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BlackRock plays defense by cutting equity risk, raising cash

[TOKYO] The world's biggest money manager is battening down the hatches heading into the third quarter, raising cash and taking a "modestly" more defensive investing stance.

"The key change in our outlook is that we now see trade and geopolitical frictions as the principal driver of the global economy and markets," BlackRock Inc's Investment Institute concluded in its mid-year 2019 outlook. While trade uncertainty has taken a toll on stocks, markets may not have taken on board the recent escalation in tensions, the institute's strategists, including Elga Bartsch, wrote in the report.

"We favor reducing some overall equity risk, keeping government bonds as portfolio stabilizers and raising some cash for US dollar-based investors," the strategists wrote. "We are overall more positive on credit markets, as the prospect of an elongated cycle bodes well for income-generating assets."

The investment giant is joining a number of financial institutions taking a more cautious stance in the second half as worries about a fragile global economy and the US-China trade war linger. Morgan Stanley has cut its global equities allocation to the lowest in five years.

Still, BlackRock is keeping an overweight stance on US equities amid "reasonable" valuations, according to the note. The group turned neutral on European stocks and downgraded its view on emerging market and Japanese shares on vulnerability to China's growth.

The strategists prefer long-term bonds from the euro zone over Treasuries, despite negative yields, on differing expectations for monetary stimulus.

"We see markets pricing in too much US easing and disinflation given still-decent economic fundamentals and potential trade disruptions," they wrote. "In contrast, we expect the ECB to meet -- or even exceed -- stimulus expectations."