BlackRock’s latest internal poll of 100 senior investment staff sees 55% in favour of a ‘low for longer’ scenario for 2014.
This anticipates fragile growth, low but stable inflation, low real rates pushing a further hunt for yield and equity-market momentum, with modest revenue and margin growth sitting alongside more share buybacks, rising dividends and corporate bond issuance.
The $4.1trn (€2.9trn) asset manager’s 2014 outlook largely favours ‘more of the same’ in economies and markets, with only 20% of senior investors backing a deflationary ‘imbalances tip over’ scenario and 25% voting for the strong risk-asset momentum and M&A boom of ‘growth breakout’.
However, after being driven by re-rating and multiple expansion during 2013, the firm warned that equity market momentum depends on earnings growth next year, and it suggested that the worst might be over for emerging markets – the ’dark horse’ of 2014.
While BlackRock’s estimate of fair value for 10-year US Treasuries puts the yield at 3.7%, it expects the Federal Reserve to do what it can to keep them expensive.
“Because there is still a significant debt overhang, I don’t think anyone – governments, corporate issuers or individual mortgage borrowers – can afford an increase in real rates up to 2-4%,” said Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute.
Benjamin Brodsky, global head of fixed income asset allocation, added that because the consensus for yields is lower than fair value, interest rate and bond volatility would be high in either of the firm’s two non-pessimistic scenarios, particularly given any break out from the current trading range.
Brodsky noted that risk-free rates and emerging markets were both negative in 2013, when the place to be was spread products in developed markets, and that he “reluctantly” continues to hold assets like high yield. “High yield is not held for valuations but for carry,” he explained. “That is always problematic, but at this stage in the absence of rising default rates it is hard to imagine significant underperformance.”
Nigel Bolton, BlackRock’s head of European equities, observed that equity market performance has been driven by multiple expansion everywhere except Japan, which had seen meaningful earnings growth.
“That is characteristic of a bull market, but we expect that markets can continue to rise, albeit at a slower pace,” he said. “It may be that multiples are de-rated [in 2014], but we expect earnings to grow and deliver a positive return, overall.”
Brodsky spoke of a “change in global growth leadership” from the emerging to the developed world. “Emerging markets have been the dog of 2013,” he said. “Emerging economies did turn around a little in the second half of 2013, but growth is still unspectacular. The only rate hikes we will see next year will be from emerging markets – there will be plenty, and this is under-reported.”
These hikes, and sovereign credit assessment that is currently too harsh in BlackRock’s view, led Brodsky to suggest that hard currency emerging market bonds could do significantly better in 2014.
On the equities side, Bolton noted some evidence of money coming out of US equities and into other markets, particularly Europe, and he also counselled against dismissing emerging markets, especially Asia. “Emerging markets are a bit of a dark horse for 2014,” he suggested.
“If 2013 was the year of the equity, 2014 might be the year of the search for a diversifier,” Cameron Watt said. “We may see the persistent lack of correlation between bonds and equities being questioned.”