There are “no signs” of the current global economic cycle ending any time soon, according to BlackRock.
The asset manager believes positive signals from the global economy mean growth could surprise on the upside in 2017.
Richard Turnill, BlackRock’s global chief investment strategist, said: “We are in the seventh year of an economic expansion, and actually there is no sign on the horizon at all that the expansion is about to come to an end.”
Turnill was speaking at the presentation of the BlackRock Investment Institute’s (BII) Global Investment Outlook for 2017.
He said the markets had abandoned the excessive pessimism on the trajectory of economic growth, which was prevalent until the first half of the year.
While earlier in 2016 the markets were pricing in a 50% probability of a global recession, consensus has now shifted towards a continued expansion of the global economy.
This is partly due to positive data on inflation, showing that the fears that deflation would lead the economy into a contraction phase were overdue.
The markets have also dealt well with political risk events, which have had a much more muted impact on market volatility than expected, added Turnill.
“We have had all these political events, but the global economy has continued to surprise to the upside, and the forward-looking indicators have got better”, said Turnill.
There is a lesson to be learned, he believes, that the economy has been far more resilient to political shocks than many, including BlackRock, had predicted.
“We expected to see more market volatility and greater economic impact,” Turnill. “The reality is the global economy has proved extraordinarily resilient.”
Part of the reason that markets did not show more volatility is that investors have been “extremely cautious”.
Turnill, however, pointed out that, although the current phase of economic expansion will continue, growth rates will continue to be low.
This is due to structural factors such as low productivity and demographics.
However, rising inflation and expectations of a rise in bond yields lead the asset manager to prefer equities over fixed income, and credit over government bonds.
Nigel Bolton, CIO of fundamental active equities and head of European equities, said investors, who have generally been underweight or neutral in equities, find themselves in a “sweet spot”, where corporate earnings are being revised on the upside.
Bolton believes the bond bull market has come to an end, and that investors that have piled into fixed income assets now have an opportunity to rotate into equities.
He mentioned that 80% of the times when yields had risen, value equities outperformed.
Similarly, 90% of the times when inflation has been rising, equities in general have outperformed.
He said the manager now favoured value and cyclical stocks, including financials, whereas bond-like stocks such as utilities or staples would underperform.
Growing confidence in the global economy and rising inflation represent two of three “inflection points”, identified by BlackRock, that change the investment outlook for next year.
The third inflection point relates to policy.
The asset manager believes the shift from monetary to fiscal policy will support global growth going forward.
In the US, the impact on growth will depend on the scope of the president elect’s stimulus measures, which at the moment is unclear.
Scott Thiel, BlackRock’s deputy CIO for fundamental fixed income, warned that the markets may be pricing in an additional impact from Donald Trump’s policies.
Political events, such as the French and German elections scheduled for next year, remain the major risks to the manager’s scenario of stable growth and rising equity markets.