global investment outlook€¦ · global investment outlook lukas daalder, chief investment...

Global Investment OutlookLukas Daalder, Chief Investment Strategist

December, 2018

BII1218E-682403-2109621

From big and lumpy to daily and multi-sourced

Technological evolution of data analyses

2

There is no guarantee that any forecasts made will come to pass.

Source: BlackRock Investment Institute and Atlanta Fed (https://www.frbatlanta.org/cqer/research/gdpnow.aspx), December 2018.

G.D.P.

BlackRock GPS

FIRST GENERATION SECOND GENERATION CURRENT GENERATION

FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLYBII1218E-682403-2109621

https://www.frbatlanta.org/cqer/research/gdpnow.aspx

How much will US stocks go up/down next year?

Some reference:

Average price return S&P500 since 1927: 7.8%

Average price return S&P500 last 5 years (Nov 2013 – Nov 2018): 8.7%

BII1218E-682403-2109621

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.

Source: BlackRock Investment Institute, with data from Thomson Reuters, December 2018.

Predicting the average return is a losing game

4

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Fre

qu

en

cy d

istr

ibu

tio

n


In less than 7% of the years, the S&P500 rose by the average


Source: BlackRock Investment Institute, with data from Bloomberg, November 2018. The bars depict the frequency distribution of the annual price returns of the S&P500 from 1927-2017. Arrows highlight the two outcomes with the highest frequency in

the past.

Stocks are prone to large moves, even in a normal year

Predicting equity returns should come with a strong health warning

5

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

RE

TU

RN

price return upper trading band for the year lower trading band for the year

average return: 7.6%

trading range: -11% / +17%

in 1987 the S&P500 rose the first 10 months by 40%,

only to end the year up by 2%...



Source: BlackRock Investment Institute, based on Bloomberg data, November 2018. Bars show the year on year price return of the S&P500 for 1927-2017 calculated from the close of each year, green and orange lines show the trading range within

which the S&P500 moved during each year.

-8%

0%

8%

16%

24%

32%

RE

TU

RN

total return upper trading band for the year lower trading band for the year

average return: 5.2%

trading range: -1% / +6%

average last 10 years: 1.7%

Bond returns have been under pressure over the past ten years

Completing the picture: bond returns


Source: BlackRock Investment Institute, based on Bloomberg and Shiller data, November 2018. Bars show the year on year total return of the US bond market from the close of each year, green and orange lines show the trading range. For 1973 -

2017 the Bloomberg Barclays US Treasury Total Return index (unhedged, USD) is used, for 1927-1973 returns are approximated by using the Shiller database. The returns over the last ten years show the performance during the years 2009 through

2018, with 2018 depicting the return over the first 11 months of the year.

6FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLYBII1218E-682403-2109621

0%

50%

100%

1996 2001 2006 2011 2016

RE

TU

RN

Equity, real estate (unhedged, EUR)

Credit, HighYield, EMD (hedged, EUR)

Government bonds (hedged, EUR)

Seeking to invest with perfect hindsight

Returns have been in decline

7


Sources: BlackRock Investment Institute, with data from Bloomberg, November 2018. Notes: Green represents the highest year on year return of three underlying ‘risky asset’ indices (MSCI Total Return World index, MSCI Total Return Emerging

Markets & S&P Total Return Developed Real Estate index) all unhedged in euros, orange shows the highest year on year return of three underlying government bond indices (Bloomberg Barclays Global Aggregate Bond index, Bloomberg Barclays

Euro Aggregate Bond index & Bloomberg Barclays US Aggregate Bond index), all hedged to euro, while purple shows the maximum year on year return for four bond related indices (Bloomberg Barclays EM local currency index, Bloomberg Barclays

EM hard currency index, Bloomberg Barclays Global High Yield index & Bloomberg Barclays Global Aggregate Corporate index) all hedged to euro.

FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY

0%

50%

2015 2016 2017 2018

Equity, real estate (unhedged, EUR)

Credit, HighYield, EMD (hedged, EUR)

Government bonds (hedged, EUR)

BII1218E-682403-2109621

2018 has been an unusual year

Total annual returns of global stocks and bonds, 1991-2018

8

1991

1992

1993

1994

1995

1996

1997

1998

1999

20002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018 YTD

-50

-40

-30

-20

-10

0

10

20

30

40

-10 -5 0 5 10 15 20 25

GL

OB

AL

ST

OC

KS

(%

)

GLOBAL BONDS (%)


Sources: BlackRock Investment Institute, with data from Thomson Reuters, November 2018. Notes: Global stocks are represented by MSCI ACWI index. Global bonds are represented by Bloomberg Barclays Global Aggregate Bond index. Total returns

are shown in U.S. dollars. 2018 returns are through Nov 27.


