Quarterly investment outlook
implementation guide

Jul 11, 2018
By BlackRock

Economic growth and corporate earnings across the globe are strong, particularly in the U.S. Yet the range of possibilities for the economic outlook has widened. investors are uneasy given fears of trade wars, the rise of global populism and tightening financial conditions. The market regime that brought outsized risk-adjusted returns in 2017 is changing. This greater uncertainty − along with rising interest rates − argues for building greater resilience into portfolios.

1. Wider range of growth outcomes

We see steady global growth ahead — but uncertainty is creeping into forecasts. The U.S. is the growth engine, propelled by fiscal stimulus, and solid economic growth is likely good for corporate earnings. We see positive spillover effects, especially to emerging markets. But rising trade tensions muddy the macro outlook, and the U.S. tax overhaul risks overheating the U.S. economy.

Investment implication: capture
global upside

Unmatched earnings growth and spending discipline underscore our preference for U.S. over other developed market equities. We also like emerging market equities, particularly in Asia, but have become more selective given risks such as a rising U.S. dollar, trade tensions, and elections. We see China’s economy as steady in the near term, even as deleveraging poses slowdown risks.

The baseline is still a constructive one of steady growth across the globe…but risks have increased.


2. Tighter financial conditions

The effects of rising interest rates and a strengthening U.S. dollar are rippling across markets. We’ve seen an increase in flows to cash-like instruments as short rates have risen. Yields for two-year Treasuries and short-maturity IG corporates are now well above the level of inflation. That means these assets can potentially play a role in capital preservation.

Investment implication: put cash to work

Unprecedented monetary policy accommodation is slowly giving way to normalization. Higher short-end rates may make cash-like investments more attractive on a risk/reward basis — and raise the bar for riskier assets. Rising rates also boost the appeal of floating rate assets, which can help to hedge against monetary tightening.

Market returns have been volatile and mostly disappointing so far this year, and we believe a key driver for that has been tighter financial conditions, a key theme we think will persist.


3. Greater portfolio resilience

Bouts of volatility this year underscore the need for portfolio resilience. We still like momentum stocks, but see quality companies with high profitability and low leverage outperforming in times of rising macro uncertainty and risk aversion. And while we favor U.S. short duration in fixed income, longer-term Treasuries should play their traditional role in cushioning any growth shocks.

Investment implication: strengthen portfolios

As uncertainty picks up, so does the importance of portfolio resilience. Quality exposures can help provide a potential buffer against future volatility spikes. We remain pro-risk — with a preference for equities but acknowledge an uneasy equilibrium between rising macro uncertainty and strong earnings. Know the role of bonds in your portfolio. While short duration or floating rate can act as offsets to an inflation shock, long-duration strategies can serve as a hedge to a slowdown in growth.

Investors should look to protect their portfolios from potential higher volatility.

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Resilience for a changing regime
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