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BlackRock comments on global growth in 2017

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Wei Li, Head of iShares EMEA Investment Strategy at BlackRock, has written a note on the increasing breadth of global economic expansion and what this means for investors.

“Roughly three-quarters of countries are clocking up growth, a first since the financial crisis, and China’s growth has surprised to the upside this year. Overall, we see no change to the big picture of a global expansion chugging along at an above-trend pace.

“Inflation is key to the policy and market outlook. Our BlackRock Inflation GPS suggests US core inflation will rise back towards 2 per cent, giving the Federal Reserve comfort in pushing ahead with policy normalisation. By contrast, we see core eurozone inflation stuck at much lower levels.”

Commenting specifically on six investment ideas, Li writes that in terms of European equities, BlackRock sees sustained above-trend economic expansion and a steady earnings outlook supporting cyclicals. Eurozone companies with much of their cost base overseas should have some cover against a strong euro in the short term.

For Japanese equities, Li says: “Japanese equities remain attractively valued following a strong earnings season in which Japanese companies posted earnings per-share growth of 22 per cent versus 9 per cent in the US and 13 per cent in Europe. We see Bank of Japan policy and domestic investor buying as supportive, while the Yen strength is a risk.”

Turning to emerging market assets, Li says: “The MSCI EM Net Total Return USD Index has gained 28 per cent year-to-date. Emerging Market Asia is our favoured region within Emerging Market equities, partly because the MSCI Emerging Markets Asia Index is 38 per cent tech at a sector level thanks to sizeable country exposures to South Korea and Taiwan. Dollar-denominated emerging market debt looks cheap on a valuation basis relative to its own history and other fixed income assets, and it also offers comparable yield for a higher average credit rating than dollar-denominated high yield, albeit with higher average duration.”

Fixed income is next on the list. “A sustained economic expansion challenges nominal bonds. We favour Treasury Inflation-Protected Securities for the long run after valuations cheapened amid weaker inflation readings. We also like floating-rate bond exposures, on the basis that the Fed ‘dot plot’ points to one additional rate increase this year and another three hikes in 2018.”

BlackRock’s sector favourites include technology. “This year’s best performing sector so far still holds appeal. Tech has posted outsized earnings growth and accounts for roughly half of US and EM Asia equity returns, but we still see ample runway. Tech firms’ balance sheet cash potentially offers some cushion against rising rates and the sector could stand to benefit from any repatriation of cash held overseas should US tax reforms incentivise doing so.

“We also like US banks, with steeper yield curves set to boost lending margins, and prospects for deregulation and increased pay-outs.
 
Finally, BlackRock favours factor investing. “The momentum style factor has performed well this year. Many US and global stocks with strong price momentum have posted double digit gains. Our outlook for a steady, sustained expansion suggests momentum should remain in the lead. The MSCI USA Momentum Index also has relatively high weightings to our preferred tech and financials sectors. By way of comparison, the S&P 500 Index is 25 per cent tech and 15 per cent financials.

“We also like the value factor, home to the cheapest companies across sectors. A sentiment shift, underpinned by confidence in the sustained global expansion, could help value add to strong third-quarter returns, we believe.”

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