Earlier this month when I provided a quick halftime look at my 2013 calls, I promised I'd provide more details on my updated mid-year outlook now that the second half has begun.
In a new piece, "What's Next: The Critical Answers", I do just that. In this outlook update, my fellow authors – Jeff Rosenberg, BlackRock's chief fixed income investment strategist, and Peter Hayes, head of the firm's municipal bonds group – and I answer common questions we're hearing from investors at the mid-year mark. Here's a short Q&A inspired by the new piece.
Q: Will global stocks go higher this year?
A: Stocks should continue to advance for the next six to 12 months, though the gains will likely be muted and accompanied by volatility. I covered the four reasons why stocks can move higher in a recent post.
Q: When will the Fed begin changing policy and what impact will that have?
A: I foresee the Federal Reserve (Fed) beginning to gradually wind down its asset purchase programs as early as this fall. But though nominal rates may continue to overshoot to the upside in the near term and the long-term direction of rates is higher, I believe the 10-year Treasury yield will hover around 2.5% for the foreseeable future given the many factors keeping a lid on rates.
Q: What is the state of the global economy? Are risks from Europe receding?
A: The global economy remains in slow growth mode, with less risk of widespread recession than in the recent past. Japan is a bright spot, but Europe remains a source of risk.
Q: Where are the best opportunities in stocks?
A: The energy and technology sectors are attractive. Underperforming emerging markets also offer value, and I see good long-term value in select markets such as Brazil, China and Korea. You can read more about which sectors and countries I like in my monthly Investment Directions commentary.
Q: Will emerging markets' underperformance continue?
A: While I wouldn't be surprised to see continued near-term challenges for emerging markets, I continue to like emerging market stocks over the long term. Although the stellar economic growth we saw in China and India in 2010 is not likely to be repeated, emerging markets growth should continue to outpace that of developed markets and current valuations provide some potentially attractive entry points.
Q: What are the opportunities now in fixed income?
A: In light of potential Fed tapering, I continue to prefer credit sectors over those more sensitive to interest rates (like Treasuries and TIPS). I also continue to like municipal bonds and believe that high yield still provides a better yield-to-risk payoff than many other fixed income alternatives.
Q: What is the outlook for gold?
A: While I still believe that investor portfolios should contain a strategic allocation to gold, changing monetary conditions provide for a less accommodating environment. All else being equal, gold returns are likely to be lower and more volatile than has been the case over the past four or five years.