As Stimulus Curtails, Fundamentals Will Re-Emerge as Key Drivers of
Portfolio Returns
Some indicators “flashing red”
Lagging productivity,
heady asset valuations
Equities “reasonably valued” relative to bonds
Stocks in
Europe and Japan favored
Emerging markets buffered against impact of Fed tightening
NEW YORK--(BUSINESS WIRE)--
With U.S. monetary policy turning, fundamentals such as productivity and
earnings growth are poised to regain prominence as drivers of investment
return - with some key indicators "flashing red," according to BlackRock (NYSE:BLK)
Investment Institute's (BII) mid-year 2015 investment outlook.
The mid-year outlook, "Nearing Normal," provides an update on BII’s main
economic assumptions and top investment ideas for 2015, a year so far
characterized by divergence in global central bank monetary policy and
asset prices.
The “red signals” BII highlights include flagging productivity, which
affects growth rates, monetary policy and, ultimately, corporate
margins. "Heady valuations in some markets and uncertainty over the pace
of Fed tightening argue for caution and selectivity in countries,
sectors and securities," said Ewen Cameron Watt, Global Chief Investment
Strategist for BlackRock. "We balance this with the sense that bull
markets often last a lot longer than expected, and the associated risk
of missing out on gains."
Today's richly valued assets include government bonds which are hovering
near record prices, BII notes. "Valuations of developed equities are
average, with the U.S. market the outlier," said Cameron Watt. “Bond and
currency volatilities have already risen, and we expect equity
volatility to follow. This would challenge traditional bond-equity
diversification."
“European markets have been troubled by the situation in Greece. This
obscures more important issues in the second half including low
productivity and challenged margins on one side of the coin and soaring
M&A on the other,” said Cameron Watt.
Markets anticipating end to zero interest rates
BII expects the U.S. Federal Reserve to raise short term rates in the
fall, and the Bank of England to follow suit in November or February
2016. Monetary policy remains easier elsewhere with the European Central
Bank (ECB) expected to maintain its asset purchasing until September
2016, the Bank of Japan continuing with its quantitative easing (QE)
program and the People's Bank of China delivering increased domestic
stimulus.
"It is premature to call an end to global QE," BII notes, but "worth
thinking about as markets tend to front-run events," suggesting that
investor focus will soon turn from central bank policy to other
investment fundamentals.
An awakening for global bond markets
Market trepidation about the first Fed hike in nine years is awakening
global fixed income markets lulled into complacency by years of
near-zero rates and regular doses of quantitative easing, notes BII.
How will bond markets react when the Fed begins to normalize rates? "A
September rate hike would likely hit short-maturity bonds," said Russ
Koesterich, Global Chief Investment Strategist for BlackRock. "Yet, any
rise in long-term rates should be subdued by yield-hungry buyers."
Across the eurozone, the "largesse" of the European Central Bank has
driven a collapse in bond yields. “Although formerly high-yielding
nations such as Spain no longer offer much absolute value, opportunities
do remain, such as long-dated sovereign debt of Portugal and
subordinated bank debt,” added Koesterich.
Rising rates will threaten some stocks and benefit others
Overall, equities look reasonably valued relative to bonds, though BII
cautions against “richly valued U.S. equities", particularly ahead of a
rising rate environment in the U.S. “The impact of rising rates will
threaten U.S. dividend-paying, low-volatility sectors such as utilities,
real estate investment trusts and consumer staples, while benefiting
banks as loan growth tends to rise in tandem,” said Koesterich.
Whilst European equities are no longer cheap, earnings forecasts are
finally on the rise. "Thank the weak euro, loose credit conditions
engineered by the ECB’s bond purchases and signs of loan growth," said
Koesterich.
In Asia, BII favors Japanese equities, with the weak yen boosting
earnings estimates, and increasing dividends and buybacks providing
extra support.
More broadly, "Asian equities away from Japan are at the cusp of a long
run higher, based on good value, easing financial conditions and reform
momentum to liberalize economies such as India and China," said Cameron
Watt. “The recent rally in Chinese domestic small and mid-cap pushed
valuations into bubble territory. Accordingly, we prefer Hong
Kong-listed Chinese equities, or H-shares.”
