Shares of AI-focused companies will be a major driver of returns for developed markets in a tough economic environment, BlackRock Investment Institute said, citing an unusually concentrated rally in a handful of technology stocks.
It said the extent of the concentration of gains on the S&P 500 surpassed levels seen in the 2000s tech boom.
"We think this unusual equity market shows a mega force like AI can be a big driver of returns even when the macro environment is not your friend," BlackRock Investment Institute's team wrote in a mid-year outlook note.
The institute, an arm of the world's biggest asset manager, has an over-weight allocation for AI-related shares in developed markets.
It recommended investors should be granular rather than relying on asset class returns, given expectations of a long-lasting "new regime" of economic volatility and high interest rates.
"We think this is an environment that is going to persist," Jean Bovin, Head of the BlackRock Investment Institute told reporters on Wednesday.
He cited tightening labor markets, the energy transition, and geopolitical instability as factors that will continue to cause inflationary pressures.
BlackRock said it expects central banks in developed economies to keep rates steady at a high level regardless of possible episodes of financial instability.
In its mid-year outlook, the institute said it remained overweight short-term U.S. government bonds as it expected interest rates to stay higher for longer, and that it was bullish on U.S. agency mortgage-backed securities.
It upgraded its views on Japan stocks to neutral from underweight, saying negative rates in Japan supported equities.
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