BlackRock, the largest financial asset manager in the world, issued a report Thursday highlighting how various "mega forces" are causing major structural changes in the economy and driving shifts in profitability across sectors.
The report – titled "Financial resilience in a new economic regime" – seeks to capture the trends that are top of mind for CEOs, CFOs and company board chairmen, and is based on thousands of conversations BlackRock has had with companies across economic sectors. Those companies, according to BlackRock, are navigating muted economic growth, higher borrowing costs, tight labor markets, inflationary pressures and a quickly-changing financial landscape.
"Over the past year, investors continued to navigate a complex macroeconomic environment with slower growth across several major markets. Supply constraints compelled central banks in developed markets to keep policy rates high, even as credit supply tightened," wrote the report authors – Joud Abdel Majeid, BlackRock's head of investment stewardship; Rich Kushel, the head of the firm's portfolio management group; and BlackRock Vice Chairman Philipp Hildebrand.
"Even as inflation eases and policy rates are set to come down, it is becoming clear that this is a new regime, shaped by powerful structural forces driving divergent performance across economies, sectors and companies," they continued.
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BlackRock's financial resilience report highlights that companies are focused on increased operational efficiency, optimizing balance sheets and assessing capital allocation.
And it further highlights four factors causing significant shifts in the economy: the rise of artifical intelligence, the "low-carbon" transition to green energy, geopolitical fragmentation and changing demographics worldwide.
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While the technology sector has heavily invested in AI infrastructure and hired top talent in the AI space, BlackRock said that investment trend will spread to other economic sectors, which could boost overall productivity for health care, pharmaceutical, retail and financial services companies. However, the report states that AI adoption poses risks around "cybersecurity, data privacy, and algorithmic biases."
In addition, BlackRock's report states that the green energy transition is moving forward, but at "uneven speeds across sectors and regions."
"We see many companies navigating the complexities that can arise as countries seek to ensure reliable and affordable energy during the transition," the report states. "We are also observing companies plan for regulatory uncertainty across jurisdictions."
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"Given the uncertainty and unevenness of the transition, we see companies responding differently across regions and sectors. In the energy sector, we have seen elevated deal-making to acquire cost-competitive assets, enabled by strong balance sheets in this sector," it adds. "We have seen new voluntary efforts to reduce emissions and some business model diversification to low-carbon fuels and carbon capture."
In recent months, the green energy industry has faced a slew of setbacks. For example, multiple developers have canceled large offshore wind projects and automakers have scaled down electric vehicle production while oil production in the U.S. has reached all-time highs.
The report notes that a massive uptick in government funding available for green energy projects has caused companies to rethink their operating models in an effort to benefit from favorable policies.
Finally, BlackRock states that changing demographics, particularly aging populations in the West, may cause major hurdles such as labor shortages.
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"We have observed companies using technology – and automation in particular – to cope with labor shortages and protect margins," the report states. "Yet we don’t think the ensuing productivity benefits will be enough to absorb all the cost pressure. That could incentivize companies to move IT or manufacturing to economies with more plentiful labor, capping the onshoring we expect due to geopolitical fragmentation but adding to supply chain rewiring."
