BlackRock unveils 2025 predictions, says artificial intelligence will eliminate ‘boom and bust’ cycles

The world’s largest fund manager believes the business cycle is dead as “mega forces”, led by artificial intelligence will eliminate the economic cycles of “boom and bust”.

BlackRock, which controls $US11.5 trillion ($A17.86t) worth of assets says that other trends that will shape the world in 2025 include the shift to net zero, geopolitical risk, demographics and the digitisation of finance.

They see a strong year for investment ahead, primarily driven by the United States.

“We have more conviction we are in a very unusual environment. 2024 has reinforced our view that we are not in a business cycle: AI has been a major market driver, inflation fell without a growth slowdown and typical recession signals failed,” BlackRock said.

The investment manager says three key themes will play in terms of investing.

Financing the future

Fundamental changes are taking place, BlackRock says, but they are taking time.

Building transformational infrastructure such as data centres for artificial intelligence, along with the required energy will need $3.5 trillion ($5.44t) of new capital every year this decade.

BlackRock believes that governments will not be able to fund the infrastructural upgrades, placing the capital burden onto the investment community. However, it is unlikely that publicly listed companies will do the majority of the capital raising. More likely, BlackRock says, private debt via non-bank lenders will be part of a transformation of the “future of finance”.

Over the next five years, BlackRock expects private market assets under management to double by 2029 and investors looking to capitalise on the opportunity will need to think about where to access new opportunities.

“Finance itself is changing and innovating rapidly as activities that were previously bundled together in single institutions, like banks, are unbundled,” BlackRock says. “With banks reining in lending, we think companies are likely to turn to the capital markets, private lending and other non-traditional sources of credit.”

In terms of assets, BlackRock prefers long dated assets of five years or more like airports and data centres over real estate and private equity.

Rethinking investing

One of the most famous investment principles has been the “60/40 portfolio, where 60 per cent of assets are in stocks and the remainder in bonds.

But BlackRock things that paradigm is shifting, as government borrowing, and geopolitical pressures alters the inverse correlation between stocks and bonds.

“The erratic correlation between stock and bond returns has defined the new regime – and government bonds have become a less reliable cushion against equity selloffs as a result,” BlackRock writes.

The firm suggests investors diversify into more asset classes, including private debt and gold. But it has also thrown its weight behind Bitcoin as a source of diversification, saying the correlation between equity markets and the cryptocurrency has typically been low.

“Bitcoin’s role as a store of value and payments system make it a potential diversifier,” BlackRock’s chief investment officer of exchange traded funds, Samara Cohen writes. “Those distinct drivers should make it less correlated with stocks and other risk assets in the long term.”

More market gains in the US

After almost doubling in value in the past two years, BlackRock remains bullish on the outlook for US shares.

They predict the mega forces driving investment will continue to push up the so-called “magnificent seven’ stocks of Nvidia, Alphabet, Meta, Amazon, Microsoft, Apple and Tesla, which together account for a third of the market cap of the US S&P 500.

Following the election of Donald Trump, there should an less regulation and lower taxes, resulting in higher corporate earnings in a higher growth environment.

We think the AI mega force will benefit U.S. stocks more and that’s why we stay overweight, particularly relative to international peers such as European stocks,” BlackRock argues.

While the firm is bearish on European equities, they do think that euro bonds and UK gilts will outperform US Treasuries, which will be dampened by growing US debt.

BlackRock also finds Japan an attractive investment market, thanks to “corporate reforms and the return of mild inflation, driving corporate pricing power and earnings growth.” The firm also thinks India is well positioned to capitalise on the global trends over the longer term.

The report calls out the danger of increased geopolitical tensions and while the overall tone is optimistic, the firm says it is on the lookout for signs of conflict.

“Key signposts for changing our view include any surge in long-term bond yields or an escalation in trade protectionism.”

BlackRock did not give a forecast for the Australian market.