9/12/2014

BlackRock Investment Institute

Economic growth and monetary policies are diverging across the world. Get ready for volatility spikes in 2015—and new opportunities.

We debated this at our 2015 Outlook Forum in mid-November in London. The semi-annual event, the seventh of its kind, was marked by intense investment debates in small and large groups.

The 20-page piece includes: our 2015 base case (see chart below); top investment ideas; in-depth sections on valuations, volatility and currencies; five interactive graphics; and spotlights on key regional investment trends.

The year of living divergently chart

GROWTH AND POLICY

  • U.S. growth is on an upswing. We expect the U.S. Federal Reserve (Fed) to start raising rates in 2015 and the yield curve to flatten.
  • Eurozone growth could surprise on the upside due to rock-bottom expectations. The European Central Bank looks set to deliver on market hopes for full quantitative easing (QE).
  • Japan's monster bet on monetary stimulus brings both short-term opportunities (equities) and long-term risks (debt blowout).
  • China is digging deeper in its monetary policy tool box to stave off an even bigger growth downdraft as it attempts reforms—a balancing act.

OUR INVESTMENTS

  • We like Japanese and European equities due to cheap valuations and monetary boosters. We favor U.S. cyclicals over defensives as the Fed tightens.
  • We prefer credit such as U.S. high yield and European bank debt over sovereign debt. We like hard-currency EM debt, and favor U.S. Treasuries over other safe-haven bonds.
  • We like income-paying real assets such as property and infrastructure, but want to get compensated for being illiquid.
  • Our contrarian idea: natural resources equities as a hedge if U.S. dollar strength fades.

AIR POCKETS

  • Nominal risk-free rates should stay low for long. This means low rates of return—unless assets become oversold or investors use leverage.
  • The foundation for a strong U.S. dollar is in place, yet the journey to long-term appreciation is tricky. Expect a bumpy ride.
  • Volatility is set to return. Elevated valuations and a voodoo-like belief in momentum raise the cost of mistakes. The key is to have a plan beforehand.
  • Stocks and bonds could fall in lock step, challenging traditional diversification. Relative value strategies and alternative investments can help.

> Download and read full outlook

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BlackRock Investment Institute

BlackRock Investment Institute

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