The macro outlook for the second quarter: tremors of change

Karim Chedid, investment strategist at BlackRock, talks to IGTV’s Victoria Scholar about the macro outlook for the second quarter and how that will impact the major asset classes.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

2017 was characterised by abnormally low volatility and high equity market returns. While the gains extended into January, the continuous climb ended in mid-February. Volatility returned and the outlook for equities became less clear. BlackRock has published its second quarter (Q2) outlook report entitled ‘Tremors of Change’, outlining three key themes for Q2.

Room to run

BlackRock’s first theme, room to run, expresses its view that the US is full steam ahead in terms of economic momentum. BlackRock says higher fiscal spending and tax reform have ‘supercharged earnings expectations for 2018’. It has raised the outlook on US equities to overweight, from neutral. BlackRock is bullish on technology and the momentum factor as beneficiaries of the growth backdrop. On emerging markets they’re still positive on equities in the region, thanks to better earnings and ‘attractive valuations relative to developed markets’.

Inflation comeback

The second theme is US inflation, which BlackRock believes is moving higher. The strategy team suggests that this will spur the Federal Reserve (Fed) to continue pushing interest rates in an upward trajectory. BlackRock sees treasury yields climbing higher, but at a slower pace, and prefers inflation protection within fixed income.

Reduced reward for risk

According to BlackRock, rewards will be lower relative to the amount of risk taken for the rest of 2018, with concerns about geopolitics lingering. The team suggests US treasuries and gold as attractive ways to diversify.

Flows

Looking back to Q1, BlackRock says the volatility failed to stymie flows into global exchange traded products (ETPs). There were $128 billion dollars of flows gathered in Q1, with developed markets taking $77 billion and emerging markets receiving $22 billion. Fixed income assets lagged behind, taking just $16 billion.

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