Q2 2017 Outlook Implementation Guide
Broadening reflation: Spreading global reflation has driven a long-awaited rebound in global corporate earnings, with the sharpest recoveries seen outside the U.S. This also helps to reinforce our view that bond yields may be poised to rise, although there are limits to how high they can go.
Low returns ahead? Our capital market assumptions point to muted returns across asset classes in the coming five years — but show investors may still be rewarded for moving out the risk spectrum. The search for yield is still on, but income-producing assets are in short supply, a reason to be cautious and dynamic in fixed income.
Different diversification: Equity market volatility is historically low despite persistent political uncertainty, while correlations are weakening across the board. Investors may need to consider ways to diversify including factors or alternatives.
Sharp increases in sentiment-based indicators may fail to translate into hard data such as investment. The anti-growth part of President Donald Trump’s agenda (protectionism) could win out over the pro-growth part (tax cuts). Signs of a faster pace of Fed rate rises could spook markets. In Europe, we do not expect elections to deliver the populist outcomes that markets have been fearing.
We prefer equities over bonds, and credit over government bonds. We like European and Japanese stocks because of the strong global growth backdrop. Value shares such as financials may benefit from potentially higher bond yields. We are neutral on the U.S. because of lofty valuations, driven by multiple expansion, too high expectations for fiscal expansion and deregulation, and the relative value seen elsewhere. We like emerging market (EM) equities in countries such as India and China. – BlackRock, April 2017.