Historically low yields are making bonds much less effective "shock absorbers" for equities, says BlackRock.
Speaking at an event in Sydney yesterday, BlackRock head of fixed income Steve Miller, said divergent economic growth and monetary policy are the “key themes” for 2015.
According to BlackRock’s Q2 Global Investment Outlook, Japanese and European equities are favourable due to monetary stimulus.
Monetary expansion implemented by the Bank of Japan has boosted Japanese equity prices, BlackRock said.
European quantitative easing and subsequent currency depreciation has supported the European equity market and helped to boost asset prices.
"We prefer equities over bonds. Bonds are becoming less effective shock absorbers for equities due to ultra-low yields," the report said.
The report also noted that as the US Federal Reserve looks to tighten monetary policy, US cyclicals (technology, financials, and global integrated oil) should be favoured over defensives (utilities, telecoms and consumer staples).
According to BlackRock, income-paying alternatives such as property and infrastructure are providing value.
However, “these assets tend to be liquid, and therefore investors need to be adequately compensated for taking on that risk,” the report said.
In terms of fixed income, credit sectors such as selected US high yield are preferred over sovereign debt, the report said.
According to Mr Miller, volatility was “flagged” at the end of 2014.
BlackRock expects volatility to spike from current levels in 2015.
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