BlackRock’s 2014 investment outlook report shows where various parts of the fixed income and equity market complex are relative to their historical valuations and will show that government bonds, relative to where they have been historically, are quite expensive.
“We would not be urging people into government bonds,” BlackRock Solutions' Australian head of fixed income, Steve Miller, told InvestorDaily.
“They do have the desirable characteristics that typically are the safe harbour part of the portfolio and if there are things which we haven’t forecasted that do occur, like a big risk event, then they will do well,” he said
“We are not saying get rid of bonds altogether in a diversified portfolio context, but just bear in mind that they are quite expensive,” he said.
Investors may want to consider other assets, such as absolute return hedge fund structures and infrastructure debt.
“Infrastructure debt might be a good way to diversify your portfolio,” Mr Miller said.
“We are very used to bond and equity returns being negatively correlated, but that’s not a relationship that has held in perpetuity and we are a little bit suspicious that, given what’s going to happen in 2014, that strong degree of negative correlation we saw a year or two ago might not persist.
“Again, that’s an argument to diversify into hedge funds, infrastructure debt, or even some high-yield type debt instruments like ETFs, which are fairly cheap and liquid.”
The BlackRock investment outlook report also touched upon the decelerated growth of the Chinese economy and its implications for Australian investors.
“While 2014 won’t be a problem, the big risk for Australia is that our fortunes are very much tied up with China, and while it’s not a central case, if China does have a serious wobble, the fall-out will be biggest in Australia,” Mr Miller said.
“Just as in 2008, it was part of our good fortune to be highly leveraged to the Chinese economy. If the Chinese economy has a wobble – and I do emphasise it’s not our central case – but if it does, the fall-out here will be hard, particularly in the short term.”
BlackRock provides investment management, risk management and advisory services for institutional and retail clients worldwide.
As of 30 September 2013, BlackRock’s AUM was $4 trillion.
