Standing Still... But Still Standing
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An Update of Our 2012 Outlook
Nearly 50 BlackRock portfolio managers recently gathered to discuss the investment landscape for the second half of this year and identify global investment opportunities. The latest BlackRock Investment Institute publication captures these discussions and revisits our 2012 scenarios.
Slowing growth across the world and the looming US "fiscal cliff" have increased the odds for our Stagnation scenario, dominated by anemic growth in the developed world and volatile risk-on/risk-off trading. Nemesis – a crisis scenario we named after the vengeful Greek goddess who punishes the prideful –stayed in the mythology books in the first half. In other words, we're standing still … but are still standing.
We first described these and other scenarios in "2012: The Year of Living Divergently" in January 2012.
Our main conclusions are:
- Stagnation Ahoy: Slowing growth across the world and market skepticism over policymakers' responses have increased the odds of our Stagnation scenario. This is characterized by anemic growth in the developed world and risk-on/risk off trading.
- Divergence Light: We have downgraded the probability of our main 2012 scenario, Divergence, to a likelihood of 35-40% (from 40-50%) – but still believe emerging economies and assets will outperform.
- Nemesis Crosses the Atlantic: The likelihood of our Nemesis crisis scenario is still much higher than we would like at 15-20%. One reason is Washington's potential failure to resolve the US "fiscal cliff" of automatic tax increases and spending cuts.
- Policy First: Policy will dominate markets – but policymakers in many cases are unable or unwilling to make the right calls.
- Get out of Debt: A global trend of deleveraging is putting downward pressure on markets.
Signposts: The eurozone's ability to fix its wobbly banking system and outline a credible plan for closer fiscal union; the US showing renewed economic strength and resolving the fiscal cliff; and visible payoff of China's efforts to restart growth.
So What Do I Do With My Money?™
- Overall: Create a defensive portfolio with a focus on income. Use options to capture risk-on/risk-off market gyrations. Focus on extremely short-term opportunities and five-year investment themes, and avoid the dangerous three- to six-month investment horizon. Emphasize individual company opportunities and relative value trades.
- Equities: We prefer direct emerging markets exposure over multinationals. Companies with strong cash flows and a track record of increasing dividends offer good opportunities.
- Fixed Income: We like credit and emerging markets debt better than sovereign bonds of the Western world and Japan. High-yield bonds and mortgage securities look good because of their limited supply and safety cushion in case of yield rises.
- Natural Resources: Oil and copper are well supported in the long term because of looming supply gaps. We prefer natural resources equities over physical materials because of relative valuations.
The BlackRock Investment Institute is a global platform that leverages BlackRock's expertise in markets, asset classes, and client segments. Launched in 2011, the Institute's goal is to produce information that makes BlackRock's portfolio managers better investors and helps deliver positive investment results for our clients.