BlackRock Says Second Half of 2016 Could Get Ugly

BlackRock analysts recently gathered to update their second half 2016 outlook, and there’s not a bull in the bunch.

The expert consensus centers on a few key themes for the rest of the year: low rates, low returns, policy limits, and volatility.

1. Low Interest Rates

Richard Turnill, BlackRock Global Chief Investment Strategist, notes that “We are living in a low-return world, with future market returns likely to be lower than in recent history.” With over 70% of the world’s developed-market bonds yielding 1% or lower, the hunt for yield has reached a fevered pitch.

2. Low Returns

Directly related to the historically low interest rate environment is the phenomenon of borrowing potential future returns and dragging them into the present. As Turnill says, “This means investors who want higher returns must consider taking on greater risk — by increasing leverage or moving into riskier asset classes. This, in turn, propels valuations of risk assets higher, at the expense of lower projected returns in the future.”

3. Policy Limits

Central banks the world over have been using monetary policy to forcibly inject economic growth into anemic markets. At first, these tactics (which include zero percent or negative interest rates, as well as asset purchases) worked well, but as time goes on, they inevitable lose effectiveness as markets adjust. Says Turnill: “Fiscal stimulus and structural reforms need to take over from monetary policy to foster growth, we believe.”

4. Volatility

Brexit-fueled equity volatility may have subsided, but currency volatility is at five-year highs. In fact, “…the dollar has started to correlate positively with global equities on a two-year rolling basis, reversing a long-standing negative correlation.” This means that the dollar is no longer gaining during short-term periods when stocks are lagging.

Conclusion

BlackRock is the best in the business when it comes to managing assets, so it pays to listen when their team speaks. While bearish equity narratives have abounded over the past 7 years and proven horribly false, many believe a turn in the markets has to come soon.

July 14, 2016
Jay Taylor Media