2014 Mid-Year Investment Outlook

Risk assets are grinding higher and volatility is extraordinarily low. Nominal economic growth is subdued (but rising) and monetary stimulus still plentiful.

What are the implications of the first post-crisis divergence in central bank strategy? And what does life after zero (rates) look like? We debated this at a New York gathering in mid-June and updated our 2014 Investment Outlook Squeezing Out More Juice.

The eight-page piece includes specific investment recommendations, updated probabilities on market scenarios and key market themes (and risks).

Download the 2014 Mid-Year Investment Outlook for BlackRock's Investment Ideas for the Second Half of 2014

Highlights:

  • Our overall views on markets are essentially unchanged. We again give our main investment scenario, Low for Longer, the highest probability for the second half. This does not necessarily mean yesterday’s winning trades will work tomorrow: Internal market leadership can change quickly.
  • Valuations are getting stretched and investor complacency is high. This sets markets up for more volatility–especially as focus shifts to the timing and scope of U.S. rate hikes.
  • The biggest change over the past six months? A brewing crisis in emerging markets (EM) has stabilized. Many economies have adjusted, setting the stage for a rebound. Check out our interactive EM Marker for current financial trends in the emerging world.
  • The U.S. Federal Reserve has stuck to the mantra of keeping rates low with great conviction–despite mounting evidence the U.S. economy is set to improve. View our interactive BlackRock Jobs Barometer to track developments in global labor markets
  • The risk? When the Fed shifts gears, markets will notice. Think steeper (and earlier) rate hikes than the market expects–but a lower peak Federal funds rate than in previous cycles.
  • The European Central Bank (ECB)’s resolve to prevent the eurozone from falling into a deflationary spiral is likely good news for European risk assets. Watch Eurozone current account balances to gauge competiveness and the ECB’s maneuvering room to start an asset purchase program.
  • We are bullish on Japanese equities–despite recent underperformance. Reasons include Godzilla-like QE by the Bank of Japan (BoJ), cheap valuations, structural reforms and domestic investor interest. View key metrics for Japan’s economy in our interactive BlackRock Japan Tracker.
  • China’s GDP growth expectations have fallen over the past years but could edge even lower. The country’s investment fueled growth is not sustainable. Reform is the only way out—but it may dampen growth in the short term.
Helen Zhu, Russ Koesterich and Ewen Cameron Watt
Helen Zhu, Russ Koesterich and Ewen Cameron Watt
Nigel Bolton, Sergio Trigo Paz and Tom Parker
Nigel Bolton, Sergio Trigo Paz and Tom Parker

So What Do I Do With My Money?

  • We generally prefer equities over bonds, particularly in our Low for Longer base-case scenario.
  • Equities are not cheap—but they are not (yet) in bubble territory. We favor Europe and Japan on valuation and asset-price boosting central bank policies.
  • Volatility is unnaturally low—and set to rise. Stock up on downside (and upside) protection while it is cheap.
  • Many bonds look expensive and risky (especially government debt). Stick to select yield plays and relative-value investments.

Investment strategies mentioned may not be suitable for all investors, depending on investor guidelines and market conditions at the time of investing.

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A World of Risk

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Sovereign Risk Index

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The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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