BlackRock 2019 Investment Outlook: Positioning for 2019

  • Themes: We see a slowdown in global growth and corporate earnings in 2019, with the U.S. economy entering a late-cycle phase. We expect the Federal Reserve’s policy to become more data-dependent as it nears a neutral stance, making the possibility of a pause in rate hikes a key source of uncertainty. Rising risks call for carefully balancing risk and reward: exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects
  • Risks: Markets are vulnerable to fears that a downturn is near, even as we see the actual risk of a U.S. recession as low in 2019. Still-easy monetary policy, few signs of economic overheating and a lack of elevated financial vulnerabilities point to ongoing economic expansion. Trade frictions and a U.S.-China battle for supremacy in the tech sector loom over markets. We see trade risks more fully reflected in asset prices than a year ago, but expect twists and turns to cause bouts of anxiety. We worry about European political risks in the medium term against a weak growth backdrop. We believe country-specific risks may ebb in the emerging world, and see China easing policy to stabilize its economy
  • Market views: We prefer stocks over bonds, but our conviction is tempered. In equities, we like quality: cash flow, sustainable growth and clean balance sheets. The U.S. is a favored region, and we see emerging market (EM) equities offering improved compensation for risk. In fixed income, we have upgraded U.S. government debt as ballast against any late-cycle risk-off events. We prefer short- to medium-term maturities, and are turning more positive on duration. We favor up-in-quality credit. In a total portfolio context, we steer away from areas with limited upside but hefty downside risk, such as European stocks
  • Still prefer equities over bonds, although with reduced conviction; preference for quality companies with strong balance sheets and sustainable free cash flows; equity valuations are back in line with post-crisis averages in developed markets and particularly attractive in EM
  • Prefer short maturities but see a role for longer-term debt as a buffer during equity market selloffs
  • We expect Chinese growth slowdown to be mild, as the country appears keenly focused on supporting its economy via fiscal and monetary stimulus
  • Process of tighter financial conditions pushing yields up set to ease in 2019; our analysis pegs the current US neutral rate at around 3.5%; we expect the Fed to become cautious as it nears neutral and pause its quarterly pace of hikes amid slowing growth and inflation in 2019; we see the pressure on asset valuations easing as a result
  • Building resilient portfolios is about more than just dialing down risk; bonds should be more effective portfolio shock absorbers in 2019; exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects
  • Few signs of overheating in the US economy today, and monetary policy is still easier than it was ahead of past recessions; this implies the current cycle still has room to run
  • European political risks are front and center as EM-specific worries recede; trade frictions look more baked into asset prices than a year ago
  • There are signs of late cycle in credit; financing costs are on the rise, input costs are up, and companies at the low end of the investment grade spectrum have been issuing more bonds to fund share buybacks and acquisitions; yet credit fundamentals generally look solid, with ample interest coverage; we prefer to take economic risk in equities, rather than in credit and we see US government bonds as a source of ballast in portfolios
  • We see crude prices stabilizing after an autumn slide sent oil into a bear market; output cuts have put a floor under prices in recent years; slower US oil supply growth in 2019 and rising demand amid still above-trend global growth could also catalyze higher oil prices; prefer equities focused on storage and transportation over E&P; also see longer-term opportunities in OFS
  • We see little impetus for further dollar strength given a relatively high valuation and few attributes that differentiate US assets from the rest of the world; EM currencies look more attractive after a sharp selloff this year

BlackRock 2019 Global Investment Outlook

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