Emerging markets in better shape; dispersion set to rise
Past Fed tightening cycles have sparked emerging market debt crises, yet
emerging markets are in better shape these days, with less external
debt, deeper financial markets and more dry powder for stimulus, BII
notes.
"Emerging market stocks look reasonable, but are not screaming buys.
Where they look cheap it is often for good reasons," said Cameron Watt.
"Key risks in the emerging markets include anemic growth in exports and
falling productivity. We prefer hard currency over most local bonds, as
we see the U.S. dollar rising against many EM currencies, and prefer
countries with reform momentum and falling inflation,” he added.
BII’s investment ideas for the second half of 2015
-
BII favors U.S. credit (high yield, mortgages and even investment
grade bonds) over government debt.
-
In the Eurozone, BII likes QE-supported subordinated bank debt and
selected long-maturity peripheral bonds.
-
In the U.S. equity market, BII prefers cyclical sectors such as
consumer discretionary, technology and financials over “bond proxies”
(utilities and consumer staples).
-
BII likes equities in Europe (particularly banks) and Japan
(financials and exporters), based on weak local currencies and
monetary stimulus.
-
BII favors emerging market equities in countries with reform momentum
or monetary easing, particularly Asia.
-
BII prefers hard currency emerging market bonds over most local bonds
and prefers countries with reform momentum and falling inflation such
as India, China and Mexico.
About BlackRock
BlackRock is a leader in investment management, risk management and
advisory services for institutional and retail clients worldwide. At
March 31, 2015, BlackRock’s AUM was $4.774 trillion. BlackRock helps
clients meet their goals and overcome challenges with a range of
products that include separate accounts, mutual funds, iShares®
(exchange-traded funds), and other pooled investment vehicles. BlackRock
also offers risk management, advisory and enterprise investment system
services to a broad base of institutional investors through BlackRock
Solutions®. Headquartered in New York City, as of March 31, 2015, the
firm had approximately 12,300 employees in more than 30 countries and a
major presence in key global markets, including North and South America,
Europe, Asia, Australia and the Middle East and Africa. For additional
information, please visit the Company’s website at www.blackrock.com
| Twitter: @blackrock_news | Blog: www.blackrockblog.com
| LinkedIn: www.linkedin.com/company/blackrock
About BlackRock Investment Institute
The BlackRock Investment Institute leverages the firm’s expertise across
asset classes, client groups and regions. The Institute’s goal is to
produce information that makes BlackRock’s portfolio managers better
investors and helps deliver positive investment results for clients.
This material is not intended to be relied upon as a forecast, research
or investment advice, and is not a recommendation, offer or solicitation
to buy or sell any securities or to adopt any investment strategy. The
opinions expressed are as of June 2015 and may change as subsequent
conditions vary. The information and opinions contained in this are
derived from proprietary and nonproprietary sources deemed by BlackRock
to be reliable, are no necessarily all-inclusive and are not guaranteed
as to accuracy. As such, no warranty of accuracy or reliability is given
and no responsibility arising in any other way for errors and omissions
(including responsibility to any person by reason of negligence) is
accepted by BlackRock, its officers, employees or agents. This material
may contain ‘forward-looking’ information that is not purely historical
in nature. Such information may include, among other things, projections
and forecasts. There is no guarantee that nay forecasts made will come
to pass. Reliance upon information in this material is at the sole
discretion of the reader.
Investment involves risk including possible loss or principal.
International investing involves risks, including risks related to
foreign currency, limited liquidity, less government regulation, and the
possibility of substantial volatility due to adverse political, economic
or other developments. The information provided here I neither tax nor
legal advice. Investor should speak to their tax professional for
specific information regarding their tax situation.
©2015 BlackRock, Inc. All Rights Reserved. BLACKROCK is a
registered trademark of BlackRock, Inc. or its subsidiaries in the
United States and elsewhere. All other trademarks are those of their
respective owners.
GMC-0088
View source version on businesswire.com: http://www.businesswire.com/news/home/20150713005572/en/
Media:
BlackRock
Jessica Greaney, 212-810-5498
Jessica.greaney@blackrock.com
or
Paige
Hofman, 212-810-3368
Paige.hofman@blackrock.com
Source: BlackRock