BlackRock is changing up its investment mix, and you might want to have a look (2024)

Multinational investment houses with $8.5 trillion under management –they’re just like us. Well, in some ways, maybe. Every few months, they take a look back at where they’ve invested, see where they’ve scored and spot their missed opportunities (patting themselves on the back or kicking themselves as needed), and then adjust. BlackRock did that recently and is making a few interesting adjustments –going bigger on AI stocks and Japanese stocks, for a start. Let’s take a look at the changes it’s making…

What’s BlackRock saying about AI?

Three months ago, in its midyear review, BlackRock was shining a bright light on five mega forces –that is, structural themes that are likely to drive major shifts in profitability across economies and sectors, and do so regardless of the macroeconomic backdrop. And the investing giant says those five forces –the AI revolution, the lower carbon emissions, a more fragmented world, an aging population, and the future of finance –are very much still in play – unsurprisingly, as the outlook for a mega force shouldn’t change after just three months.

But when it comes to AI, BlackRock says that after just a few months, it’s got reason to go even bigger into the trend. Its latest research finds that the value of AI patents from public companies has surged, which could suggest they’re submitting higher-quality patents.

BlackRock sees a multi-country and multi-sector AI-centered investment cycle beginning and says it’s going to rocket sharply higher. And that’s why it’s adopting an overweight position on the AI mega theme.

Now, asset managers don’t get much bigger than BlackRock and so its investing moves are closely watched by the market. If you think its view on AI makes sense, you could consider taking advantage of the recent pullback in key AI-related stocks like Nvidia and Advanced Micro Devices, or buying the Nasdaq tracking Invesco QQQ Trust Series ETF (ticker: QQQ; expense ratio: 0.2%) for more broad-based AI and tech exposure.

And what’s BlackRock saying about Japan?

BlackRock’s other big change is geographical. It’s shifting its developed markets stock allocation to adopt an overweight position on Japanese shares. And it’s got a few key reasons for that: there have been accelerating stock buybacks and other shareholder-friendly corporate reforms, companies are seeing strong earnings, and the Bank of Japan is still carrying on with accommodative monetary policy (think: negative interest rates).

These charts show the increase in the size of share buybacks and dividends, left, and the strong, upward earnings revisions, right, which have helped boost Japan’s Topix stock index by a pretty punchy 19% so far this year.

Mind you, there’s one big issue with investing in Japan this year and that’s the Japanese yen. It’s fallen sharply against other major developed currencies this year – sliding 13% against the US dollar and 11% against the euro. So if you like the stock market outlook, but worry that the yen could continue to weaken, you might consider buying a hedged ETF like the WisdomTree Japan Hedged Equity Fund (DXJ; 0.48%). The fund, which removes the currency risk for US dollar-based investors, is up 36% this year and focuses on dividend-paying companies. On the other hand, if you expect the yen to find its footing and begin to finally rally, you could lean into the iShares MSCI Japan ETF(EWJ; 0.5%): it’d give you an added boost with the yen’s gains.

What else is BlackRock changing?

Well, it moved to an underweight position in US stocks, mostly because of concerns about growth. That said, the US is still its heftiest portfolio allocation.

But a lot of the firm’s focus right now is on bonds. Persistent inflationary pressures, much of it driven by supply constraints, have caused bond yields to surge to 16-year highs. BlackRock sees central banks keeping monetary policy tight – that is, keeping interest rates high – to try to keep a lid on inflation.

You can see the shift higher in bond yields in the US, UK, and Germany. And BlackRock says the changes in interest rate expectations have offered up some interesting income opportunities. The firm has taken on an overweight position in UK and European government bonds, with yields fattening well beyond their pre-pandemic levels.

Several ETFs can help you follow suit, giving you exposure to bonds from across Europe and the UK. For the UK, the Lyxor Core UK Government Bond (DR) UCITS ETF (GILS; 0.05%) does the trick: it currently yields 4.46% and is invested in bonds with an average time to maturity (duration) of 8.4 years. For European bond exposure, you can buy the iShares EUR Govt Bond 7-10yr UCITS ETF (IBGM; 0.15%), which holds euro-area bonds with seven- to ten-year maturities.

In the US, BlackRock says short-dated government bonds yielding 5% look particularly attractive for income, especially relative to investment-grade (or high-quality corporate) bonds, which offer slightly higher yields for much more risk.

To shift some money into short-dated US government bonds, you could buy the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL; 0.135%), which invests in Treasury bills with only one to three months to maturity. Alternatively, you could invest in money market funds.

Sure, there’s a chance that BlackRock has it wrong with its view of higher-for-longer interest rates. And if that’s the case, and interest rates actually fall, then you’d likely see better investment returns from longer-duration bonds. The iShares 20+ Year Treasury Bond ETF (TLT; 0.15%) has been a terrible performer again this year, falling 12%, but it’d bounce back if interest rate expectations drifted lower.

And, lastly, BlackRock also sees some juicy income opportunities in private credit, as bank credit becomes less and less available. To take advantage, you could consider buying exposure, via the Goldman Sachs Business Development Company (GSBD) with its 12.4% dividend yield, or the FS KKR Capital Corp (FSK) with its 14.2% yield.