Exactly one month ago we reported that BlackRock, the world’s largest asset manager, had downgraded global equities to Neutral, saying “U.S. valuations are elevated.” The chief catalyst for that call was BlackRock’s assumption that a summer Fed rate hike was imminent, something which now is assured won’t happen for years. So overnight BlackRock shifted its attention, and this time sees Brexit as the downside catalyst du jour, one which for Blackrock is enough to cause it to trim its global growth expectations, as it now expects “a modest slowdown over the next 12 months.”
More importantly, Blackrock also notes that since “there’s limited scope for monetary policy to reflate the global economy, however, and much-needed fiscal stimulus and structural reform progress looks unlikely over the coming months” it has in response “downgraded European stocks to underweight, with a negative view of the eurozone banking sector.“
Offsetting this negativity is Blackrock’s “preference for income” and as a result it has “upgraded U.S. credit and EM debt to overweight. We like U.S. investment-grade credit, hard-currency EM debt, stocks in selected EMs and global quality and dividend-growth stocks.”
Here are the key points:
- We have updated our asset views to reflect political uncertainty, weaker global growth and low-for-longer interest rates ahead.
- Global stocks have regained some of what they lost in the two trading days post Brexit, but safe-haven assets remain resilient.
- This week’s U.S. jobs report will show the extent to which May’s weak report was an anomaly.
One thing that’s certain in a post-Brexit world: uncertainty. We see heightened political uncertainty, more modest global growth and low-for-longer interest rates ahead, and we have updated our asset views accordingly.
Political uncertainty has increased following the British vote to exit (Brexit) the European Union (EU), and we expect elevated uncertainty for some time. The UK prime minister position is open, a Scottish independence referendum is possible and Brexit negotiation will likely take at least two years. The imminent risk of other EU exits is low, we believe, but key political votes occur in Italy, France and Germany over the next 15 months, and in the U.S. in November.
We have trimmed our global growth expectations, and now expect a modest slowdown over the next 12 months. We see risk of a UK recession and European slowdown, as Brexit uncertainties weigh on sentiment. Our new BlackRock Macro GPS “nowcasting” indicator suggests Brexit-related uncertainty has already started to negatively impact UK and global economic growth. We see limited direct economic impact on the U.S., developed Asia and emerging markets (EM), but increased downside risks.
We expect lower rates ahead, with the Bank of England set to cut interest rates soon, U.S. rates on hold and potential for further quantitative easing in the UK, eurozone and Japan. We believe there’s limited scope for monetary policy to reflate the global economy, however, and much-needed fiscal stimulus and structural reform progress looks unlikely over the coming months.
In response, we have downgraded European stocks to underweight, with a negative view of the eurozone banking sector. We have a preference for income, and have upgraded U.S. credit and EM debt to overweight. We like U.S. investment-grade credit, hard-currency EM debt, stocks in selected EMs and global quality and dividend-growth stocks. Overall, in today’s uncertain, low-growth environment, we prefer credit to equity and believe exposure to gold and alternatives as diversifiers makes sense.
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