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Why the World’s Biggest Money Manager Thinks Inflation Is Back

December 7, 2017, 11:30 AM UTC

BlackRock (BLK) is the world’s biggest asset manager, overseeing about $6 trillion in client money as of the end of November, and its investment decisions create ripples that roll through every major global market.

To give Fortune readers a preview of what the firm expects in 2018, BlackRock’s senior strategists shared their outlook with us in advance of its mid-­December publication. Highlights follow from our conversations with the team. (Click here to read the full BlackRock 2018 outlook.)

One of BlackRock’s main themes for 2018: Globally, inflation will most likely be back to stay. That’s a good thing, because we’re not talking about Gerald Ford–era, runaway price increases but rather the steady inflation of around 2% a year that the Federal Reserve and macroeconomists associate with healthy growth. For the first time in nearly a decade, “instead of worrying about ‘What if growth stalls?,’ you’re seeing real inflation coming through,” says Richard Turnill, BlackRock’s global chief investment strategist.

In the U.S., wage pressure is on the rise after years of ultralow unemployment. But Turnill says China is now the bigger factor globally, as it cuts production capacity in its huge state-owned heavy industries and focuses on stoking consumer spending by its own middle class. “Historically China’s been a deflationary force,” he notes. “Now it’s starting to become an inflationary force.”

“Instead of worrying about ‘what if growth stalls?,’ you’re seeing real inflation coming through.”
Richard Turnill, global chief investment strategist, BlackRock

Rising inflation generally makes economists happy; it makes bond owners a bit queasy, since the value of most bonds declines as interest rates rise. A faster than expected spike could mean sharp drops in the prices of longer-­duration bonds and riskier corporate junk bonds. BlackRock’s team is neutral or underweight on most classes of bonds for 2018, advising clients not to load up on them. Jeffrey Rosenberg, chief fixed-income strategist, says that investors who want the income associated with bonds should focus on floating-rate loan funds and Treasury Inflation-Protected Securities (TIPS). The payouts from those assets rise as interest rates rise, he explains, “and if bond prices are going down, TIPS bond prices are going to go down less.”

A version of this post appears in the Dec. 15, 2017 issue of Fortune, as part of the article “The Planet’s Biggest Investor Prepares for 2018.”