Post on 14-Apr-2018
transcript
Global Investment OutlookQ4 2017
FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.
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Kate MooreChief Equity Strategist
BlackRock Investment Institute
Jean BoivinHead of Economic and Markets Research
BlackRock Investment Institute
Isabelle Mateos y LagoChief Multi-Asset Strategist
BlackRock Investment Institute
Jeff Rosenberg Chief Fixed Income Strategist
BlackRock Investment Institute
Richard TurnillGlobal Chief
Investment Strategist
BlackRock Investment Institute
THEMES ........................ 3–4Sustained expansionRethinking risk; rethinking returns
SPECIAL TOPICS .......... 5–6InflationGeopolitics
MARKETS ....................7–11Government bondsCreditEquitiesEquity style factorsAssets in brief
G L O B A L I N V E S T M E N T O U T L O O K S U M M A R Y
Growth is cruising at above-trend rates across the world. We see inflation picking up in the U.S. but moving sideways at low levels in the eurozone, supporting monetary policy divergence. Remarkably steady growth is fostering subdued market volatility. We see this providing fertile ground for risk-taking in equities and emerging market (EM) assets.
• Inflation is key to the policy and market outlook. Our new BlackRock Inflation GPS suggests U.S. core
inflation will rise back toward 2%, giving the Federal Reserve comfort in pushing ahead with policy
normalization. In the eurozone, the lagging recovery means there is plenty of slack left in the economy.
The European Central Bank (ECB) may prolong its ultra-easy policies longer than markets expect.
• We see upbeat economic growth pushing bond yields up after a dip caused by a soft inflation patch,
geopolitical unease and a downshift in Fed rate increase expectations. Yet we see any yield rises
capped by structural factors such as graying populations, excess savings and tepid productivity growth.
U.S. policy normalization and potential for upside economic surprises support the U.S. dollar, in our view.
• What are the risks? Policy missteps or miscommunications cannot be ruled out as the Fed and some
other central banks reduce accommodation. China’s economy could slow if the country re-emphasizes
reforms over short-term growth after a crucial party congress. Geopolitical risks also lurk. But we see
few triggers that could shock markets out of their low-volatility regime reinforced by steady growth.
• Structurally lower yields underpin our positive view on equities and other risk assets. We are bullish on
EM: Valuations are attractive, investors are returning and EM stocks are increasingly tilted toward high-
growth companies. We like European and Japanese stocks and prefer equities overall to credit, where
much good news appears priced in. We like the momentum and value equity style factors.
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Spreading the wealthBreadth and level of global composite PMI, 2003–2017
PMI level
20172015
Shar
e ab
ove
50
Global composite PMI
Share of countries with PMI above 50
30
40
50
60
70
0
25
50
75
100%
201320112009200720052003
The recovery in global growth is broadening
Sources: BlackRock Investment Institute, with data from Markit, September 2017. Notes: The blue line is the global composite Purchasing Managers’ Index (PMI) and includes manufacturing and services activity for 34 countries. The green line shows the share of countries in this index with a PMI above 50, indicating expanding activity.
Room to recoverU.S. wage growth across cycles, 1981–2017
Ann
ual w
age
gro
wth
Prior peak
Trough Potential Peak
1
2
3
4
5
6%
2007–present
2001–20071981–1990
1990–2001
U.S. wage growth has been weak this cycle
Sources: BlackRock Investment Institute, with data from the U.S. Bureau of Labor Statistics, September 2017. Notes: The chart shows the annual pace of U.S. wage growth (average hourly earnings) across cycles. Each line begins with the previous cycle’s peak, as determined by the National Bureau of Economic Research. Cycles are aligned based on their peaks, troughs and point when potential output is reached. For our interactive graphic: blackrockblog.com/cycles-in-context.
3
Themes: sustained expansion
The increasing breadth of the global economic expansion is pointing
to a longer lifespan. Roughly three-quarters of countries are clocking up
growth. See the Spreading the wealth chart. All economies in the eurozone
are improving — a first in the post-crisis period. China’s growth surprised to
the upside this year as Beijing kept the economy humming ahead of the
Communist Party’s key National People’s Congress (NPC) in October. We
could see a policy reset after the NPC, with greater focus on long-term
structural reforms at the expense of growth in the short run.
