Global Investment Outlook Russ Koesterich, CFA Managing Director, Global Allocation 6
Asset performance YTD Source: Thomson Reuters Datastream, BlackRock Investment Institute. Apr, 6 Note: Total return in local currency except currencies, gold and copper which are spot returns. Government Bonds are ten year benchmark issues
Index Level Inflation Low growth, but no recession Manufacturing bottoming Global Manufacturing Activity, -6 6 Inflation on the horizon U.S. Core and Breakeven Inflation, 5-6 55 5 5 5 6 China US Eurozone BlackRock Investment Institute, Institute for Supply Management and Markit, April 6. Notes: The lines show purchasing managers' index levels. A value above 5 indicates expansion, while below 5 indicates contraction. 5 7 9 5 Breakeven Core CPI Core PCE Sources: BlackRock Investment Institute, U.S. Federal Reserve and U.S. Bureau of Labor Statistics, April 6. Notes: Core consumer price index (CPI) inflation and core personal consumption expenditures (PCE) inflation exclude food and energy prices. The five-year breakeven inflation rate is the difference between the nominal yield on five-year U.S. Treasuries and that on five-year Treasury Inflation Protected Securities. Breakeven inflation rates briefly fell below zero during the financial crisis; this has been excluded from the chart.
Trillion, $ Total Return (%) Theme : Low returns ahead Negative rates driven down expected returns Government Bonds with Negative Yields, -6 Equity returns have borrowed from the future Global Equity Returns by Source, 995-6 8 7 6 Swiss National Bank adopts negative rates ECB Cuts Rates Further Below Zero BoJ adopts negative rates 5 - ECB adopts negative rates - Jun Dec Jun 5 Dec 5 Japan Germany France Other Total -6 995 5 5 Dividends Earnings Multiple Expansion Total Return Sources: BlackRock Investment Institute, J.P. Morgan and Thomson Reuters, April 6. Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, April 6. Notes: Global equities are based on the MSCI All-Country World index. Earnings growth is based on aggregate -month forward earnings forecasts. Multiple expansion is represented by the share of return not explained by earnings growth or dividends. The 6 returns are for the first quarter only.
YIELD Index Theme : Divergence is slowing Policy divergence has been material Two-Year Government Bond Yields, -6 but is now waning shown by easing of dollar strength U.S Dollar Index, 975-6.5 5 Fed Ends QE 8 Bernanke 'Taper' Speech 6 5.5 Fed Raises Rates BoJ Cuts Rates Below Zero 5 95 -.5 ECB Announces QE - 5 6 8 975 985 995 5 5 US Germany Japan Sources: BlackRock Investment Institute and Thomson Reuters, April 6. Notes: QE stands for quantitative easing. BoJ stands for Bank of Japan. ECB stands for European Central Bank. BlackRock Investment Institute and Thomson Reuters, April 6. The chart shows the DXY Dollar Index. The lines have been rebased to at January,. 5
Score Dispersion Theme : More volatility and dispersion Unwinding of crowded positions has led to significant return dispersion across major markets Crowded Positions, -6 Market dispersion creates opportunities Cross-Sectional Global Equity Return Dispersion, 8-6.5 8% QE QE QE.5 %.5 -.5 % - -.5 - -.5 Jul Jan Jul Jan 5 Jul 5 Jan 6 6% -Year Average U.S. Dollar Emerging Markets Commodities % 8 6 Source: BII April 6, RQA Analysis. Data are based on BlackRock analysis of portfolio flows, reported positions by fund managers and price momentum. A positive score means investors are overweight the asset class; a negative score indicates the reverse. The emerging markets line is based on an average of emerging market currency and equities positioning. Commodities are based on an average of energy and industrial metals. BlackRock Investment Institute and MSCI, April 6. Cross-sectional return dispersion is the standard deviation of monthly returns of individual securities within the MSCI World Index. QE refers to the U.S. Federal Reserve's quantitative easing programs. 6
Change (billions) Total (trillions) Perhaps EM risk is overestimated Devaluations fears diminished, but watch reserves Many EM currencies have potential to rebound in a more favorable dollar environment Chinese Foreign Exchange Reserves, 6-6 Emerging Market Currency Declines: Current vs. Asia Crisis Won 5 Rupee Zloty Rupiah -5 Peso Lira Rand - 6 8 6 Real Monthly Change Total Reserves Ruble -% -75% -5% -5% % Since Asia Crisis BlackRock Investment Institute, People's Bank of China and Thomson Reuters, April 6. BlackRock Investment Institute and Thomson Reuters, April 6. The chart shows the peak-to-trough decline in currency value versus the U.S. dollar during the Asia crisis (996-), compared with the decline from the peak value since the start of to today. 7
Yield Yield (%) Sovereigns: Expensive but effective diversifiers ECB will continue to drive compression -Year Government Bond Yields, 5-6 Municipal bonds can potentially offer attractive risk adjusted return Fixed Income Yields and Volatility by Sector, 6 8 High Yield 6 Jan 5 Apr 5 Jul 5 Oct 5 Jan 6 Apr 6 Germany U.S. Italy Spain Portugal BlackRock Investment Institute and Thomson Reuters, April 6. Yield Tax-Adjusted Yield Volatility BlackRock Investment Institute, Barclays, JP Morgan and S&P, April 6. Volatility is based on annualized standard deviation of daily total returns over the last three years. The tax-adjusted yield for municipal bonds is based on a.% overall tax rate. All data are based on Barclays indexes except for emerging markets (JP Morgan EMBI Diversified Index) and municipal high yield (S&P Municipal Bond High Yield ex Puerto Rico Index). 8
U.S Euro U.K. Japan U.S Euro U.K. Japan U.S. Euro U.K. U.S. Euro U.S. Dollar Local U.S. Euro U.K. Japan Emerging Yield (%) Net Debt to EBITDA (6=) Credit: You are being paid to take credit risk Attractive credit Selected Asset Yields: Current vs Pre-Crisis. 7.5 Leverage rising Net Debt to EBITDA for U.S. and Eurozone Equities, 6-6 5 5..5. 75 5 -.5 5 Cash -Year Government Bonds Investment Grade High Yield EM Debt Equity Earnings Yield 75 6 8 6 Current U.S. Eurozone Sources: BlackRock Investment Institute, Thomson Reuters, Bank of America Merrill Lynch, J.P. Morgan and MSCI, April 6. Cash is based on one-month interbank rates. Corporate bonds are based on Bank of America Merrill Lynch index yields; U.S. dollar emerging debt is based on the J.P. Morgan EMBI; local emerging market debt is based on the J.P. Morgan GBI-EM. The equity earnings yield is based on the inverse of the - month forward P/E ratio for MSCI indexes. Sources: BlackRock Investment Institute and Thomson Reuters, April 6. The chart shows the ratios of net debt to -month forward EBITDA for U.S. and Eurozone Datastream Total Market Index excluding financials. The ratios are rebased to at the start of 6. 9
Yield (%) Index Equities: There is some value here The Case for Equities Rediscovering Value Equity Dividend Yield vs. Government Bond Yields. Value Equities Relative to Overall Market, -6 6 5 5 5 95-9 6 8 6 Equity Dividend Yield -Year Government Bond Yield U.S. Europe Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, April 6 Chart shows largest 8 developed equity markets based on MSCI market capitalization. BlackRock Investment Institute and MSCI, April 6. The lines show the MSCI value indexes divided by their respective total market indexes, rebased to as of January. For example, the purple line shows the MSCI Europe Value Index relative to the MSCI Europe Index.
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