Think about diversifying your diversifiers, says BlackRock's Gargi Chaudhuri

Key Concepts

• Market Volatility: Extreme fluctuations in market prices.
• Economic Uncertainty: Lack of clarity about the future economic direction.
• Portfolio Positioning: How investors should allocate assets within their portfolios.
• Defensive / Minimum Volatility Investing: Strategies aiming to reduce portfolio fluctuations, often by investing in stocks with historically lower volatility.
• Diversification: Spreading investments across different asset classes, regions, or strategies to reduce risk.
• Diversifying Diversifiers: Finding alternative or additional assets beyond traditional hedges (like long-duration bonds) to protect against downturns when traditional correlations break down.
• Safe Havens: Assets traditionally expected to hold or increase value during market turmoil.
• Long Duration Treasuries: Bonds with longer maturities, typically sensitive to interest rate changes but often used as a hedge against equity risk.
• Fixed Income (Front End, Belly of the Curve): Referring to different maturity segments of the bond market. Front end = short maturities; Belly = intermediate maturities.
• Income Focus (Fixed Income): Prioritizing investments that generate regular cash flow (interest payments).
• Liquid Alternatives: Investment funds using alternative strategies (like hedge funds) but offering daily liquidity.
• Market Neutral: Strategies aiming to profit regardless of the overall market direction, often by balancing long and short positions.
• International Investing: Investing in markets outside the investor's home country.
• European Value: Investing in European stocks considered undervalued based on fundamental metrics.
• Latin America (LatAm) Investing: Investing in the markets of Latin American countries.
• Geopolitical Fragmentation: Increasing division and tension between different global political blocs.
• Supply Chain Rewiring: The ongoing process of companies diversifying or relocating their supply chains away from traditional hubs (like China).
• Valuations: The assessment of a company's or market's worth.
• Bink (Strategy/Fund): Mentioned as a strategy focusing on income in the belly of the fixed income curve with low interest rate risk.
• ILF (Fund Ticker): Mentioned as a potential fund for Latin American exposure.
• AI (Artificial Intelligence): Mentioned as a persistent investment theme.

Blackrock Spring Outlook: Navigating Market Volatility

Gargi Chowdhry, Blackrock's Head of iShares Investment Strategy Americas, discussed Blackrock's Spring Outlook report, addressing the extreme market volatility and economic uncertainty facing investors. The core challenge is how to position portfolios when traditional hedges may not be working as expected.

Core Client Concerns and Recommendations

Two primary questions from clients were highlighted:

1. Amid persistent volatility, should investors move to cash?
2. What should investors do when traditional hedges, like long-duration Treasury bonds, fail to protect against equity market downturns (as seen in periods during April)?

Blackrock's key recommendations are:

1. Stay Invested: Chowdhry emphasized, "Stay invested in the markets... make sure you don't leave the market." This is due to the rapid, bi-directional nature of volatility, making market timing difficult and potentially costly.
2. Shift to Defensive Positions: Within the market, consider moving towards "defensive minimum volatility parts of the market." These strategies aim for lower volatility and potentially better downside protection.
3. Diversify Your Diversifiers: Recognize that traditional hedges might not suffice. Investors should "think about diversifying your diversifiers." Instead of relying solely on long-duration Treasuries, consider a combination of:
   • Front End of Fixed Income Markets: Focus on shorter-maturity bonds, emphasizing income generation.
   • Gold: A traditional alternative asset often sought during uncertainty.
   • Liquid Alternatives: Specifically those that are "more market neutral in nature," aiming to reduce correlation with broad market movements.

Redefining Safe Havens and Diversification Needs

The traditional definition of a "safe haven" is being questioned. Long-duration Treasuries, typically expected to perform well during economic slowdowns or uncertainty, have not provided the expected protection recently. Chowdhry noted the "trifecta" that surprised investors: simultaneous declines in equity markets, bond prices, and the US dollar. This necessitates thinking harder about diversification.

• Need for Additional Diversification: The breakdown in traditional correlations suggests investors need an "additional layer of diversification."
• Underweight in International: A key finding is that many US investors (often "more than 50%" or "more than 70%") have a "huge underweight to international markets."
• International Opportunity: With the possibility that the US dollar has peaked or may stabilize/decline, international investments could offer benefits. Blackrock suggests investors "add international here. Add some European value here."

Fixed Income Strategy: Focus on Income and the Belly

Given the poor performance of the long end of the fixed income market, the recommendation is to adjust fixed income exposure:

• Avoid Over-reliance on Long Duration: The long end "hasn't worked really for some time now" and failed as a diversifier in 2025 [likely meant 2024/recent periods].
• Focus on the Belly of the Curve: Target intermediate-maturity bonds.
• Prioritize Income: Seek strategies that generate income.
• Specific Strategy Example: Chowdhry mentioned moving to strategies like "Bink," which provides "income in the belly of the curve with very little interest rate risk."

International Focus: Latin America, China, and India

• China and India: Acknowledged as major influencers but facing specific issues – China with demographics and India with recent conflict/stability concerns. These factors need consideration within an international allocation.
• Latin America (LatAm): Presented as an "often overlooked" region that could offer opportunities in a "bifurcated geopolitically fragmented world."
  • Potential Drivers: LatAm may benefit from the "rewiring of supply chains" and offers relatively cheaper valuations.
  • Caveat: LatAm would not be immune to a global recession.
  • Investment Vehicles: Addressing concerns that LatAm funds are dominated by "utilities and staid banks," Chowdhry suggested that investors can capture economic potential but stressed diversification. Rather than allocating entirely to LatAm, consider adding exposure via broad funds (like "ILF") or specific country funds (Mexico, Brazil) in addition to other international holdings like Europe.

Persistent Themes: AI

Artificial Intelligence (AI) remains a significant underlying theme, even if discussed less recently. Chowdhry anticipates more focus on AI during the earnings season and suggested that recent price pullbacks ("backup in prices") might present investment opportunities in this space.

Conclusion/Synthesis

Blackrock's Spring Outlook advises investors to navigate the current volatile and uncertain environment by staying invested but shifting towards more defensive, minimum volatility strategies. Crucially, investors need to rethink diversification beyond traditional bond hedges, incorporating assets like front-end fixed income (with an income focus), gold, market-neutral liquid alternatives, and increased international exposure (including European value and potentially overlooked regions like Latin America). The failure of long-duration bonds as a reliable hedge and the potential peak in the US dollar underpin the call for broader diversification. Fixed income strategies should focus on the "belly of the curve" and income generation (e.g., via strategies like "Bink"). While acknowledging risks in specific emerging markets like China and India, opportunities exist, particularly in areas benefiting from geopolitical shifts and supply chain adjustments, like LatAm, provided diversification is maintained. Persistent themes like AI also warrant attention, especially following price corrections.