Overall, however, we see no change to the big picture of a global expansion
chugging along at an above-trend pace. Drops this year in developed
market (DM) bond yields and the U.S. dollar were unexpected given the
robust growth backdrop. We see potential for rebounds in both as inflation
firms and the Fed presses on with removing monetary accommodation.
A broadening of steady growth beyond the U.S. gives us confidence the
global expansion is sustainable.
The U.S. economic expansion is getting long in the tooth. Or is it? Some
slack remains in the economy — even as the jobless rate touches levels
rarely seen since the 1950s. Slower growth — a function of structural
changes such as an aging society — means economic slack created in the
last recession is being eroded at a sluggish pace. Our work suggests the
expansion can run for much longer — likely years — until the economy
reaches potential and then the peak that marks the end of the cycle.
Wage growth has been a pain point since the crisis. But when looking at
economic cycles based on their peaks and troughs, rather than time
elapsed, we see the trend is not too far off from past cycles. See the Room to
recover chart. Lingering wage weakness is one reason we think this recovery
still has legs. A sustained expansion supports company earnings growth, we
believe, reinforcing our upbeat view on equities. It is also why we like the
momentum style factor, which historically has outperformed in expansions.
Amid a steady U.S. expansion, we favor stocks and the momentum style.
T H E M E S S U S TA I N E D E X PA N S I O N
Click to view interactive data
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Collapsed into calmVolatility of U.S. economic data, 1970–2017
Perc
enti
le
2017
0
25
50
75
100%
20102000199019801970
Payrolls
Core inflation
Economic volatility has plunged to historical lows
Sources: BlackRock Investment Institute, with data from the U.S. Bureau of Labor Statistics, September 2017. Notes: The lines show the historical percentile ranking of the five-year rolling standard deviation of U.S. core consumer price inflation and monthly change in payrolls.
Patience neededGlobal equity annualized returns by holding period from September 2007
Holding period (years)
10987654321
-17.5%
5.1%3.9%3.0%
4.4%1.9%
-14.9%
-8.2%
-3.7%-1.2%
Global equities climbed back from crisis-induced losses
Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Notes: The bars represent the annualized return of the MSCI World Index from the beginning of September 2007 over various holding periods in years. For example, the bar for a four-year period shows the annualized return from the beginning of September 2007 to the end of 2011. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index.
Themes: rethinking risk; rethinking returns
Market volatility (vol) has been testing lows. What is less appreciated is
that this is happening at a time of historically subdued volatility in economic
data. These low-vol environments — both market and macro — tend to
overlap each other. Indicators such as U.S. employment and inflation today
are among their least volatile in the past 50 years. See the Collapsed into
calm chart. Low-vol regimes are the historical norm, not the exception —
especially if systemic vulnerabilities in the financial system are kept in check,
we find. See Learning to live with low vol of July 2017.
We are concerned about valuations in some corners of the credit markets at
this point. We also see the potential for mispricings as seemingly low-risk
strategies that involve selling volatility have become a popular way of
generating income across asset classes. Yet we do not spot broader signs
of “irrational exuberance” in financial markets today.
Spotting systemic risks in advance is difficult, but we see none on the
immediate horizon that might undercut the current economic expansion.
Equity indexes hitting new highs inevitably stirs talk of stretched valuations.
The assumption is that valuations are bound to some long-term mean —
and will necessarily revert. We have a different take. We find historical
comparisons less useful today. Why? We expect the future to look different
from the past, partly due to structurally lower interest rates. Viewed through
this lens, equity valuations are not that extreme, we believe. As a result, we
favor taking advantage of temporary equity market sell-offs, particularly in
the current environment of low volatility and solid corporate earnings.
What if a market shock were to morph into a systemic crisis? Buying on the
dip only works if the investor takes a long view and has a stomach for
volatility. Patience eventually was rewarded after the 2008 crisis — but it
took six volatile years to claw back losses from the 2007 peak. See the
Patience needed chart.
We favor taking advantage of temporary equity sell-offs in the current
landscape of low volatility and strong earnings growth.
T H E M E S R E T H I N K I N G R I S K ; R E T H I N K I N G R E T U R N S
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Special topic: inflation
The inflation outlooks in the U.S. and eurozone stand in stark contrast.
Our BlackRock Inflation GPS points to core U.S. inflation climbing back
near 2% in coming months. See the Inflation’s demise exaggerated chart.
