Updated Investment Views For The Second Half

by: Richard Turnill

Chief Investment Strategist Richard Turnill shares how to potentially position portfolios for the market and economic environment we see ahead for the remainder of 2016.

Lower for longer rates and low returns. Monetary policy may have reached the limits of its effectiveness in driving asset prices. And expect volatility ahead. These are the key themes BlackRock portfolio managers and executives believe are likely to shape markets in the second half, as I shared in an earlier post on our new midyear outlook. Also on our radar for the remainder of 2016: Political uncertainty and weaker global growth.

You may be wondering, however, what this outlook means for portfolios, especially in the wake of the United Kingdom's Brexit vote. We have updated our investment views to reflect our expectations for the third and fourth quarters. Here's a quick look at some of our key asset class views for the second half.

Our outlook on fixed income improves

We have turned more positive on some fixed income assets due to elevated geopolitical risks and easy monetary policy in a low-growth world. We especially like income, including investment-grade credit. We see investment-grade corporate debt as attractive in a world hungry for yield. We also prefer emerging market (EM) debt, whose relatively higher yields now look more attractive post Brexit given that some key headwinds to EMs have turned into tailwinds.

We're neutral toward U.S. Treasuries and European sovereigns, but we do like the former as a hedge against global risks. We also prefer selected eurozone peripheral sovereigns.

More watchful on stocks

We are now more cautious on global equities. Heightened economic and political uncertainty could exacerbate already poor corporate earnings trends, and valuations look elevated. We're particularly cautious of European stocks, given factors including poor profit growth. We have downgraded European stocks to underweight, and hold a negative view of the eurozone banking sector.

We prefer dividend growers and quality companies in the current low-rate environment. We're focusing on companies with rising dividends, strong cash flows and low payout ratios. An added bonus for dividend growers: We see them outperforming when the Federal Reserve (Fed) eventually raises rates. We also like stocks in selected emerging markets.

What would make us more bullish toward stocks overall? A pickup in earnings growth, or a shift toward fiscal expansion and structural reform.

What else?

In today's uncertain, low-growth environment, we also believe exposure to gold and alternatives as diversifiers makes sense.

This post originally appeared on the BlackRock Blog