2018: slowdown, except for the US

9

Chinese PMI data slowing…

Forward-looking estimates may not come to pass.Sources: BlackRock Investment Institute, with data from Bloomberg, November 2018. Notes: The BlackRock Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months’ time.

BlackRock Growth GPS for U.S., eurozone and Japan,

2015-2018

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2016 2017 2018

RE

AL

GD

P G

RO

WT

H (

%)

U.S. Eurozone Japan

48

49

50

51

52

53

54

2015 2016 2017 2018

PM

I IN

DE

X L

EV

EL

China GPS China Current PMI

Future China Caixin PMI implied by BlackRock Macro GPS vs. current, 2015-2018

Forward-looking estimates may not come to pass.Sources: BlackRock Investment Institute, with data from Thomson Reuters, October 2018. Notes: SAAR 6mma is a six-month moving average of the seasonally adjusted annual rate.


Market attention towards geopolitical risk has risen sharply in 2018

10

Source: BlackRock Investment Institute, with data from Thomson Reuters. Data as of November 2018. Notes: We identify specific words related to each geopolitical risk and use text analysis to calculate the frequency of their appearance in the Thomson Reuters Broker Report and Dow Jones Global Newswire databases as well as on Twitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average. The BGRI’s risk scenario is for illustrative purposesonly and does not reflect all possible outcomes as geopolitical risks are ever-evolving.

Global BlackRock Geopolitical Risk Indicator (BGRI), 2008-2018

-3

-2

-1

0

1

2

3

4

2008 2010 2012 2014 2016 2018

BG

RI S

CO

RE


Recent market moves reflect a rising degree of caution

11

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.Sources: BlackRock Investment Institute with data from Thomson Reuters, November 2018. Notes: The dark blue line shows the cumulative return of the S&P 500 index since July 2016. Returns are broken down into the "growth effect" and "uncertainty" effect. Co-movements in U.S. real yields and equities are interpreted as the market pricing in a change in growth expectations - the growth effect. The non-growth change is the uncertainty effect. We drawn on the methodology used in the 2014 IMF paper News and Monetary Shocks at a High Frequency: A Simple Approach. In the inset chart, we plot the uncertainty effect against the BlackRock Geopolitical Risk Indicator (BGRI) for global trade tensions, as detailed on our BlackRock geopolitical risk dashboard.

Estimated macro drivers of U.S. equity performance, 2016-2018

-15%

0%

15%

30%

45%

Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018

RE

TU

RN

Growth effect Uncertainty effect U.S. equity return


https://www.imf.org/en/Publications/WP/Issues/2016/12/31/News-and-Monetary-Shocks-at-a-High-Frequency-A-Simple-Approach-41912

https://www.blackrockblog.com/blackrock-geopolitical-risk-dashboard/

So what about 2019?

BII1218E-682403-2109621

2019: we believe the US will join the slowdown pack…

13

Forward-looking estimates may not come to pass.Sources: BlackRock Investment Institute with data from Thomson Reuters, November 2018. Notes: The BlackRock U.S. Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months’ time. The BlackRock U.S. Financial Conditions Indicator (FCI) is a measure of the impact of financial asset prices on the near-term outlook. It is constructed so as to be comparable with our Growth GPS indicator. The inputs into the FCI capture the impact of policy rates, bond yields, corporate bond spreads, equity markets and exchange rates. The U.S. FCI is moved forward six months, so that the value today is shown at a date six months in the future.

Financial conditions tighten, tax break effect set to wane

BlackRock U.S. Growth GPS and U.S. Financial Conditions Indicator, 2015-2018


1.75

2

2.25

2.5

2.75

3

3.25

2015 2016 2017 2018 2019

RE

AL

GD

P -

AN

NU

AL

GR

OW

TH

RA

TE

U.S. Growth GPS U.S. FCI shifted forward 6 months

BII1218E-682403-2109621

Is the U.S. moving to a recession?

U.S. output gap is moving into positive territory

14

Q3 2018

-8

-6

-4

-2

0

2

4

6

65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16 19

U.S

. O

UT

PU

T G

AP

(%

)

U.S. Recession Recession Early Mid Late

?

Forward looking estimates may not come to pass.

Sources: BlackRock Investment Institute with data from the Federal Reserve and Thomson Reuters, October 2018. Notes: the chart shows the U.S. output gap as estimated by the Board of Governors of the Federal Reserve. Economic cycles are

categorised into early, mid, late and recession stages, based on a statistical technique called cluster analysis. This technique looks at economic variables that have behaved in similar patterns at different points of the cycle and uses these patterns to

identify the different stages.