Such an outcome should reassure Fed officials that this year’s inflation misses
were mostly due to one-offs such as a price war in wireless data charges. We
see the Fed pushing ahead with a rate rise later in the year given a strong
labor market and steady economic expansion. We see further rate increases
as likely in 2018, even with looming changes to the Fed’s leadership.
By contrast, we see core inflation stuck at much lower levels in the
eurozone. That should keep the ECB cautious about winding down its bond
purchases. We believe policy divergence supports the U.S. dollar against
the euro, and see U.S. yields rising more than eurozone yields. We prefer
U.S. inflation-protected securities over nominal bonds and see them
offering better value than similar instruments in the UK and eurozone.
Contrasting inflation outlooks suggest greater monetary policy
divergence between the U.S. and eurozone than markets are expecting.
Economic slack is the culprit in the eurozone’s sluggish inflation outlook.
Our work finds that domestic activity, primarily spare capacity in the jobs
market, is the main drag. Other key drivers of inflation are monetary policy
and global factors such as commodity prices and the exchange rate. The
ECB’s quantitative easing program has been only mildly effective in
offsetting lingering domestic slack. See the Domestic drag chart.
The eurozone recovery should keep eroding this slack, but it still has a long
way to go. Extra-loose policy is needed to ensure that inflation climbs back
to target and stays there, we believe. Any sustained strength in the euro
could weigh on inflation. Winding down monetary accommodation too
quickly would risk inflation being stuck below target for even longer.
See our September 2017 Getting to inflation’s core for details.
Ongoing ECB policy accommodation is needed to help get inflation back
near its 2% target.
S P E C I A L T O P I C I N F L AT I O N
Inflation’s demise exaggeratedFuture inflation implied by BlackRock Inflation GPS vs. actual
Ann
ual i
nflat
ion
rate
BlackRock GPS
Inflation rate
0
1
2
3%
EurozoneCanadaU.S. PCEU.S. CPIUK
Our GPS shows some upside for inflation in coming months
Sources: BlackRock Investment Institute and BlackRock Scientific Active Equity group, with data from Thomson Reuters, September 2017. Notes: The BlackRock Inflation GPS shows where the core (excluding food and energy) Consumer Price Index (CPI) for each economy may stand in six months’ time. U.S. PCE shows core personal consumption expenditures price inflation.
Domestic dragFactors driving eurozone core inflation, 2008–2017
Perc
enta
ge
po
int d
evia
tion
fro
m tr
end
2008
-1.5
-1
-0.5
0
0.5%
2014 2015 2016 20172009 2010 2011 2012 2013
Monetary policy
Others Net deviation
Spare capacity has held down eurozone inflation
Domestic activity
Sources: BlackRock Investment Institute, with data from Thomson Reuters and Eurostat, September 2017. Notes: The chart breaks down the economic drivers causing eurozone inflation to slow below its long-term trend, based on a 2000–2008 mean. The breakdown, in percentage points, is based on an ECB model published in the January 2017 paper Missing disinflation and missing inflation: the puzzles that aren’t.
Click to view GPS interactive
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Special topic: geopolitics
If markets are a sea of calm, geopolitics are anything but. We have our
eyes on 10 geopolitical risks and are tracking their likelihood and potential
market impact. See the A world of risk map. We focus on two here: the
North Korea crisis and the related risk of deteriorating U.S.-China relations.
We view North Korea’s missile and nuclear weapons program as a major
threat to regional stability, U.S. security and nuclear non-proliferation.
The possibility of armed conflict has risen, we believe, given North Korea’s
missile launches over Japan, a nuclear test and an intense war of words.
This has raised the chance of misstep or miscalculation, and we could see
limited action such as the shooting down of missiles. Yet we currently see
a low probability of all-out war; the costs are too high on all sides. Instead,
we expect the U.S. to intensify its “peaceful pressure” campaign, imposing
unilateral sanctions and leaning hard on China to participate. We see the
crisis straining U.S.-China relations just as economic tensions are rising.
Long-term government bonds are useful diversifiers against volatility and
equity market sell-offs sparked by geopolitical risks.
We see frictions between the U.S. and China heating up over time. The
countries risk falling into the “Thucydides Trap,” a term coined by Harvard
scholar Graham Allison to describe clashes between rising powers and
established ones. We see trade and market access disputes straining
an increasingly competitive U.S.-China relationship in the long run, and
believe markets have yet to factor in this gradual deterioration.
