MIDYEAR 2016 GLOBAL INVESTMENT OUTLOOK Our views for the second half
Markets are torn between anxiety over the fallout from the UK’s vote to exit the European Union (Brexit) and the prospect of a strengthening U.S. economy. What’s in store for the second half?
Around 90 BlackRock portfolio managers and executives gathered at our Outlook Forum in mid-June to debate the question. We updated our conclusions in the wake of the UK Brexit vote — and now see rising downside risks to global growth. This points to a U.S. Federal Reserve on hold — and reinforces our view of low global interest rates for long.
The chart below illustrates one of our three investment themes for the year: low rates and low returns. The hunt for yield is getting more challenging. More than 70% of the bonds in developed-market government bond indexes today have yields of 1% or lower. Falling yields are dragging down expected returns across the capital markets.
Yielding little
Global government bonds by yield, 2014-2016
Outlook forum
We had vigorous debates on three key topics:
- Reflation: Some of us see inflation rising from depressed levels in the U.S. and elsewhere — if oil prices hold steady. The Brexit vote , however, is casting a shadow over the eurozone due and could send inflation expectations even lower there;
- Emerging Markets (EM): An expected hiatus in Federal Reserve rate rises bodes well for beaten-down EM assets;
- Financials: We see selected U.S. universal banks offering some refuge in a sector under siege globally.
Themes
We updated our three themes for the year:
1 We are living in a low-return world , with future market returns likely to be lower than in recent history;
2 Monetary policy has been a key driver of asset prices — but its effectiveness looks to be waning. A passing of the baton from monetary policy to fiscal policy and structural reforms is needed, but we are not holding our breath;
3 We see more volatility ahead as Brexit-related anxiety weighs on economies in Europe and the business cycle matures.
Risks
We see geopolitical uncertainties and a renewed rise in the U.S. dollar as near-term risks, and populism as a medium-term challenge for trade, growth and markets. A potential surprise: a rally in risk assets prompted by investors shifting out of cash and low-yielding assets in search of higher returns.
Markets
We have turned more positive on most fixed income due to elevated geopolitical risks and easy monetary policy in a low-growth world. We like income, including investment-grade credit and EM debt. We are cautious on equities, particularly in Europe, given the turn in risk sentiment and poor profit growth. We prefer dividend growers and quality companies. We like gold as a portfolio diversifier.
Assets in brief
Views on assets for Q3 on an unhedged currency basis
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