Favour equities over bonds but expect more volatility, says BlackRock

Investors should anticipate both increasing divergence in asset returns and broader range of risks, according to BlackRock Investment Institute’s midyear outlook.

Diminishing stimulus, diverging returns and emerging risks will drive the markets for the rest of 2013, the BII midyear investment outlook highlighted.

According to BlackRock’s Ewen Cameron Watt (pictured), Nigel Bolton and Benjamin Brodsky global monetary policy is diverging and the era of easy money is slowly ending.

At the same time, the US Federal Reserve is ready to wind down bond purchases if US economic momentum holds. As the report also highlights, risks are increasing, including a potential emerging market funding crunch and spike in real interest rates, and volatility is back.

As BII’s Chief Investment Strategist Watt stressed, investors in Europe are still quite risk averse but are getting more confident. 

Watt added that BlackRock still prefers equities over bonds but believes investors must brace themselves for more market gyrations.

“We like domestic Europe, some insurance banking in Europe, as well as some bank stocks, although many European banks need to improve capital ratio,” Watt said.

“We are approaching a fork in the road for global monetary policy and have had a rehearsal of the impact on markets,” he added.

 Highlights from BII’s mid-year report also include:

• The Fed: The Fed has sketched out a plan for gradual QE withdrawal but made clear the pace depends on economic data. Other signposts include Europe making progress on cleaning up and recapitalising its banks, and Japan not just talking about labor market reforms and deregulation but implementing them.

• Emerging Markets: Funding strains in some emerging economies are real and could get worse, but an exact repeat of the 1997-1998 Asia crisis looks unlikely. The most vulnerable countries are those dependent on external funding. This shows up in current account deficits and plummeting currencies. Disparities among emerging markets are growing fast-and so are disparities among returns. Picking the right exposure is more crucial than ever.

• China: China’s economy is slowing-but those expecting a monster stimulus are probably daydreaming. If anything, China is reining in alarming credit growth. This is good in the long run, but can cause market disruptions in the short term.

Click here to read full report [asset_library_tag 6866,BlackRock-Setting New Standards]

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