Federal Reserve estimate of the U.S. output gap, 1965-2018


We believe markets will need to contend with a synchronised slowdown

in growth and more uncertainty in earnings

15

Distribution of eurozone two-year forward GDP

forecasts, 2018 vs. 2017

Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from Consensus Economics, November 2018.Notes: The lines show the distribution of two-year forward GDP forecasts as of November 2018 and 2017. The vertical axis shows the relative frequency of each forecast.

Distribution of U.S. two-year forward GDP forecasts,

2018 vs. 2017

0 0.5 1 1.5 2 2.5 3 3.5

RE

LA

TIV

E F

RE

QU

EN

CY

GDP Growth (%)0 0.5 1 1.5 2 2.5 3 3.5

RE

LA

TIV

E F

RE

QU

EN

CY

GDP Growth (%)


Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from Consensus Economics, November 2018.Notes: The lines show the distribution of two-year forward GDP forecasts as of November 2018 and 2017. The vertical axis shows the relative frequency of each forecast.

Nov 2018

(2020 forecast)

Nov 2018

(2020 forecast)

Nov 2017

(2019 forecast)Nov 2017

(2019 forecast)

BII1218E-682403-2109621

-3

-2

-1

0

1

2

3

-7.5

-5

-2.5

0

2.5

5

7.5

2012 2013 2014 2015 2016 2017 2018

BG

RI S

CO

RE

WE

EK

LY

FL

OW

(U

SD

BIL

LIO

N)

European equity flows European fragmentation BGRI (RHS)

European political risk is back on the market’s radar

Europe fragmentation BGRI and flows in to European equities, 2012-2018

16

Draghi

“whatever it

takes” speech

Brexit vote

Macron wins

French

election

Source: BlackRock Investment Institute, with data from Thomson Reuters. Data as of November 2018. Notes: We identify specific words related to each geopolitical risk and use text analysis to calculate the frequency of their appearance in the Thomson Reuters Broker Report and Dow Jones Global Newswire databases as well as on Twitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average. The BGRI’s risk scenario is for illustrative purposesonly and does not reflect all possible outcomes as geopolitical risks are ever-evolving. European equity flows are based on EPFR data, and show weekly inflows in to European equity mutual funds and ETFs


2019: all bad?

BII1218E-682403-2109621

0

10

20

30

40

50

60

70

2010 2012 2014 2016 2018

% G

DP

Broad Credit Flow as % of GDP SAAR 6mma

Reasons to be -cautiously- cheerful:

Chinese growth looks resilient in the near-term

18

Sources: BlackRock Investment Institute, with data from Thomson Reuters, October 2018. Notes: SAAR 6mma is a six-month moving average of the seasonally adjusted annual rate.

Chinese authorities have started to stimulate the economy again, which is slowly feeding through

China broad credit growth as % of GDP, 2010-2018



Most asset classes have become cheaper in 2018

Developed market equity returns and 12m forward

earnings growth, 2017-2018

19

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in

an index.

Source: BlackRock Investment Institute with data from Thomson Reuters, November 2018. Notes: Developed market

equities are represented by MSCI World Index. Earnings are based on 12-month forward earnings growth. Returns

measured in USD.

95

100

105

110

115

120

125

130

135

140

Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18

IND

EX

Price index 12-month forward earnings


0

2

4

6

8

10

U.S. 2-yearTreasury

U.S. 10-year

Treasury

U.S. IGCredit

U.S. HYCredit

$ EMD DM Equity EM Equity

YIE

LD

(%

)

2013-2017 1st Jan 2018 Current

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in

an index.

Sources: BlackRock Investment Institute, with data from Thomson Reuters, November 2018. Notes: Equity market

yields are represented by 12-month forward earnings yields. Indexes used from left to right are: Thomson Reuters

Datastream 2-year and 10-year U.S. Government Benchmark Indexes, Bloomberg Barclays U.S. Credit Index,

Bloomberg Barclays U.S. High Yield Index, JP Morgan EMBI Global Diversified Index, MSCI World Index and MSCI

Emerging Markets Index.

Asset yield comparison, November 2018

BII1218E-682403-2109621


We believe investors are being compensated for EM risks

20

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.Sources: BlackRock Investment Institute, with data from Thomson Reuters, November 2018. Notes: The lines show the yields on the JP Morgan EMBI Global Diversified Index (hard currency) and JP Morgan GBI-EM Global Diversified Index (local currency).

We favour hard over local currency EMDThe sell off has restored significant value to EM equities

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.Sources: BlackRock Investment Institute, with data from Thomson Reuters, November 2018. Notes: The lines show the 12-month forward price-to-earnings ratios for the MSCI World Index (representing developed markets, or DM) and MSCI Emerging Markets Index (representing emerging markets, or EM).

