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Navigating markets in 2017

Global growth expectations are on the rise – and we see room for more upside surprises. Our BlackRock GPS – which combines traditional economic indicators with big data signals like internet searches – points to a rise in growth estimates in the months ahead. However, markets may still be underestimating the breadth of the global economic rebound. Whereas the US was the locomotive of growth in 2016, non-US economies have contributed as much as the US to the rise in our G7 GPS this year.

BlackRock GPS vs. G7 consensus, 2015–2017


Navigating markets in 2017

Sources: BlackRock Investment Institute and Consensus Economics, March 2017.
Notes: The BlackRock GPS shows where the 12-month consensus GDP forecast may stand in three months’ time for G7 economies. The blue line shows the current 12-month economic consensus forecast that we calculate by using GDP-weighted Consensus Economics data.

Signs of a rebound abound: long-dormant inflation rates have started to creep higher in the eurozone and the UK. Energy prices have driven much of the trend, but a rising percentage of consumer price index components are clocking increases, bolstering our view that the current upswing has legs. Against this backdrop, we have refreshed our three 2017 investment themes:

1. Broadening reflation

Reflation is going global. The signs include a rebound in inflation expectations from lows in mid-2016, a bottoming out in core inflation and wages, and a synchronised pick-up in economic activity indicators and corporate earnings estimates. Actual inflation has bounced in the UK − driven by a weak sterling − and is creeping higher in the eurozone, whilst in China, wholesale prices have shot up after sliding for five straight years. This broadening reflationary trend is contributing to a sea change in financial markets.

How can you position your portfolio to defend against – and benefit from – reflation?

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2. Low returns ahead

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. Our subdued return outlook means investment strategies need a rethink.

Which markets offer the greatest potential for returns in 2017?

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3. Different diversification

Long-held relationships across asset classes appear to be breaking down. For investors seeking to build traditionally diversified portfolios, this challenges some conventional wisdoms. As we brace for sporadic spurts of volatility, bonds are still effective shock absorbers, but we also see room for factors and alternatives as diversifiers. We see weakening correlations, low volatility and still-muted risk appetite favouring risk taking and putting a premium on security selection.

Amid a regime change in cross-asset correlations, are your portfolios as diversified as they appear?

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This material is prepared by BlackRock and 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 March 2017 and may change as subsequent conditions vary.

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