BlackRock has downgraded U.S., European and global stocks to neutral, according to its latest weekly market commentary, titled “Time for caution.”
“The growing likelihood of an imminent Fed rate increase and more elevated U.S. valuations warrant short-term caution,” wrote Richard Turnill, BlackRock’s global chief investment strategist.
While BlackRock recently reversed its underweight position on U.S. equities to overweight, recent developments have put its position down a notch to “neutral.” An earlier BlackRock report in May also shows a “slightly overweight” outlook on equities in the U.S., Eurozone, China, India and Mexico.
“U.S. stocks have been in a sweet spot since mid-February, supported by solid economic growth and falling real yields on the back of expectations of a Fed on hold,” Turnill writes. “Yet yields have started rising again. Higher U.S. inflation and hawkish Fed comments have now put a summer rate increase back on the table, increasing investor anxiety and the likelihood of near-term volatility.”
While the U.S. consumer and housing sectors are strong and growth appears to be stabilizing, BlackRock sees rising interest rates and peak margins limiting returns.
“We expect the Fed to raise rates once or twice this year,” Turnill writes. “We also see the potential for a corporate earnings recovery later in 2016.”
Despite its neutral position, BlackRock does prefer stocks to government bonds, and within equities, it specifically likes global dividend-growth and quality stocks.
Following a meeting of the BlackRock investors, BlackRock downgraded global equities to neutral.
“The MSCI World Index is up 14% from its mid-February low, as stocks have shaken off fears of a global recession, an oil-price collapse and a Chinese currency devaluation,” Turnill writes.
European stocks were also downgraded to neutral. According to BlackRock, despite Europe’s reasonable valuations, stronger consumer spending and an ECB policy that’s supportive, its weak profit growth, challenged banking system and a potential British exit from the European Union make European stocks a potential risk.
According to BlackRock, stocks overall appear more vulnerable to short-term risks.
These risks include “a Fed that increases rates too aggressively, a Brexit, a worsening European immigration crisis and a slowdown in global growth,” Turnill writes. “We also see less upside to China’s growth expectations after a recent uptick in activity, and oil prices have rebounded a long way and now reflect improved fundamentals.”
What would make BlackRock more bullish?
“Evidence of reflation, and an emphasis on expansionary fiscal policy and structural reform over monetary policy globally,” according to Turnill.
BlackRock's asset class views are from a U.S. dollar perspective over a three-month horizon.
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