Hormuz). For example, in the question of interest, the abundance scenario leads to estimates for an interest rate of 3%, while the scenario of scarcity and competition for capital may leave the long-term returns around 5% – a dramatic gap that requires rethinking the structure of the portfolio.

The report emphasizes that the concentration trend in the American market has reached its peak, when the share of the technology sector in the stock indices has doubled since the launch of ChatGPT at the end of 2022. Because of this, Blackrock recommends a selective and focused approach that yields a much higher profit potential than increasing horizontal exposure to stocks.

One of Blackrock’s warnings to investors is that portfolio diversification is becoming more complex. The reason is that the exposure to AI is no longer limited to technology stocks only, but permeates a wide variety of investment avenues – from industrial stocks to infrastructure, bonds and even private investments. In addition, some of the most attractive areas, such as infrastructure, do not clearly belong to a single asset category, and therefore traditional diversification is more difficult to achieve.

Wei Li, the chief investment strategist of the Blackrock Investment Institute, admits that it is particularly difficult to build a base scenario for the markets today, because a key open question remains: will AI be a deflationary force that will reduce costs, or rather an inflationary one because of the huge investments it requires?

Either way, Blackrock focuses on investing in companies that provide inputs that are in short supply and without which it is impossible to continue expanding the AI ​​infrastructure. According to Lee, companies along this value chain, from power generation, through data centers to software companies and cloud providers, are still generating a positive return on their investments.

The advantage of the USA

Blackrock continues to prefer the American market, among other things thanks to the leadership in the chip field, the advanced AI models, the energy independence and the deep capital markets that are able to finance the replica investments required for the AI ​​revolution. According to her, it is likely that many of the companies that will benefit from the wide adoption of the technology will be American.

Blackrock estimates that the second half of the year will be more challenging for the stock and bond markets, because inflationary pressures in the US, Europe and Japan may cause the central banks to maintain a neutral line and even raise interest rates. However, Lee does not believe that the high interest rate environment will harm companies that benefit from the huge investments in AI infrastructure, the transition to clean energy and the adaptation of supply chains. According to her, as long as the growth in the companies’ profits is faster than the negative effect of the interest rate increase, their shares can continue to perform well.

As for bonds, Blackrock recommends entrenching itself in the short- and medium-term portion. The report explains that the historical correlation between stocks and bonds has gone awry, and long-term bonds no longer provide the traditional cushion of protection against falls in the markets. Blackrock maintains an “underweight” position on long-term US bonds due to the huge volumes of debt issuance and the premium that investors will demand to hold them. Instead, the part is preferred The short and medium of the curve in the US and the Eurozone, which she says offers extremely attractive returns in relation to volatility.

From China to Europe

As for China, Blackrock believes it is strong – but not at any cost. China also enjoys advantages in the shortage centers of the AI ​​world, including battery production, advanced industry, robotics and rare metals. However, Blackrock does not recommend broad overexposure to the Chinese market. According to Lee, the return on capital of the Chinese companies is relatively low and the aggressive price competition means that even when companies manage to increase their market share, this does not always translate into higher profitability.

For investors looking for opportunities that are not directly dependent on AI, Blackrock points to European financial stocks (benefiting from healthy interest margins and increasing M&A activity), which it says are trading at attractive pricing. However, the report states that even though Europe is trying to build independent resilience in the fields of defense, energy and technology, its economic growth remains weak and the return on capital lags behind the US.