Earlier this month when I provided a quick halftime look at my 2013 calls, I promised I’d provide more details on my updated mid-year outlook now that the second half has begun.
In a new piece, “What’s Next: The Critical Answers”, I do just that. In this outlook update, my fellow authors – Jeff Rosenberg, BlackRock’s chief fixed income investment strategist, and Peter Hayes, head of the firm’s municipal bonds group – and I answer common questions we’re hearing from investors at the mid-year mark. Here’s a short Q&A inspired by the new piece [see 25 Wild ETF Charts From 1H 2013].
Q: Will global stocks go higher this year?
A: Stocks should continue to advance for the next six to 12 months, though the gains will likely be muted and accompanied by volatility. I covered the four reasons why stocks can move higher in a recent post.
Q: When will the Fed begin changing policy and what impact will that have?
A: I foresee the Federal Reserve (Fed) beginning to gradually wind down its asset purchase programs as early as this fall. But though nominal rates may continue to overshoot to the upside in the near term and the long-term direction of rates is higher, I believe the 10-year Treasury yield will hover around 2.5% for the foreseeable future given the many factors keeping a lid on rates [also see iShares Launches MSCI USA Quality Factor ETF (QUAL)].
Q: What is the state of the global economy? Are risks from Europe receding?
Q: Where are the best opportunities in stocks?
A: The energy and technology sectors are attractive. Underperforming emerging markets also offer value, and I see good long-term value in select markets such as Brazil, China and Korea. You can read more about which sectors and countries I like in my monthly Investment Directions commentary [see also The Cheapest ETF for Every Investment Objective].
Q: Will emerging markets’ underperformance continue?
A: While I wouldn’t be surprised to see continued near-term challenges for emerging markets, I continue to like emerging market stocks over the long term. Although the stellar economic growth we saw in China and India in 2010 is not likely to be repeated, emerging markets growth should continue to outpace that of developed markets and current valuations provide some potentially attractive entry points.
Q: What are the opportunities now in fixed income?
A: In light of potential Fed tapering, I continue to prefer credit sectors over those more sensitive to interest rates (like Treasuries and TIPS). I also continue to like municipal bonds and believe that high yield still provides a better yield-to-risk payoff than many other fixed income alternatives [see also 101 High Yielding ETFs For Every Dividend Investor].
Q: What is the outlook for gold?
A: While I still believe that investor portfolios should contain a strategic allocation to gold, changing monetary conditions provide for a less accommodating environment. All else being equal, gold returns are likely to be lower and more volatile than has been the case over the past four or five years.
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Source: BlackRock commentary
Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. A portion of a municipal bond fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
Narrowly focused investments typically exhibit higher volatility. The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters. Technology companies may be subject to severe competition and product obsolescence.
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