Source: BlackRock Investment Institute, November 2016.
Notes: the Fed and ECB meetings are those accompanied by press conferences. The BoJ events shown are followed by the publication of the central bank's outlook report.
We believe financial markets have reached a critical inflection point, characterised by growth, inflation and policy. We see upside surprise for global growth in 2017, with our BlackRock Macro GPS pointing to an uptick in the months ahead; solid manufacturing readings reinforce this upbeat GPS message. Meanwhile, economies around the world are experiencing broadening inflationary pressures, amid a growing shift from monetary to fiscal policy, supporting the global economy. This inflection point underpins our three key themes for 2017:
A global battle with deflation appears to be over at last, with improving global growth and the prospect of fiscal expansion fueling higher inflation expectations. Here, the US is leading the charge, as a tightening labour market and increasing hourly earnings propel prices higher, while China’s Producer Price Index has clawed out of five years of deflation and Eurozone headline inflation has hit a two-year high. The emerging global reflationary trend is contributing to a sea change in financial markets.
How can you position your portfolio to defend against – and benefit from – reflation?
Economic boom times look unlikely to return. Ageing populations, weak productivity growth and excess savings are conspiring to deprive many economies of the raw ingredients they need to fuel a major upswing. While our economic view is comparatively optimistic, the global economy’s capacity for rapid growth looks to have been severely dented and this will invariably suppress potential investment returns.
Which markets offer the greatest potential for returns in 2017?
Long-held relationships across asset classes appear to be breaking down. The negative relationship between stocks and bonds (the key ballast in balanced portfolios) has notably weakened, making it harder to buffer equity market swings.
Dispersion has also picked up. Weekly stock market returns have grown more varied of late, with greater distinction between equity winners and losers. This trend could strengthen as the baton is passed from monetary to fiscal policy – both in the US and further afield.
Amid a regime change in cross-asset correlations, are your portfolios as diversified as they appear?
How could increasing dispersion affect your investments?