BlackRock Says Expect More Volatility This Year, But Equities Are Still Place To Be

Tom Burroughes

3 January 2014

Investors should continue to be positioned for more equity market gains this year even though they have risen from a year before, but volatility is likely to increase and people should be more discriminating in their stock selections, argues BlackRock.

The chief global investment strategist of the US asset management giant, which oversees $4.096 trillion of client funds, said international equities look to be more attractively priced than their US counterparts. (US stocks rallied by around 25 per cent during 2013.)

“We would also encourage investors with longer-term time horizons to consider emerging markets despite their recent under-performance, as they too offer compelling value,” Russ Koesterich said in a note.

He pointed out that 2013 began with a great deal of foreboding, citing the example of worries about “fiscal cliff” budget wrangles in the US as well as concerns about the eurozone debt position.

“Instead, however, 2013 proved to be a year when most major risks were avoided and the table was set for a strong investing year. The economic recovery continued (if unevenly), inflation remained low and, notwithstanding a mid-year jolt, interest rates rose (but not disruptively),” he said.

Koesterich said he expects that most of the macro factors that took hold in 2013 to persist: improving but relatively slow economic growth, weak inflation and slowly rising interest rates.

“That said, we do expect growth to pick up modestly, both in the United States and globally. Although the Fed has begun its long awaited taper, policy remains accommodative and supportive of the economy. Lower energy prices and an improving housing market also represent tailwinds. In 2014, we expect the U.S. economy will edge past the 2 per cent growth rate in which it has lived for the past couple of years and come in at around 2.5 per cent to 2.75 per cent. Global growth should accelerate from 3 per cent in 2013 to around 3.5 per cent next year,” he said.

He said real interest rates should rise gradually in 2014. “We do not believe rates will rise rapidly or dramatically, partly because the Fed will likely keep the fed funds rate anchored at close to zero through 2014, but we do think yields will climb modestly. We would look for an increase of around 0.5 per cent for the 10-year Treasury over the course of 2014,” he said.

Fixed income
“There are few bargains in fixed income markets. With rates likely to rise and inflation still low, we would avoid both long-dated Treasuries and Treasury Inflation Protected Securities. Instead, we advocate sticking with fixed income credit sectors, including high yield bonds,” he continued.

“Additionally, we believe municipal market fundamentals are sound and that muni bonds look attractive - especially as investors complete their 2013 tax returns and feel the impact of higher taxes,” he said.