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Source: BlackRock. Based on $6.44 trillion in AUM as of 09/30/18

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Quarterly investment outlook
implementation guide

Oct 5, 2018
By BlackRock

1. Wider range of growth outcomes

We see the steady global expansion rolling on, underpinned by above-trend U.S. growth. Yet the range of potential economic outcomes is widening as the cycle matures. Stimulus-fueled surprises and productivity gains could boost growth and risk assets, whereas escalating trade disputes and rising price pressures could create downside risks.

“

Our base case … we still think global growth will be steady and will push forward through the rest of 2018. ”

Investment implication: capture
global upside

Strong earnings momentum, corporate tax cuts and fiscal stimulus make the U.S. our favored region, with a preference for the technology sector. The 2018 selloff has restored value in EM, and we see the greatest opportunities in EM Asia on the back of strong fundamentals.

2. Tighter financial conditions

Rising macro uncertainty and less easy monetary policy are combining to form tighter financial conditions. Gradual increases in U.S. rates have contributed to bouts of volatility and sharply depreciating emerging market (EM) currencies. Investors can now potentially receive decent returns in U.S. short-term bonds without having to take major credit and duration risk.

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Tighter financial conditions manifest themselves in three key areas in financial markets: higher interest rates, a higher risk premium, and a stronger dollar. ”

Investment implication: put cash to work

Higher short-end rates may make cash-like investments more attractive on a risk/reward basis — and raise the bar for riskier assets. In fixed income, we favor short-term bonds in the U.S. and take an up-in-quality stance in credit. Rising rates also boost the appeal of floating rate assets, which can help to hedge against monetary tightening.

3. Greater portfolio resilience

We believe global growth can sustain at above-trend levels, even as the range of potential macro outcomes widens heading into 2019. But rising macro uncertainty and tighter financial conditions argue for a greater focus on making portfolios more resilient to downside shocks.

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We have decided to temper our risk stance … The way we’ve done this is try to focus on different segments of the markets that give us buffers to macro and potentially market shocks. ”

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Investment implication: strengthen portfolios

We believe equity investors will be compensated for risks, but advocate a greater focus on fortifying portfolios amid macro uncertainty. We favor the momentum factor, but see a role for quality exposures as a buffer. In fixed income, know the role of bonds in your portfolio. Although we prefer short-duration bonds in fixed income, longer-term government bonds can play a key diversification role as ballast in the face of any equity market selloffs.

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