THE world's largest asset manager, BlackRock, has downgraded global equities to "neutral".
"The growing likelihood of an imminent Fed rate increase and more elevated US valuations warrant short-term caution," said global chief investment strategist Richard Turnill in a weekly note.
US stocks are at the 70th percentile of their long-term range; while stocks are vulnerable to short-term risks such as an aggressive rate hike cycle, a UK exit from the European Union, a European immigration crisis and a global growth slowdown.
BlackRock thus downgraded US and European stocks to "neutral", with the caveat that it still prefers stocks to government bonds.
But there is the possibility of corporate earnings recovering later this year, Mr Turnill said.
"What would make us more bullish? Evidence of reflation, and an emphasis on expansionary fiscal policy and structural reform over monetary policy globally," he said.
Emerging markets equities contain value for long-term investors but structural challenges like excess debt persist, BlackRock said in its three-month outlook.
In Asia excluding Japan, the asset manager likes India. However, it said that the tail risk for Chinese currency devaluation remains, along with long-term headwinds as various imbalances get corrected.
For fixed income, BlackRock is "underweight" on the asset class. On US Treasuries, it said that improving economic data and rising inflation are risks for short-duration bonds.
The only fixed income segments that it likes are US municipal bonds due to their yields and low volatility; and non-US developed markets bonds, which are underpinned by easy monetary policies.