In the short term, tensions could rise if Chinese President Xi Jinping
pursues an even more nationalistic agenda in the wake of the NPC.
Economic tit for tats could lead to an erosion of relations — and have
sector-specific effects. U.S. military action against North Korea and/or
an accidental clash in the South China Sea would deal a blow to the
relationship, in our view, and hurt risk assets. But our base case is that
the U.S. and China avoid these land mines in the short term, and try to use
U.S. President Donald Trump’s upcoming visit to emphasize cooperation.
S P E C I A L T O P I C G E O P O L I T I C S
A world of riskBlackRock’s top-10 geopolitical risks, September 2017
Major cyber attack Major terror attack
Russia-NATO conflictNorth American trade tensions
South China Sea conflict
North Korea conflict
Fragmentation in Europe
U.S.-China tensions
Gulf conflicts
Escalation in Syria and Iraq
Source: BlackRock Investment Institute, September 2017. Notes: The graphic shows the top 10 geopolitical risks BlackRock tracks. Flags denote key nations exposed to these risks; major cyber attack and major terror attack are global in nature. This is for illustrative purposes only.
“ The U.S. and China are drifting toward greater
tensions because of increased economic
competition and the inevitable friction of a rising
power challenging an established one.”
Tom Donilon — Chairman, BlackRock Investment Institute
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7 M A R K E T S G O V E R N M E N T B O N D S
Government bonds
The softness in bond yields this year has wrong-footed many investors.
We see upside in yields as attention returns to the Fed and some other
central banks gradually removing policy accommodation. The slide in
nominal yields after midyear was mostly driven by real (inflation-adjusted)
yields rather than inflation expectations, which were the key driver earlier in
the year. See the Getting real chart. Real yields fell as some market
participants doubted central banks’ willingness to withdraw stimulus.
Fading hopes for a fiscal boost from U.S. tax cuts also played a role.
Inflation expectations have been relatively steady. This suggests they do not
have to rise for nominal yields to climb higher again. A revaluation of the
outlook for monetary policy normalization would be enough. This may
already be in motion, with a rebound in yields since early September. Any
lift in inflation expectations — or U.S. tax cuts — could add fuel to the move.
Bond yields should rise as some central banks remove stimulus.
The injection of monetary stimulus to the global economy is set to
decelerate. Policymakers are taking confidence from a sustained global
expansion and re-emerging inflation. The Fed has set out how it will wind
back its crisis-era balance sheet. See Crossing the river by feeling the
stones of June 2017 for details. The ECB faces challenges maintaining its
current level of stimulus as it runs into self-imposed limits. We see the
central bank trimming its bond purchases, but perhaps at a slower clip than
many market participants expect. We expect the Bank of Japan (BoJ) to
keep up the pace of its mega stimulus in a bid to revive inflation.
The net result: Central banks will still be net purchasers of assets in 2018,
but at a slower rate. See the Easing off chart. Investors will have to digest a
larger share of bond issuance globally. We expect yields to rise only gently
given strong demand for income. Yet any increase in fiscal deficits could lift
bond issuance — a reason to keep tabs on the prospects for U.S. tax cuts.
We see higher yields ahead, but structural factors such as aging
populations and strong demand for income limit upward moves.
Getting realU.S. 10-year Treasury yield breakdown, 2016–2017
0
0.5
1
1.5
2
2.5%
Jan. 2016 Jan. 2017
Real yield
Inflation breakeven
Nominal yield
Real yields dragged nominal rates lower
Sept.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Notes: The nominal yield is based on the benchmark 10-year Treasury yield. The real yield is based on the 10-year benchmark inflation-linked Treasury. The inflation breakeven is calculated as the nominal yield minus the real yield.
Easing off G3 central bank net asset purchases, 2006–2018
12-m
ont
h ro
lling
flo
w in
trill
ions
2018
-0.5
0
0.5
1
$1.5
2006 2008 2010 2012 2014 2016
U.S.
EurozoneG3 totalJapan
Central bank asset purchases are set to roll over in 2018 Estimates
Sources: BlackRock Investment Institute, with data from the Fed, ECB and BoJ, September 2017. Notes: Data from Sept. 30, 2017, are estimates. G3 refers to the U.S., Japan and the eurozone. The U.S. estimate is based on the addendum to the Policy Normalization Principles and Plans issued by the U.S. Fed. The ECB estimate is based on a BlackRock survey of 15 dealers on Sept. 26; it assumes the ECB will cut monthly purchases to 40 billion euros at the start of 2018, gradually reduce them further and complete the program by year-end. The BoJ estimate assumes the central bank maintains its monthly pace of asset purchases in place since September 2016.
