Developed markets into sustained expansion: BlackRock

Singapore

DEVELOPED economies are cruising at slightly above trend rates since the Great Financial Crisis of 2009, helped by subdued financial market volatility, fading fears of deflation and fewer near-term political risks.

The low financial market volatility, characterised by recessions and financial crises, does not necessarily signal that markets are complacent.

So says BlackRock, one of the world's most prominent investment firms.

At its Mid-year Global Investment Outlook press conference, BlackRock focused on three key themes - sustained growth, rethinking returns and rethinking risks.

Belinda Boa, BlackRock's head of investments for the Asia-Pacific and CIO of emerging markets, Fundamental Active Equity, said developed economies had moved from a theme of reflation to sustained expansion, entering a phase of growth sustained at above two per cent.

"We are probably mid-cycle," said Ms Boa, adding that growth was evident in all the economies outside the US, making for a global "synchronised growth story".

BlackRock sees economic expansion over time, feeding into upward pressure on wages and inflation. It added that it "favours the momentum style factor" in today's expansionary, low-volatility environment.

BlackRock noted that many of the investors are very nervous about entering equity markets, but added that low volatility is more normal than what investors imagine.

"We are in a low volatility regime 80 per cent of the time," Ms Boa added.

With research suggesting that high-volatility rarely occurs without the end of an economic expansion, the firm sees a risk that many investors are under-invested in equities, which BlackRock reckons are cheaper than they look. BlackRock emphasised that risk management was the key, as long-run investment success is contingent on avoiding catastrophic drawdowns.

The fixed income segment has been in a 35-year bull market, and BlackRock sees more upside for fixed income and equities.

Amid structurally lower growth and interest rates, Ms Boa reckons investors "need to rethink, from an equity and fixed income perspective, returns for the rest of the year".

BlackRock prefers European, Japanese and emerging market equities over fixed income, and higher quality credit over government bonds. The firm also sees room for the momentum style factors and is betting on the technology sector to outperform, albeit with potential for swift reversals.