Good value is increasingly difficult to find and it’s unclear how the impact of central bank actions will be felt, or indeed when those actions will be, says Blackrock’s global chief investment strategist Ewen Cameron Watt.
He told FTAdviser that central bank and economic divergence will continue to play out in 2015 as the major driver of returns, especially in fixed income. If anything, the disparity between economies – and the respective central bank policies – looks set to widen, according to Mr Cameron Watt.
“The Bank of England and the US Federal Reserve are tightening monetary policy and both look likely to raise rates in the first half of 2015, but the Bank of Japan, European Central Bank and now the People’s Bank of China are stepping up with more easing.”
Questions remain for the ECB are whether existing measures be enough to reach ambitious balance sheet targets, or whether fully-fledged, quantitative easing is inevitable.
Meanwhile, Japan is ‘all-in’ on a high-stakes bet that monetary stimulus will jump-start the country’s economy.
“The central bank’s balance sheet has swollen to almost 60 per cent the size of Japan’s GDP – roughly three times the ECB’s balance sheet as a share of the eurozone economy – whether this is enough to reach the BOJ’s inflation target remains to be seen.”
Mr Cameron Watt stated that after an extended period of calm, concentration in crowded positions brings the risk of bouts of greater volatility.
He advised that the balance between reaching out for returns and staying liquid will be crucial, but hard to maintain. As always, good diversification will enable investors to ride out volatility and eke out returns, but it will become tougher to achieve as traditional assets become more correlated.
“This is where alternatives, particularly income-paying real assets such as property and infrastructure, can help.
Mr Cameron Watt suggested that there are likely to be selective opportunities within emerging markets, as their economies echo developed markets divergence, but added that a lot rests on the success of reforms in China and India.
“Divergence means dollar strength: good for Japan and Europe but bad for commodities and emerging markets. Lower oil prices could provide a boost to global growth, but if the conflict between the West and Russia escalates, growth may slow, particularly in Europe.”
Blackrock’s general preference for equities over bonds holds. In particular, the firm likes Japanese and European equities due to cheap valuations and monetary boosters, while within fixed income it prefers credit sectors such as U.S. high yield and European bank debt over sovereign debt.
“But overall, finding value in an increasingly fully-valued world, and the hunt for yield following 2014’s bond rally, are likely to be key challenges for investors,” Me Cameron Watt added.
peter.walker@ft.com