Emerging and developed market equity valuations, 1990–2018 Emerging market hard- and local-currency debt yields, 2010–2018

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016 2017 2018

YIE

LD

(%

)

Local currency Hard currency

5

10

15

20

25

1990 1995 2000 2005 2010 2015

P/E

RA

TIO

DM EM DM Average EM Average


Balance portfolios for upside and downside risks

21

• Most positive on EM equities with a

preference for Asia

• Overweight U.S. equities given

relatively robust earnings outlook

Source: BlackRock Investment Institute. As of November 2018. Subject to change.

• Like quality style equities with strong balance sheets

• Neutral on European and U.S. credit, with a

preference for IG over HY

• Favour hard currency EMD over local currency

• Lower conviction on Japanese stocks given high

weighting to value sectors

• Underweight European stocks where political risks do

not look fully reflected in prices


Identifying

assets with

right-hand

tails…

… while

adding to

ballast…

… but reducing

exposure to

areas where

risk-taking isn’t

rewarded

Adding to ballast:

We take an up-in-quality stance at this stage of the cycle

Sharpe ratio of equity style factors across the economic cycle, 2000-2018

22

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Expansion Slowdown Contraction Recovery

SH

AR

PE

RA

TIO

Value Momentum Quality Min Vol

Source: BlackRock Investment Institute with data from Bloomberg, November 2018. Notes: The bars show the sharpe ratio of developed market equity style factors during different stages of the economic cycle. We break down the four stages of the

cycle based on changes in a wide range of high-frequency economic indicators. We then look at the excess return divided by the risk of MSCI World Value, MSCI World Momentum, MSCI World Quality and MSCI World Minimum Volatility during these

different stages.


2018 has been an unusual year:

We expect modest positive returns for stocks and bonds in 2019

Total annual returns of global stocks and bonds, 1991-2018

23

1991

1992

1993

1994

1995

1996

1997

1998

1999

20002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018 YTD

-50

-40

-30

-20

-10

0

10

20

30

40

-10 -5 0 5 10 15 20 25

GL

OB

AL

ST

OC

KS

(%

)

GLOBAL BONDS (%)

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Forward looking estimates may not come to pass.

Sources: BlackRock Investment Institute, with data from Thomson Reuters, November 2018. Notes: Global stocks are represented by MSCI ACWI index. Global bonds are represented by Bloomberg Barclays Global Aggregate Bond index. Total returns

are shown in U.S. dollars. 2018 returns are through Nov 27.

2019?


How to access BlackRock Investment Institute content

24

Source: BlackRock Investment Institute. For illustrative purposes only.


Publications

https://www.blackrock.com/corporate/insights/blackrock-investment-institute

Data visuals (including GPS)

https://www.blackrock.com/corporate/insights/blackrock-investment-institute/insights

Geopolitical Risk Dashboard


https://www.blackrock.com/corporate/insights/blackrock-investment-institute

https://www.blackrock.com/corporate/insights/blackrock-investment-institute/insights


Important information

25

In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons.

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Issued in the Netherlands by the Amsterdam branch office of BlackRock Investment Management (UK) Limited: Amstelplein 1, 1096 HA Amsterdam, Tel: 020 - 549 5200.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the

value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views

expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no

assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2018 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are registered and unregistered

trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.


Important information

26

BlackRock Capital Market Assumptions

This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class assumptions are passive, and do

not consider the impact of active management. All estimates in this document are in U.S. dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely

on judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies.

References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They

should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change

without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to

provide, and should not be relied on for, accounting, legal, or tax advice.

The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for

each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent

limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other

factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints,

fees, expenses, taxes and other factors that could impact future returns.

BlackRock 5-year asset return and long-term volatility assumptions

Five-year and long-term equilibrium annualized return assumptions are in geometric terms. Return assumptions are total nominal returns. Return assumptions for all asset classes are shown in unhedged

terms, with the exception of global ex-US treasuries. We use long-term volatility assumptions. We break down each asset class into factor exposures and analyse those factors' historical volatilities and

correlations over the past 15 years. We combine the historical volatilities with the current factor makeup of each asset class to arrive at our forward-looking assumptions. This approach takes into account

how asset classes evolve over time. Example: Some fixed income indices are of shorter or longer duration than they were in the past. Our forward-looking assumptions reflect these changes, whereas a

volatility calculation based only on historical monthly index returns would fail to capture the shifts. We have created BlackRock proxies to represent asset classes where historical data is either lacking or of

poor quality. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to

pass, actual returns could be significantly higher or lower than forecasted. The geometric return, sometimes called the time-weighted rate of return, takes into account the effects of compounding over the

investment period. The arithmetic return can be thought of as a simple average calculated by taking the individual annual returns divided by the number of years in the investment period.

Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses.

Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


global investment outlook€¦ · global investment outlook lukas daalder, chief investment...

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