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8 M A R K E T S C R E D I T
Credit
Yes, credit spreads are close to historically tight levels. Yet we believe
credit is an attractive source of income — and one seeing persistent
demand in the context of a low-yield fixed income universe. Spreads
have widened slightly in the past few months in both the U.S. and European
investment grade markets, offering some value even if valuations look a bit
rich at these levels. See the Shrinking credit world chart.
Today’s valuations imply future returns will come from clipping coupons
(carry) rather than tightening spreads. As a result, we believe credit offers
less upside than equities on a risk-adjusted basis if our scenario of
sustained global expansion pans out. But this environment of low market
and economic volatility is one where corporate defaults are expected to be
limited. In the U.S., we prefer an up-in-quality stance. In Europe, we like
earning spread in supranational, covered and subordinated financial bonds.
We like credit for income in a low-yield world, and prefer an up-in-quality
stance given relatively tight spreads.
We see opportunities in EM debt. Key reasons: support from synchronized
global growth, buoyant commodity prices and global investor thirst for
yield. Unlike DM central banks, many of their EM counterparts have room to
cut rates amid steady growth and subdued inflation. This should lead to a
further narrowing of interest rate differentials versus the rest of the world as
the Fed leads its DM peers in normalization. We expect relative price
outperformance in EM debt as a result.
Stronger EM currencies have boosted the performance of EM local-currency
debt this year. Subdued EM currency volatility lends support to the asset
class. See the EM divergence chart. We see the U.S. dollar appreciating
only modestly and gradually — and not diluting the EM investment case.
So what are the main risks? A stalling of global growth momentum, a yield
spike caused by slowing monetary stimulus, or a rapidly resurging dollar.
We like selected EM debt for income and potential price appreciation
amid low inflation and currency volatility in the emerging world.
Shrinking credit worldInvestment grade credit spreads, 2016–2017
Spre
ad v
ersu
s g
ove
rnm
ent b
ond
s
Eurozone
U.S.
Asia
0.75
1.25
1.75
2.25%
Jan. 2017Jan. 2016
CSPP announced
CSPP launched
Sept.
Credit spreads have tightened since the ECB said it would buy corporate bonds
Sources: BlackRock Investment Institute, with data from Bloomberg, September 2017.Notes: The lines show the yield spread between investment grade corporate credit and government bonds in percentage points for each region. U.S. data are based on the Bloomberg Barclays U.S. Credit Index, eurozone data on the Bloomberg Barclays EuroAgg Credit Index, and Asia data on the JP Morgan JACI Diversified Investment Grade Index. CSPP refers to the ECB’s corporate sector purchase program.
EM divergenceEM currency volatility and yield differential vs. DM, 2003–2017
EM
cur
renc
y vo
lati
lity
ind
ex
EM
local vs. D
M yield
differen
tial
0
10
20
30
20172015201320112009200720052003
2
4
6
8%
EM currency volatility
EM vs. DM yield differential
EM vs. DM yield differential is wide given low currency volatility
Sources: BlackRock Investment Institute, with data from Bloomberg, September 2017.Notes: EM currency volatility is represented by the JP Morgan Emerging Market Volatility Index. The EM vs. DM yield differential is based on the JP Morgan GBI-EM Global Diversified Index and the JP Morgan GBI Global Index.
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9 M A R K E T S E Q U I T I E S
Equities
The sustained global expansion is providing a positive backdrop for
corporate earnings. Earnings are growing at a faster than 10% pace in all
major regions for the first time since 2005, excluding the post-crisis bounce,
our research shows. Analyst forecasts are holding steady in the U.S. and
Europe, are up in Japan and have almost doubled this year in EMs. See the
Earning their keep chart. These trends give us comfort taking risk in stocks.
We favor non-U.S. markets, including Europe and Japan. EM stocks top our
list, even after a strong rally this year. Economic reform momentum, improving
cash flows and reasonable valuations make a solid investment case. This year’s
top sector also holds appeal: Tech has posted outsized earnings growth
and accounted for roughly half of U.S. and EM Asia equity returns. We still
see ample runway, as outlined in Tech for the long run of September 2017.
