Q4 2016 GLOBAL INVESTMENT OUTLOOK

Our views for the fourth quarter

Dez 13, 2016 / By BlackRock

Low returns rule the markets. Governments are warming up to fiscal support. An unusually divisive US presidential election looms large. What should investors expect in the last quarter of the year?

 


We see upside to global economic growth prospects but also greater market volatility ahead. This comes after a summer lull, record highs for US equities and a rebound in emerging market (EM) assets. We expect the US Federal Reserve to press on with slow interest rate increases while other major central banks start to approach limits of their easy policies.

The Bank of Japan, for example, already owns about 40% of Japanese government bonds (JGBs). At its current pace of buying, it would hold two-thirds of the JGBs by 2020, we estimate, as shown in the chart below. Additional easing measures may have diminishing returns - and unintended consequences.

Pushing the limits

Central bank share of outstanding bonds, 2009-2020

Our views for the fourth quarter

Themes

Here are the themes for the fourth quarter:

1 We see early signs of a regime change for market returns due to US reflation and a global pivot from monetary stimulus to fiscal support, even if the immediate economic impact is limited.

 

2 Our return expectations are at post-crisis lows across asset classes, but we believe investors will be compensated for taking on risk in equities, selected credit, EM and alternative assets.

 

3 Central bank asset purchases have smothered volatility and pushed investors to take greater risks, but we could see short bursts of heightened volatility as the limits of monetary policy become clearer.

Risks

Equity and bond returns are becoming more correlated and could fall in tandem, while rising long-term yields are a tail risk that could cause an unwanted tightening of financial conditions. A divisive US presidential election is the top political risk. Near-term China risks have receded amid a gradual currency depreciation and a pick-up in Asia’s export machine. China’s yuan stability and debt build-up remain medium-term risks, however.

Markets

We prefer shorter-duration US government bonds and favour selected eurozone peripheral debt over other sovereigns. We generally like investment grade corporate bonds in the eurozone, UK and US. We find EM debt attractive but have become more selective, and we see further upside in EM equities. Dividend stocks may come under pressure from higher bond yields, so we prefer companies that can sustainably grow dividends.

Asset Class Views

Views From a U.S. Dollar Perspective Over a Three-Month Horizon



Overweight Neutral Underweight

U.S.

Consumption and labour markets are strong, but rising wages could pressure profit margins and valuations are elevated. We like dividend growers and quality stocks.

Europe

ECB stimulus is supportive, but post-Brexit uncertainty challenges already poor profits. A weak pound helps UK exporters; we are cautious on UK domestic stocks and European banks.

Japan

Attractive valuations and better corporate governance are not enough to offset a soft economy and rising yen. The BoJ is nearing the limits of monetary policy; structural reforms are needed.

EM

Our conviction is growing. Currencies and trade balances have adjusted, and we see less risk of a sharp U.S. dollar rise. We like domestically oriented stocks and Ems with reform momentum.

Asia ex Japan

China’s transition to a service economy is slowing growth, yet much of this is priced in. A China credit bust and currency devaluation are tail risks. We like India and ASEAN economies.

U.S. Treasuries

A Fed on hold, risk-off sentiment and easy global monetary policy offer support near term. Long-maturity bonds have a structural bid amid low rates and are diversifiers.

U.S. Municipals

We favour munis for their tax-exempt income, low volatility, and strong demand from investors seeking stability and yield. We prefer bonds tied to specific revenue streams.

U.S. Credit

We generally prefer investment grade bonds. Yields offer better compensation for risks entailed, such as rising corporate leverage.

DM ex U.S. Fixed Income

We prefer selected sovereigns in the eurozone’s periphery over the core due to higher yields and ECB support. The ECB’s corporate bond purchases and muted UK issuance underpin investment-grade credit.

EM Debt

We prefer high yield hard-currency debt, but are cautious on commodity exporters. We like local-currency debt in Brazil, India, Indonesia and Poland for those who can stomach volatility.

Commodities

Commodities markets are oversupplied. Oil market fundamentals have improved, but we see much of this as priced in. We like gold as a portfolio diversifier.

Asset Class View Comments
Equities
Neutral
U.S.
Consumption and labour markets are strong, but rising wages could pressure profit margins and valuations are elevated. We like dividend growers and quality stocks.
Europe
ECB stimulus is supportive, but post-Brexit uncertainty challenges already poor profits. A weak pound helps UK exporters; we are cautious on UK domestic stocks and European banks.
Japan
Attractive valuations and better corporate governance are not enough to offset a soft economy and rising yen. The BoJ is nearing the limits of monetary policy; structural reforms are needed.
EM
Our conviction is growing. Currencies and trade balances have adjusted, and we see less risk of a sharp U.S. dollar rise. We like domestically oriented stocks and Ems with reform momentum.
Asia ex Japan
China’s transition to a service economy is slowing growth, yet much of this is priced in. A China credit bust and currency devaluation are tail risks. We like India and ASEAN economies.
Fixed Income
Neutral
U.S. Treasuries
A Fed on hold, risk-off sentiment and easy global monetary policy offer support near term. Long-maturity bonds have a structural bid amid low rates and are diversifiers.
U.S. Municipals
We favour munis for their tax-exempt income, low volatility, and strong demand from investors seeking stability and yield. We prefer bonds tied to specific revenue streams.
U.S. Credit
We generally prefer investment grade bonds. Yields offer better compensation for risks entailed, such as rising corporate leverage.
DM ex U.S. Fixed Income
We prefer selected sovereigns in the eurozone’s periphery over the core due to higher yields and ECB support. The ECB’s corporate bond purchases and muted UK issuance underpin investment-grade credit.
EM Debt
We prefer high yield hard-currency debt, but are cautious on commodity exporters. We like local-currency debt in Brazil, India, Indonesia and Poland for those who can stomach volatility.
Commodities
Neutral
Commodities
Commodities markets are oversupplied. Oil market fundamentals have improved, but we see much of this as priced in. We like gold as a portfolio diversifier.
Overweight Neutral Underweight
Richard Turnill
Managing Director, ist Global Chief Investment Strategist von BlackRock
Richard Turnill ist Global Chief Investment Strategist von BlackRock. Davor war er Chief Investment Strategist von BlackRocks Fixed Income und active Equities Geschäft sowie ...