The major investment manager says the unpredictable nature of US policy actions is leading the group to turn to cash, government bonds and emerging market debt.
In its Global Investment Outlook: Q4 Update, BlackRock noted that trade disputes and geopolitical frictions have become key drivers of the economy and markets.
“US trade policy has become increasingly unpredictable. Recent geopolitical volatility – including attacks on Saudi oil infrastructure – underscores this message from our Midyear Outlook,” the group said.
The investment manager’s Midyear Outlook saw an upgrade in emerging market debt and European equities and a reduction in Japanese equities and US Treasuries.
“Persistent uncertainty from protectionist policies is denting corporate confidence and slowing business spending. Yet we still believe the economic expansion is intact, supported by dovish central banks and a robust US consumer,” the report noted. Blackrock believes this suggests moderate risk-taking will likely be rewarded – even as recent events reinforce our call for a greater focus on portfolio resilience.
The manager expects more Federal Reserve rate cuts, but believes markets are pricing in too much monetary easing.
“The ECB materially exceeded market expectations on stimulus, launching a broad package with a combined impact that should be greater than the sum of its parts,” the report said.
“We do not believe monetary policy alone is a cure for the fallout from global trade tensions. Supply chain disruptions could deliver a hit to productive capacity that fosters mildly higher inflation even as growth slows. This complicates the case for further policy easing.”
Overall, Blackrock favors reducing risk amid the ongoing protectionist push, preferring US equities for their “reasonable valuations and relatively high quality”.
“We like EM debt for its coupon income. We are overweight euro area sovereigns: a relatively steeper yield curve brightens their appeal even at low yields. And we see government bonds as important portfolio stabiliser.”