We also like U.S. bank stocks, with steeper yield curves set to boost lending
margins, and prospects for deregulation and increased payouts.
Steady economic and strong earnings growth bode well for equities.
Much has been made of rock-bottom equity volatility. Yet low volatility at
the equity index level masks a lot of action below the surface. Worries
about widespread technological disruption are causing major valuation
swings within sectors — as disruptors chip away at traditional business
models saddled with high fixed costs and real estate footprints.
The retail sector is a prime example. A boom in online shopping and shifting
consumer preferences (toward experiences versus things) are challenging
legacy retail business models. Returns for Internet retailers once trailed their
traditional counterparts but have skyrocketed since 2016. The casualty:
every other retail subsector. See the Disruption fear bubble chart. We
believe some of these moves are overdone. This can mean opportunity for
stock pickers. We like innovative retailers that can differentiate themselves,
and look for opportunities in other sectors hit by disruption.
Low volatility at the market’s surface can conceal great dispersion — and
opportunities — in individual stocks beneath.
Disruption fear bubbleU.S. retail equity performance, 2014–2017
Tota
l ret
urn
-25
0
50
100
150%
20152014 20172016
Internet
Multiline
Speciality
Food & staples
Internet retailers have sprinted ahead of traditional players
Sources: BlackRock Investment Institute, with data from Standard and Poor’s, September 2017.Notes: The lines show the total return for S&P 1500 retail subsectors from January 2014. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Earning their keepAnalyst forecasts of 2017 corporate earnings growth
Ann
ual c
hang
e
Emerging markets
Japan
Europe
U.S.
EM and Japanese earnings expectations have jumped this year
10
15
20%
Sept.JulyApril Jan.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Note: The lines show the path of aggregate analyst expectations of 2017 earnings growth for companies in various regions.
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10 M A R K E T S E Q U I T Y S T Y L E FA C T O R S
“ Most indexes are effectively exposed to just
two or three factors. Adding factors that are
missing or muted can bring better balance —
and significant diversification benefits.”
Andrew Ang — Head of BlackRock Factor-Based Strategies
Equity style factors
The momentum style factor has been on a tear this year. Many U.S. and
global stocks with strong price momentum have posted double-digit gains.
Is the outperformance overdone? We don’t think so. Our outlook for a
steady, sustained expansion suggests momentum should remain in the
lead. It has historically outperformed the broader market except in cases of
recession or financial crisis, our work suggests.
Our analysis finds the momentum factor is not too popular for its own good.
In fact, none of the major equity style factors is flashing warning signs from
overly hot positioning. See the Hot, but not too hot chart. We also like the
value factor, home to the cheapest companies across sectors. Caution has
kept investors away from discounted segments of the market. A sentiment
shift, underpinned by confidence in the sustained global expansion, could
help value add to strong third-quarter returns, we believe.
Momentum in developed markets has more upside potential, we believe.
Value could benefit amid a solid macro backdrop and improved sentiment.
Style factors can’t be ignored. Any investment in an equity index has an
embedded style exposure. In fact, most market-cap-weighted equity
indexes are heavily slanted toward just a handful of style factors, dominated
by momentum and value, the BlackRock Factor-Based Strategies Group
finds. For example, momentum and value made up nearly 60% of the MSCI
ACWI Index by market cap as of March 2017. See the Unintended exposures
chart. Conclusion: Many investors may not be as diversified as they think.
Adding exposure to underrepresented factors can help diversify portfolios.
Hot, but not too hotPositioning across equity factors, 2016–2017
Posi
tion
sco
re
July
Minimum volatility
-3
-2
-1
0
1
2
3
Jan. 2017 Aug.Jan. 2016
QualityValueMomentum
Popular underweight
Popular overweight
Sources: BlackRock Investment Institute and BlackRock Risk and Quantitative Analysis, with data from Bloomberg, EPFR and State Street, August 2017. Notes: Data based on BlackRock’s analysis of portfolio flows, fund manager positions as reported by State Street, and price momentum. A positive score means investors are overweight; a negative score indicates the reverse.
