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April 2017

Q2 2017 Outlook
implementation guide


Reflation is going global. The signs include a rebound in inflation expectations, a bottoming out in core inflation and wages, and a synchronized pick-up in economic activity indicators and corporate earnings estimates.

We believe the reflation trade —overweighting cyclical equities —may have room to run, especially outside the U.S.

Global yields may rise further but within limits: The U.S. Federal Reserve (Fed) is likely to raise interest rates only gradually, and structural dynamics such as aging population should keep us in a low-return world.

Investors can consider going beyond broad equity and bond exposures to help diversify portfolios in this environment, and may want to include factor exposures and alternatives.

Key themes

Broadening reflation: Spreading global reflation has driven a long-awaited rebound in global corporate earnings, with the sharpest recoveries seen outside the U.S. This also helps to reinforce our view that bond yields may be poised to rise, although there are limits to how high they can go.

Low returns ahead? Our capital market assumptions point to muted returns across asset classes in the coming five years —but show investors may still be rewarded for moving out the risk spectrum. The search for yield is still on, but income-producing assets are in short supply, a reason to be cautious and dynamic in fixed income.

Different diversification: Equity market volatility is historically low despite persistent political uncertainty, while correlations are weakening across the board. Investors may need to consider ways to diversify including factors or alternatives.


Sharp increases in sentiment-based indicators may fail to translate into hard data such as investment. The anti-growth part of President Donald Trump's agenda (protectionism) could win out over the pro-growth part (tax cuts). Signs of a faster pace of Fed rate rises could spook markets. In Europe, we do not expect elections to deliver the populist outcomes that markets have been fearing.


We prefer equities over bonds, and credit over government bonds. We like European and Japanese stocks because of the strong global growth backdrop. Value shares such as financials may benefit from potentially higher bond yields. We are neutral on the U.S. because of lofty valuations, driven by multiple expansion, too high expectations for fiscal expansion and deregulation, and the relative value seen elsewhere. We like emerging market (EM) equities in countries such as India and China.

Figure 1: Odd man out: Sources of equity
total return since U.S. election

Figure 1: Odd man out: Sources of equity total return since U.S. election

Sources: BlackRock Investment Institute and Thomson Reuters, 21st March 2017. Notes: Equity markets are represented by the MSCI Japan, Europe ex-UK, USA, Asia ex-Japan and Emerging Market indexes. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.