Entering text into the input field will update the search result below

Reasons To Embrace Risk

Richard Turnill profile picture
Richard Turnill

Key points

  • We believe the synchronized and sustained economic expansion and low-yield environment bode well for risk assets.
  • German bunds helped drive global government bond yields up for a second week on prospects of reduced monetary stimulus.
  • Soft loan growth, relatively weak trading volumes and a flattening yield curve lowered U.S. bank earnings expectations.

The global economy is chugging along, with the eurozone perking up even as inflation remains subdued. In a low-yield environment, we believe this bodes well for risk assets.

U.S. equity market valuation, 1988-2017

Sources: BlackRock Investment Institute, with data from MSCI and Thomson Reuters, June 2017.
Notes: U.S. equities are represented by the MSCI U.S. Equity Index. Absolute valuation is based on the earnings yield (the inverse of the 12-month forward price/earnings ratio). Valuation relative to bonds is based on the earnings yield minus the U.S. real bond yield (10-year U.S. Treasury yield minus U.S. core CPI inflation). Valuations are shown in percentiles. For example, the current U.S. absolute earnings yield is in the 18th percentile. This means the earnings yield has been equal to or lower than that level 18% of the time since 1988.

We look at the earnings yield of U.S. equities - the implied yield in earnings estimates that makes potential returns comparable to bond yields. U.S. equities look expensive on this basis, as shown by the blue line in the chart. But compared with historically low bond yields (green line), U.S. equities still look cheap.

Rethinking returns

We see the world in a synchronized and sustained economic expansion, as detailed in our Global investment outlook: Midyear 2017. Eurozone's growth has accelerated, and we believe any near-term worries on China are likely overstated. Yet overall we see an environment of structurally lower growth and interest rates. This suggests comparing today's valuation metrics to past levels

This article was written by

Richard Turnill profile picture
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock Investment Institute (BII). He is responsible for ensuring we create, coordinate and communicate value added market and investment insights and deliver them consistently to our clients and client facing professionals. Prior to his current role he was Chief Investment Strategist for the Alpha Strategies Group, responsible for developing strategic plans around the Alpha Strategies product range and the positioning of Alpha Strategies products both internally and externally. He has also served as Head of the Global Equity team within the Fundamental Active Equity division of BlackRock's Portfolio Management Group. He was responsible for leading the team which manages large cap global equity portfolios. Mr. Turnill's service with the firm dates back to 1996, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. At MLIM, he led the global equity team and was responsible for overseeing all aspects of the investment process. Earlier, Mr. Turnill was a group economist in MLIM's Central Strategy Group, head of MLIM's asset allocation and economics team, and was the Chief Investment Officer for the Merrill Lynch Global Private Client discretionary business in EMEA Pacific. Prior to joining MLIM in 1996, Mr. Turnill worked in the international division of the Bank of England as an economic advisor and the global economics team of Paribas Capital Markets in London. Mr. Turnill earned an MA degree in economics from Cambridge University in 1991.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.