Unintended exposuresFactor decomposition for MSCI All-Country World Index, 2002–2017
Shar
e o
f eac
h fa
cto
r
2002
Momentum
0
25
50
75
100%
2004 2006 2008 2010 2012 2014 2017
Minimum volatility
Value
Size
Quality
Sources: BlackRock Investment Institute, with data from MSCI, September 2017. Notes: The analysis breaks down the style factor exposure of the MSCI ACWI using stock-by-stock style scores derived from the Barra equity risk model. We then seek to mimic the style factor exposure of the benchmark index as closely as possible with a hypothetical portfolio composed of the following five MSCI World style indexes: Enhanced Value, Momentum, Mid-Cap Equal Weighted (size), Minimum Volatility and Sector Neutral Quality. For further details on the methodology see the paper What's in your benchmark? A factor analysis of major market indexes by Ang, Madhavan and Sobczyk (2017). For illustrative purposes only. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
Click to view interactive data
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11
▲ Overweight — Neutral ▼ Underweight
Assets in briefViews on assets from a U.S.-dollar perspective, September 2017
M A R K E T S A S S E T S I N B R I E F
Asset class View Comments
Equities
U.S. — 2017 earnings momentum is strong. Policy progress, particularly related to tax reform, would provide additional support to
earnings in 2018. We like value, momentum, financials, technology and dividend growers.
Europe ▲We see sustained above-trend economic expansion and a steady earnings outlook supporting cyclicals. Companies with much
of their cost base overseas should have some cover against a strong euro in the short term, we believe.
Japan ▲Positives are improving global growth, more shareholder-friendly corporate behavior and solid earnings amid a stable yen
outlook. We see BoJ policy and domestic investor buying as supportive. Yen strength is a risk.
EM ▲Economic reforms, improving corporate fundamentals and reasonable valuations support EM stocks. Sustained above-trend
expansion in the developed world are other positives. Risks include sharp changes in currency, trade or other policies.
Asia ex-Japan ▲The region’s economic backdrop is encouraging. China’s economic growth and corporate earnings outlook look solid in the
near term. We like India, China and selected Southeast Asian markets.
Fixed income
U.S. government
bonds ▼Sustained economic expansion challenges nominal bonds. We favor TIPS for the long run after valuations cheapened amid
weaker inflation readings. We are neutral on agency mortgages due to current valuations and potential future impacts of the
Fed’s balance sheet run-off.
U.S. municipal
bonds — Demand for income and diversification are likely to drive further demand for munis despite tightening spreads. We see
seasonally weak supply supporting the sector in coming months and favor intermediate to 20+ year maturities.
U.S. credit ▲Stronger growth favors credit over Treasuries. We generally prefer up-in-quality exposures and investment grade bonds due to
elevated credit market valuations. Floating rate bank loans appear to offer insulation from rising rates, but we find them pricey.
European
sovereigns ▼High valuations and the market’s focus on improving economic data make us cautious. Waning political risks should cause core
eurozone yields to rise and spreads of semi-core and selected peripheral government bonds to narrow.
European credit ▼Risks are tilted to the downside amid heady valuations and the possibility of shifting market expectations for central bank
support. We are defensive and prefer selected subordinated financial debt.
EM debt — We see sustained global growth benefiting EM debt. The asset class tends to perform well in such an environment — even if
the Fed is raising rates. We focus on income as high valuations make further capital gains less likely.
Asia fixed income — We like U.S. dollar Asian credit given a benign economic backdrop and supportive corporate fundamentals. We favor
investment grade credits in China and India due to improving credit trends and have a selective stance overall on high yield.
OtherCommodities and
currenciesNA
Oil prices are underpinned by supply-and-demand rebalancing. The U.S. dollar has scope to strengthen, with the Fed normalizing
ahead of its DM peers and potential for U.S. economic upside. The British pound is supported by a more hawkish central bank.
Note: Views are as of Sept. 30, 2017.
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Lit. No. BII-OUTLOOK-Q4-2017 37750-0917
BlackRock Investment InstituteThe BlackRock Investment Institute (BII) provides connectivity between BlackRock’s portfolio managers, originates market research and publishes insights. Our goals are to help our fund managers become better investors and to produce thought-provoking content for clients and policymakers.
BLACKROCK VICE CHAIRMANPhilipp Hildebrand
GLOBAL CHIEF INVESTMENT STRATEGIST Richard Turnill
HEAD OF ECONOMIC AND MARKETS RESEARCHJean Boivin
EXECUTIVE EDITORJack Reerink
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