What investors can wait for the next months?

Policymakers will have a major influence on investments in the next months, and investors must concentrate their attention on it. These are some of the conclusions investors can take from a reported released this week by BlackRock, who has more than US$3.6 trillion in assets under management. The report—called “Standing Still ... But Still Standing - Update of Our 2012 Outlook—shows the second half of 2012 is going to be dominated by three factors: policy, policy and policy. And, in terms of global growth, the risk of stagnation has increased.

First of all, European policymakers are working to end a three-year debt drama and trying to resuscitate growth. Secondly, the US faces a fragile economy while Japan is experiencing a strong currency and trade deficits. Finally, in emerging markets, China is trying to move toward a consumption-driven economy while keeping up growth. Brazil is easing monetary policy to re-ignite growth and India faces big deficits. So, global corporate earnings appear to be weakening.

The big question is whether policymakers can avoid a global recession scenario. According to the BlackRock analysts, the probability of stagnation has increased. “Slowing growth across the world and market skepticism over policymakers’ responses have increased the odds of our ‘Stagnation’ scenario to 40-45 percent (from 15-25 percent). This is characterized by anemic growth in the developed world and risk-on/risk off trading”, says the report.

To the asset management firm, China is still a puzzle and it is facing a challenge to shift to a consumption economy without losing growth. “There are tentative signs Beijing’s recent easing and stimulus measures could have an effect, and receding inflation gives policymakers room for a lot more.”

According to BlackRock, most of the emerging markets (except India) appear to have enough tools to re-ignite their domestic growth—although many remain dependent on exports to the developed world—and they still have investments opportunities to investors. “Many emerging markets (…) now trade at a 20% discount to developed markets – a level that historically has been the launching pad for performance.” To BlackRock analysts, policymakers in emerging markets have the maneuvering room to actually increase spending and cut interest rates.

Yet the global picture is not pretty. The eurozone’s economy is slumping at the same time the US and Japanese economies are weakening. China’s stimulus is still on focus, while Brazil and India are on a downhill trajectory. “The impact of lower energy and commodities prices had yet to be felt”, says BackRock.

The good news is European governments have decided to recapitalize weak banks in Spain—a move long opposed by Germany. “This shows policymakers realize the banks are the eurozone’s Achilles heel.” The move to promote the European Central Bank (ECB) to become a regional bank regulator faces political challenges, but also has the potential to stabilize fragile sentiment. “The devil will be in the details—which are still sketchy. European policymakers are good at making pronouncements, but so far have proved less adept at implementation”, says the report. To BlackRock, the recent Greek elections have reduced the prospects of an imminent and messy “Grexit,” a departure of the country from the eurozone.

About the US, the analysts have been worried. Job growth has stalled. Another piece of bad news is the fact that the American national savings rate has dropped 13% in the first quarter. “Such declines have precipitated a fall in personal consumption in the subsequent quarter 75% of the time since 1960.”

In terms of investments opportunities, BlackRock recommends investors take a direct exposure in multinationals with extensive revenues in emerging markets. Fixed income securities such as corporate bonds and emerging markets debt look safer. “Duration is shorter and higher yields provide a nice safety cushion against price declines”, says the report.


Mariana Monteiro da Silva said...

Oi Lu!
Estamos mexendo no meu blog e resolvemos dar uma passadinha no seu.
Parabéns e boa sorte!
Beijos e saudades!
Mari e Ro.

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