With geopolitical risks rising, the outlook for fixed-income assets is generally positive, whereas equities are less attractive, according to the BlackRock Investment Institute’s (BII) Mid-Year 2016 Global Investment Outlook.
There is likely more volatility in the cards for global markets, “torn between anxiety over the fallout of the U.K.’s vote to exit the European Union (Brexit) and the prospect of a strengthening U.S. economy,” the BII report says.
The BII’s expectations for global growth have been pared back a bit, and that there’s a risk of a recession in the United Kingdom. In this environment, the search for yield is also getting more challenging for investors, the BII report says.
Against this backdrop, the BII has “turned more positive on most fixed income due to elevated geopolitical risks and easy monetary policy in a low-growth world,” the report says. It suggests that quality government bonds, such as U.S. Treasuries, make sense as a portfolio hedge against “risk-off” episodes; and, that investment grade corporate debt is “attractive in a world hungry for yield.”
The BII also has a positive outlook on Canadian bonds, despite the fact that they have posted outsized returns so far this year. It expects that the forces driving these returns will remain in place, and that the Bank of Canada will continue to pursue a neutral to accommodative monetary policy.
The BII is more cautious on equities, particularly European stocks. The report cites “negative risk sentiment, elevated valuations and poor earnings growth.”
“Canadian equities have had a stellar run so far this year, outperforming other developed markets by a wide margin thanks to a mix of higher commodity prices, newly announced fiscal stimulus measures and an accommodative central bank” says Kurt Reiman, BlackRock’s chief investment strategist for Canada, in a statement.
“While valuations are less forgiving and oil prices reflect a lot of good news, Canadian stocks would likely outperform amid heightened global uncertainty given the higher exposure to gold-related stocks,” Reiman adds.
Additionally, the BII is “warming up” to emerging markets assets, the report says, “thanks to structural reforms in some countries and a strong demand from investors fleeing negative rates.”
“Portfolio flows into EM assets have resumed — with room for upside because most investors are still underweight the asset class,” it adds.
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