With one after another bank issuing downgrade reports on global stocks, including such stalwarts as JPM and, most recently, Goldman, overnight a far more important market entity – the world’s largest asset manager – joined the club when BlackRock downgraded U.S. and European stocks to neutral, citing elevated U.S. valuations and the higher probability of a midyear interest-rate increase by the Federal Reserve.
“We see the odds of a summer Fed rate increase rising if U.S. data this week show solid job gains, rising wages and an inflation pickup,” writes Richard Turnill, BlackRock’s global chief investment strategist in a note Tuesday. The company expects the Fed to raise rates once or twice this year, he says.
Here are the key points:
- We have downgraded global stocks. U.S. valuations are elevated and a mid-year Federal Reserve (Fed) rate increase appears more likely.
- Rising expectations of a June or July Fed rate increase sent U.S. Treasury yields higher last week.
- We see the odds of a summer Fed rate increase rising if U.S. data this week show solid jobs gains, rising wages and an inflation pickup.
We have downgraded global equities to neutral, following a meeting of the BlackRock investors behind our views. The growing likelihood of an imminent Fed rate increase and more elevated U.S. valuations warrant short-term caution.
The chart above shows how 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. 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.
Global stocks look vulnerable
Equities no longer look cheap. 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.
U.S. equity valuations sit around the 70th percentile of their long-term historical range, according to our calculations. And stocks overall appear more vulnerable to short-term risks. These include a Fed that increases rates too aggressively, a Brexit, a worsening European immigration crisis and a slowdown in global growth. 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.
We have downgraded U.S. and European stocks to neutral. We do prefer stocks to government bonds, and within equities, we like global dividend-growth and quality stocks. We expect the Fed to raise rates once or twice this year. We also see the potential for a corporate earnings recovery later in 2016. What would make us more bullish? Evidence of reflation, and an emphasis on expansionary fiscal policy and structural reform over monetary policy globally.
via http://ift.tt/1VwxRhY Tyler Durden