BlackRock has trimmed its expectations for global growth as volatility looms after the UK’s decision to leave the EU.
The asset manager said UK will fall into recession over the coming year and growth in each of the following five years will be at least 0.5 percentage points lower on the back of Brexit.
The UK is likely to be hit by a “significant reduction of investment”, said Richard Turnill, global chief investment strategist for BlackRock.
Downgrades are projected in an already poor growth outlook in the eurozone as the Brexit vote weights on sentiment, while a “moderate negative impact” in the US and Asia is expected, Turnill said.
Thus, the global economy is “limping along”, with the US holding up and Chinese growth, commodities and EM currencies stabilizing, according to BlackRock Investment Institute.
After the Brexit vote, volatility soared, with the VIX index of US equity market volatility spiking to near 2016 highs. At the same time, long-held relationships among various asset classes appear to be breaking down, with implication for portfolio hedges.
“Betting on yesterday’s winners rising (or losers falling) further – the momentum trade – has gotten a lease on life amid low growth and easy monetary policies,” Turnill said. “We see volatility driving more investment flows into our favourite assets: high-grade credit, quality equities and dividend growers.”
For Q3 2016, BlackRock has a neutral view on US, Japan and EM stocks, while it underweights European stocks due to risk sentiment, elevated valuations and poor earnings growth.
Scott Thiel, BlacRrock’s deputy chief investment officer of Global Fundamental Fixed Income, said current low yields have favoured US investment-grade bonds and EM high yield-hard currency debt, but with caution on commodity exporters.
Within commodities, gold is currently “the most attractive” investment as a portfolio diversifier, Turnill said.
Gold has very low correlation with other assets in a portfolio, and performs “extraordinary well” during periods of high uncertainty and volatility, he said.