MULTI-ASSET INCOME INSIGHT

Credit assets in the spotlight

Jan 15, 2019

A dramatic 2018 sets the stage
for credit opportunities in 2019.

Financial markets started 2018 with a bang, only to end with a rapid bust in the fourth quarter. To put the year into perspective, 90% of asset classes globally posted a negative return in U.S. dollar terms* for the first time in over a century. It was only the second time in nearly 30 years that both global stocks and global bonds were down for the year.

In this environment, the fund provided downside protection versus its blended benchmark of 50% stocks and 50% bonds, and generated robust levels of income, closing the year with a 12-month yield of 5.5%.

What was unusual about last year was how poorly financial markets performed relative to the real economy. In our view, investors overreacted to the first signs of slowing growth, and the sentiment pendulum swung dramatically from euphoria to fear. We think this trend will moderate in 2019 and we’d argue that asset prices today better reflect potential macroeconomic risks.

We believe a U.S. economic recession is unlikely given consumer strength, but we are monitoring key risks including how companies react to trade uncertainty, shifting Fed policy expectations, and global growth levels, particularly Chinese economic trends.

Within equity markets, better valuations and softening fundamentals have created an environment where the range of outcomes is much wider than in recent years, and leads us to be cautious on adding to broad equity exposure in the BlackRock Multi-Asset Income Fund.

We see the greatest opportunities for investors today in credit asset classes that offer significantly higher levels of income than one year ago, which can be a powerful driver of total return even if price volatility remains elevated. Should interest rates rise, we would likely increase the fund’s duration (interest rate exposure) as a hedge against economic growth scares.

* Source: Deutsche Bank, based on the returns of 70 asset classes.

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