Global growth expectations are on the rise, and we see room for more upside surprises...
Reflation is going global. The signs include a rebound in inflation expectations, a bottoming out in core inflation and wages, and a synchronized pick-up in economic activity indicators and corporate earnings estimates.
Read the key points of BlackRock's analysis below.
Or, download the complete commentary (PDF).
Key Points:
- Themes: We believe the reflation trade — over weighting cyclical equities — has room to run, especially outside the U.S. We see global yields rising further but within limits: The U.S. Federal Reserve (Fed) is likely to raise interest rates only gradually, and structural dynamics such as aging populations keep us in a low-return world. We believe investors need to go beyond broad equity and bond exposures to diversify portfolios in this environment, and include factor-based allocations and alternatives.
- Risks: Sharp increases in sentiment-based indicators may fail to translate into hard data such as corporate investment. In the U.S., the anti-growth part of President Donald Trump's agenda (protectionism) could win out over the pro-growth part (deregulation and tax cuts). Any shift of expectations toward a faster pace of Fed rate rises could spook markets. We see upside risk in Europe, where we do not expect elections to deliver the populist outcomes feared by markets.
- Market views: We prefer equities over fixed income, and selected credit over government bonds. We like European and Japanese stocks amid strong global growth. We see value shares such as financials benefiting from rising yields. We are neutral on U.S. shares because of lofty valuations and the risk that expectations for tax reform and deregulation may be too high. We like emerging market (EM) equities on reform progress in countries such as India and our view that near-term risks to China's growth are overstated. In fixed income, we prefer higher-quality corporate bonds and selected EM debt.
- Low returns ahead: We see a classic 60/40 portfolio of U.S. equities and diversified bonds returning less than 4% annually over the next five years — far below annual returns of 10% from 2012 to 2016. Our assumptions are for market returns, or beta. Active management can potentially enhance returns, especially in asset classes where specialist knowledge is key, managers have a track record of out-performance, the opportunity set is larger than benchmark indexes, and few liquid and low-cost passive alternatives are available.
Read BlackRock's Global Investing Outlook for 2Q 2017, review their 1st Quarter predictions, or see what Lord Abbett and JP Morgan expect for 2017.
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