For qualified investors

Keep a cool head in the risk rally

By Richard Turnill

Key points

  1. We see scope for the risk rally to persist in the near term, yet are wary of market complacency and the potential for higher volatility later in 2019.
  2. The UK Parliament voted to delay Brexit, and against a no-deal EU exit. British MPs are set to vote again on the withdrawal deal this week.
  3. We expect the Federal Reserve to keep interest rates unchanged at this week’s policy meeting. The key to watch: guidance on its balance sheet.

Keep a cool head in the risk rally

Risk appetite has rebounded in 2019. Equities and other risk assets have performed well, just as various gauges show improving sentiment across markets. We remain modestly and selectively overweight equities – and moderately pro-risk in general – but would caution against expectations for the early-2019 rally to roar on.

Chart of the week

Global equities return and earnings revisions ratio, 2014-2019

Chart of the week

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from MSCI, Thomson Reuters, March 2019. Notes: We use the MSCI ACWI Index to represent global equities. Return refers to the total return of the index in US dollars, rebased to 100 at the start of 2014. Earnings revisions ratio refers to a three-month moving average of the number of analyst earnings upgrades relative to the numbers of downgrades over a month.

Our base case for 2019 is that the global economy and corporate earnings will slow, but still grow, as we approach a late-cycle stage. We see the near-term risk of recession as low, yet uncertainty over the duration of the cycle is high. The recent global stock market rally has come despite this weakening economic and earnings environment. Downgrades in analysts' earnings expectations have increasingly outnumbered upgrades since mid-2018. See the chart above. We see potential for further downgrades to dampen stock returns – even though risk assets have historically tended to do well in late cycle. The rally so far this year can be seen as partly a snap-back from exaggerated worries of economic slowdown in the last quarter of 2018. The market’s assessment of the growth outlook is now more reasonable, in our view. A sign of calmer nerves in markets: The VIX Index of stock market volatility has fallen by more than half from its December peak.

Drivers behind the risk rally

A perceived decline in geopolitical risk, in particular around US-China trade relations, has helped provide a better backdrop for risk assets in early 2019. Our indicator of market concern relating to US-China competition has fallen from last summer’s peak, and the market's attention to our global trade tensions trade risk has nudged down as well. The immediate risk around US-China trade tensions has declined, but we believe the longer-term strategic confrontation between the US and China over technology will be a persistent feature of markets. This suggests investors may be becoming complacent about these risks and highlights the potential that any negative surprises have to roil markets. And there are other geopolitical risks that could emerge in 2019. We are particularly wary about the potential for a breakdown in US-European Union trade negotiations, for instance.

Also contributing to the risk-on sentiment: a perception that global monetary policy has taken on a more dovish tilt. Markets now see the Federal Reserve on pause for the entirety of 2019 and have further pushed back expectations for an interest rate rise in the eurozone after the European Central Bank (ECB) said rates were unlikely to rise until at least 2020. We expect no change in the fed funds rate in the first half – with some potential for the Fed to raise rates late in 2019 if growth stabilises above trend and signs of inflationary pressure gradually build. Markets may be underappreciating this possibility, in our view. Markets also expect to see growth stabilising in both China and Europe – and could be prone to setbacks should a recovery fall short of expectations.

What are the investing implications? Valuations of most assets do not appear stretched, yet we would be wary of extrapolating the strong start to the year to the remainder of 2019. The path of least resistance for risk assets may be higher in the short term, but we advocate more carefully balancing risk and reward in portfolios. Our preferred approach to building portfolio resilience: substantial allocations to government bonds, flanked by selective risk-taking in areas such as US and emerging market (EM) equities.


  • China A-shares scored their biggest weekly gain since mid-2015 after the US announced it would hold back on a planned tariff increase on Chinese goods. Better-than-expected factory activity data and MSCI’s confirmation on raising index weighting of Chinese domestic shares also helped. Global stocks steadied. A summit between US President Donald Trump and North Korean leader Kim Jong Un ended without any agreement. Ten-year US government bond yields hit a one-month high.
  • The British pound rallied on diminished perceived risks of a no-deal Brexit. UK Prime Minister Theresa May promised lawmakers a chance to vote on a no-deal Brexit and on asking the European Union to delay the deadline, if her revised Brexit deal is voted down.
  • US gross domestic product (GDP) grew faster than expected in the last quarter of 2018, underlining the strength in the economy. China’s factory activity contracted in February, but there were signs of improving domestic manufacturing demand.



  Date: Event
March 5 Eurozone retail sales; US non-manufacturing ISM Report on Business
March 7 ECB monetary policy meeting
March 8 US employment situation
March 9 China Consumer Price Index (CPI) and Producer Price Index (PPI)

We expect no policy change at this week’s ECB meeting. But any further signs of policymakers acknowledging a weakening growth outlook would be notable, following the recent shift in tone from some of the traditionally hawkish Governing Council members. The ECB staff will also release updated macroeconomic forecasts which could see downgrades of both growth and core inflation projections. We expect the ECB to keep rates on hold at least through 2019, and see a high likelihood it will renew a key liquidity provision program later in the year.

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 ...

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