Market outlook by asset class

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. All data in the following is sourced from Bloomberg, Markit and BlackRock. It is correct as at April 2019, unless otherwise specified.

US equities
European equities
Japanese equities
EM equities
Fixed income
Commodities

US equities

US GDP and corporate earnings growth has slowed, but we still see the country as the global leader on both fronts. This underpins our preference for US equities over other developed markets. Our Macro GPS points to US real GDP growth of around 2.5% – slightly above consensus.

S&P 500 average earnings growth slowed to 12.3% in Q4, but remains well above the eurozone rate (-6.1%). Although there could be a US-led earnings recession in 2019, last year set a high bar with US corporate tax cuts fuelling record earnings growth.

A bias towards the quality factor – encompassing firms with strong balance sheets and high levels of free cash flow – also makes US equities relatively appealing. In particular, we favour US healthcare and technology firms for their quality characteristics. US technology firms have also posted higher profit margins and stronger sales growth than the broader market over the past five years, with vastly lower corporate leverage.

European equities

European equities have shown signs of recovery this year, with easing by the European Central Bank (ECB) helping to support sentiment, while muted expectations lower the bar for positive news to push stocks higher.

Yet the European market tends to be tilted towards the value factor – a perennial underperformer in late-cycle and recession phases – and we see little catalyst for a sustained uptick in performance. We therefore remain underweight European equities.

Japanese equities

Easing measures by the Bank of Japan (BoJ) have provided some support for Japanese equities this year, but signs of growth and inflation pick-up, while encouraging, remain nascent. The market tends to have a bias towards the value factor, which has historically underperformed in late-cycle and recession phases, and earning uncertainty is a key risk.

In the absence of catalysts for a sustained rally, we remain neutral Japanese equities.

Emerging Markets

Emerging market debt (EMD) has benefited from supportive macroeconomic conditions so far this year, following a challenging 2018. We see EMD yields as attractive on an absolute and relative basis.

Spreads to IG bonds have tightened but remain relatively wide compared to the past few years. Valuations also remain reasonable following EMD’s lacklustre performance last year amid tightening financial conditions.

This year, headwinds that weighed on EMD in 2018 are abating. The Fed is on pause for at least the first half of the year, which has curbed US dollar strength. Quarterly inflows into EMD ETPs have totalled $9.7B globally in Q1 – the highest quarterly total on record.

Although evenly split between hard and local currency for most of this year, flows have started to tilt towards the latter. We have no clear preference for hard over local currency, given the waning dollar strength.

Fixed income

Fixed income has been in vogue so far this year, with the asset class accounting for 60% (US$62.2B) of flows into global ETPs, compared to 25% in 2018. Investment grade (IG) credit has accounted for more flows than any other fixed income category this year, with $23.7B added. Flows into US Treasuries have fallen significantly, from $28B in Q4 to just $6.4B in the year to date.

We think inflation-linked bonds have started to offer value again after inflation expectations have moved to price in a muted inflation outlook. We like inflation-protected US government bonds (TIPS) given the Fed’s dovish pivot and recent indications that inflation would be allowed to breach their 2% target – albeit temporarily. A slowing but growing US economy also makes TIPS an attractive alternative to nominal bonds, which could suffer if inflation drives higher.

Although the Fed pause comes in response to weakening macro data (including inflation rates), TIPS are also well-positioned in the event that the US economy fares better than expected, as their inflation-linked nature would capture higher inflation expectations.

We favour an up-in-quality approach to portfolios at this stage of the economic cycle, which feeds into our preference for IG bonds within an overall neutral fixed income view. Solid fundamentals are supportive for IG bonds in the US, but in the eurozone relative value earlier in the year in the BBB segment looks to have caught up. We continue to favour IG over high yield, specifically in the US, given the latter’s susceptibility to a growth slowdown.

Commodities

Diversification is a key component of portfolio resilience, and the re-emergence of the negative correlation between stocks and bonds means that fixed income can once again play a role here.

We also see precious metals – particularly gold and silver – as effective diversifiers due to their low correlation to traditional asset classes and perceived safe-haven status.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.

1 BlackRock and Markit, April 2019. Flows are given in net terms, in USD, unless stated otherwise.

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