Most investors are less positive about the next quarter as BlackRock (BLK) warns that “recessions” and “lingering inflation” are coming as central banks will continue to raise rates “sharply”.

Two-thirds of investors said they were feeling less bullish about Q4 in a poll conducted by the world's biggest asset manager, with recession fears topping concerns.

“Right now central banks are raising rates very sharply in a kind of ‘do whatever it takes to get inflation down’ mentality and that means,” Alex Brazier, deputy head of BlackRock’s Investment Institute, said in the asset manager's Q4 2022 Global Outlook EMEA client meeting.

“We think they are and will continue to raise rates sharply — in the US, in Europe, in the UK and elsewhere — and that will create recession.”

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“Recessions are coming in our view [and] in Europe those central bank rate hikes will be amplified by the energy shock that is dragging down real incomes and will also weigh on activity.”

The former executive director for financial stability strategy at the Bank of England (BoE) said central banks have not come to terms with the fact that “a pretty deep recession” would be needed to bring inflation down to their targets.

“We actually see them stopping once the economic damage their rate hikes have caused becomes clear. We think that won’t happen until early next year but it does mean that they will stop but not early enough to prevent causing economic damage in terms of recession.”

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BlackRock believes that central banks might stop their interest rate escalation in time to avoid a recession that is deep enough to return inflation to their targets. The European Central Bank (ECB) and the BoE have a similar target of 2% inflation.

Inflation in the UK eased slightly in August, falling to an annual rate of 9.9% from 10.1% in July, easing the pressure on households somewhat — but remained close to the highest rate in 40 years.

A majority of the BoE’s nine-member monetary policy committee (MPC) voted to increase the key base rate by 0.5 percentage points to 2.25% last month — its highest level since 2008 — judging that the risks of inflationary pressures becoming entrenched outweighed the short-term dangers to the economy.

“We see inflation coming down as energy and food prices stabilise and recession brings down core recession somewhat,” Brazier said, although BlackRock does not predict central banks will do enough to curb inflation down to their targets.

“We will see a recession coming in the US, Europe, UK and at the same time we will be living with lingering inflation.”

BlackRock predicted that inflation will be lower than now but above pre-pandemic levels.

But as markets are set to remain choppy, where should investors allocate their assets?

Navigating the storm

The selloff in UK assets offered a glimpse of underappreciated financial stability risks amid the worsening trade-off between growth and inflation facing policymakers.

To help navigate volatile markets, BlackRock is looking at businesses that are ready to weather the storm.

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“Markets will remain choppy,” warned Becci McKinley Rowe, co-head of fundamental equities at BlackRock.

In a previous research note, BlackRock said investors should look to avoid most stocks with recession risks rising.

Rowe said that a selective balanced approach is a key aspect that investors should consider when looking at their options.

“Businesses are going to have to weather this market storm that we’re in and some will weather it better than others. There will be winners and losers across all sectors,” she said.

Rowe added that when it comes to fundamental equities, BlackRock is looking at “the quality of the business, robust balance sheets, resilience of margin, the predictability of cash flow”.

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For the asset manager, companies that tick the boxes above are the ones that going to come out potentially even stronger after the storm.

“The quality element is something that is at the forefront of our mind. Companies that have got a buffer in terms of their balance sheets and capital structure to get them through,” Rowe added.

Watch: What is a recession and how do we spot one?