Growth prospects are not strong enough to allow the end of QE, BlackRock’s Stuart Reeve says
Stuart Reeve, manager of the BlackRock Global Income fund, discusses the best opportunities for investors in the US following Bernanke’s comments.
Bernanke’s comments have clearly spooked the markets but should global growth be strong enough, the end of QE will be healthy for markets with equities performing well after an initial period of indigestion. However, while we think US growth prospects are decent if compared to the rest of the world, we do not believe global growth prospects are strong enough to allow and withstand the end of QE.
In fact, we expect a continuation of the low and volatile growth environment on a global scale, probably for many more years, if history is any guide. On that basis, over the medium-term we will continue to look for high quality businesses, geographically diversified in their end markets. These companies are capable of generating sustainable growth in profits and cash flows without the benefit of a strong economic recovery.
Since 2008, sentiment and expectations for GDP growth in the US, and elsewhere, have been much more volatile and far more optimistic than the growth actually delivered. Looking back over the very long-term, the average US GDP growth rate has been declining steadily over each of the past five decades.
Recent optimism about a strong acceleration of US growth, fuelled by the recent employment data, will likely repeat the pattern of the past few years. I would not assume that the US GDP growth rate is going to reaccelerate well above 3%.
• Pfizer, a large cap pharmaceutical company at 12x earnings, with pipeline potential in vaccines and other areas, and the medium-term opportunity to realise value in its animal health business, would be one such company.
• Another good example would be Kraft Foods, which is more US domestically exposed and rated at 17x earnings, with significant efficiency opportunities that should allow management to reinvest in the business and deliver margin expansion.
The US economy appears to be in better shape than elsewhere in the world but US equity valuations suggest that this has already been priced in. Adopting a global investment approach allows you to take advantage of the differences in valuations across various markets.