BlackRock, Inc. based in New York City, is the world’s largest investment management company, with $5.4 trillion assets under management, which is even bigger than Vanguard’s massive portfolio. Due to its large size and influence, BlackRock is often referred to as the world’s largest shadow bank. So when this company releases a report, the investment community tends to pay attention. A couple of months ago the company published its 2017 global outlook. The full report can be found here. Below are some highlights from the report.
– Prefers equities over fixed income.
– Likes emerging market equities and global ex-U.S. equities.
– Believes the U.S. financial sector can benefit from rising yields.
– Favors higher-quality corporate bonds and selected EM debt.
Here is a graph that shows the company’s projected returns of various asset classes for the next five years.
The general theme in the report suggests that BlackRock is more bullish on the global economy (ex-US) than inside the United States. When it comes to debt BlackRock suggests high yield bonds and emerging market debts are likely to outperform.
In terms of risk, the company explains that “a lot is hinging on the new U.S. administration’s growth agenda. Many U.S. stocks that sprinted ahead on prospects of tax reform, deregulation and stimulus have already fallen back. To be sure, fundamentals also have driven U.S. equity performance, with the tech sector benefiting from rising demand and high oil inventories sapping sentiment in the energy sector. Yet failure to pass a new health care bill has revealed a fractured Congress,calling into question meaningful pro-growth reforms and raising risks of protectionism. This could set up stocks for more policy disappointments.” In contrast to this, BlackRock believes that “European elections risks are overstated” and it sees demand for “perceived safe-haven bonds weakening and investors rediscovering European equities: Flows into European equity funds are lagging a spurt in economic activity.”
But the Federal Reserve recently increased interest rates again. So could rising rates in the U.S. create more growth and investment returns than BlackRock has predicted? Current research shows that, like stock prices, changes in interest rates and bond prices are mostly unpredictable. Despite the unpredictable nature of interest rate changes, investors may still be curious about what might happen to stocks if interest rates go up.
According to a research report by Dimensional Fund Advisors, “while there is a lot of noise in stock returns and no clear pattern, not much of that fluctuation seems to be related to changes in the effective federal funds rate.” PWL Capital: a wealth management and financial planning company says that “there’s no evidence that investors can reliably predict changes in interest rates. Even with perfect knowledge of what will happen with future interest rate changes, this information provides little guidance about subsequent stock returns. Instead, staying invested and avoiding the temptation to make changes based on short-term predictions may increase the likelihood of consistently capturing what the stock market has to offer.”
The best way to think about it for me is to go long on all my stock and bond holdings and assume a neutral position on future rates. For example, the Fed fund rate recently increased by 0.25% in the south. So last week I paid down $2,000 of my U.S. margin loan. I did this so the total cost to maintain my US debt remains roughly the same. I’m not going to anticipate another rate hike or a rate decrease any time soon. But when it happens, I will adjust again. It’s a good thing rates change gradually. I try not to time rate movements because an investment strategy based upon attempting to exploit these sorts of changes isn’t likely to produce a fruitful outcome.
Opinions expressed in this article are those of the author and do not necessarily reflect the views of New Kapitall Holdings LLC nor it's subsidiary broker-dealer Kapitall Generation
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